<PAGE>
FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION FILE NO.: 333-57511
PROSPECTUS SUPPLEMENT NO. 3
TO
PROSPECTUS DATED JUNE 30, 1998
3,740,034 SHARES
[SFX ENTERTAINMENT, INC. LOGO]
CLASS A COMMON STOCK
(PAR VALUE $.01 PER SHARE)
The following information (including the annex hereto, "Supplement No. 3")
supplements the Prospectus dated June 30, 1998 (the "Prospectus") of SFX
Entertainment, Inc., a Delaware corporation (the "Company"), related to the
offering of up to 3,740,034 shares of Class A Common Stock, par value $.01 per
share (the "Class A Common Stock"), of the Company from time to time by certain
Selling Stockholders. Capitalized terms used but not defined herein have the
meaning ascribed to them in the Prospectus.
This Supplement No. 3 should be read in conjunction with the Prospectus,
the Prospectus Supplement No.1, dated July 7, 1998 ("Supplement No. 1") and the
Prospectus Supplement No. 2, dated September 18, 1998 ("Supplement No. 2"). To
the extent information contained in this document (including the annex hereto)
differs from the Prospectus, Supplement No. 1 or Supplement No. 2, please rely
on the information in this Supplement No. 3.
The Company has sold in a private placement $200.0 million (the "Note
Offering") in aggregate principal amount of its 9 1/8% Senior Subordinated
Notes due December 1, 2008 (the "Notes"). The offering memorandum relating to
the Note Offering, which contains updated information regarding the Company and
the Notes (including financial information), is attached hereto as Annex A and
incorporated by reference herein. The securities offered pursuant to the Note
Offering have not been registered under the Securities Act of 1933, as amended,
and may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. This Supplement No. 3
shall not constitute an offer to sell or a solicitation of an offer to buy the
Notes.
---------------
The date of this Prospectus Supplement No. 3 is November 25, 1998
<PAGE>
ANNEX A
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported):
November 23, 1998 (November 19, 1998)
SFX ENTERTAINMENT, INC.
(Exact name of registrant as specified in charter)
Delaware 0-24017 13-3977880
(State or Other Jurisdiction of (Commission File No.) (IRS Employer
Incorporation) Identification No.)
650 Madison Avenue, 16th Floor, New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 838-3100
N/A
(Former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS.
The Company has entered into a purchase agreement dated as of November 19,
1998, pursuant to which it has agreed to offer in a private placement $200.0
million in aggregate principal amount of its 9 1/8% Senior Subordinated Notes
due 2008 (the "Notes") (the "Note Offering"). To ensure that the public market
is provided with the same disclosure as that contained in the offering
memorandum relating to the Note Offering, certain information set forth in such
offering memorandum, including financial information, is set forth in Exhibit
99.1 hereof.
The securities offered pursuant to the Note Offering have not been
registered under the Securities Act of 1933, as amended, and may not be offered
or sold in the United States absent registration or an applicable exemption
from registration requirements. This Form 8-K shall not constitute an offer to
sell or a solicitation of an offer to buy the Notes.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits
Exhibit 99.1 Excerpts from offering memorandum, dated November 19, 1998
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
SFX ENTERTAINMENT, INC.
By: /s/ Thomas P. Benson
----------------------------
Name: Thomas P. Benson
Title: Chief Financial Officer
Date: November 23, 1998
<PAGE>
EXHIBIT INDEX
Exhibit 99.1 Excerpts from offering memorandum, dated November 19, 1998
<PAGE>
OFFERING MEMORANDUM STRICTLY CONFIDENTIAL
$200,000,000
[SFX LOGO]
SFX ENTERTAINMENT, INC.
9 1/8% SENIOR SUBORDINATED NOTES DUE 2008
--------------
INTEREST PAYABLE JUNE 1 AND DECEMBER 1
--------------
The Notes will be redeemable at the option of the Company, in whole or in part,
at any time on or after December 1, 2003, initially at 104.563% of their
principal amount, plus accrued and unpaid interest and Liquidated Damages (as
defined herein), if any, declining ratably to 100% of their principal amount,
plus accrued interest and Liquidated Damages, if any, on or after December 1,
2006. In addition, at any time prior to December 1, 2001, up to 35% of the
original aggregate principal amount of the Notes may be redeemed, at the option
of the Company, with the proceeds of one or more offerings of common equity of
the Company at 109.125% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any.
The Notes will be general unsecured obligations of the Company, subordinate in
right of payment to all existing and future Senior Debt (as defined herein) of
the Company. The Notes, which mature December 1, 2008, will rank pari passu
with the Old Notes (as defined herein), which mature on February 1, 2008. The
Notes will be guaranteed on a senior subordinated basis by the Guarantors (as
defined herein) and such guarantees will rank pari passu with the guarantees of
the Old Notes. As of September 30, 1998, after giving pro forma effect to the
Pending Acquisitions (as defined herein), this Offering and the application of
the net proceeds therefrom, and the anticipated borrowings under the Senior
Credit Facility (as defined herein), the Company would have had approximately
$897.4 million of indebtedness outstanding, of which $347.4 million would have
been Senior Debt (excluding letters of credit). This Offering is conditioned
upon obtaining the consent of the lenders under the Senior Credit Facility.
--------------
The Notes are eligible for trading in the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") Market.
--------------
FOR A DESCRIPTION OF CERTAIN FACTORS RELATING TO AN INVESTMENT IN THE NOTES,
SEE
"RISK FACTORS" BEGINNING ON PAGE 13.
--------------
THE NOTES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR
THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT PURSUANT TO AN EXEMPTION FROM,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. ACCORDINGLY, THE NOTES ARE BEING OFFERED AND SOLD ONLY (1) TO
"QUALIFIED INSTITUTIONAL BUYERS" (AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT) AND (2) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH REGULATION S UNDER
THE SECURITIES ACT. FOR A DESCRIPTION OF CERTAIN RESTRICTIONS ON TRANSFER OF
THE NOTES, SEE "TRANSFER RESTRICTIONS."
--------------
PRICE 100% AND ACCRUED INTEREST, IF ANY
--------------
The Notes are offered, subject to prior sale, when, as and if issued to
and accepted by the Initial Purchasers and subject to approval of certain legal
matters by Latham & Watkins, counsel for the Initial Purchasers. It is expected
that delivery of the Notes will be made on or about November 25, 1998 at the
office of [Banker], New York, New York, against payment therefor in
immediately available funds.
--------------
[BANKER]
[BANKER]
[BANKER]
[BANKER]
November 19, 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES. SPECIFICALLY,
THE INITIAL PURCHASERS MAY OVERALLOT IN CONNECTION WITH THIS OFFERING AND MAY
BID FOR, AND PURCHASE, NOTES IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "PRIVATE PLACEMENT."
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary .......................................... 1
Risk Factors ..................................... 13
Use of Proceeds .................................. 24
Capitalization ................................... 25
Selected Consolidated Financial Data ............. 26
Unaudited Pro Forma Condensed
Combined Financial Statements ................... 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ...................................... 50
Overview of the Live Entertainment
Industry ........................................ 68
Business ......................................... 71
Agreements Related to the Pending
Acquisitions .................................... 88
Management ..................................... 91
Principal Stockholders ......................... 100
Certain Relationships and Related
Transactions ................................... 102
Description of Other Indebtedness ................ 106
Description of the Notes ......................... 110
Certain United States Federal Tax
Considerations ................................. 141
Private Placement ................................ 145
Transfer Restrictions ............................ 145
Legal Matters .................................... 147
Independent Auditors ............................. 148
Available Information ............................ 148
Index to Consolidated Financial Statements........ F-1
Appendix A--Accredited Investor Letter ........... A-1
</TABLE>
------------
THIS CONFIDENTIAL OFFERING MEMORANDUM (THIS "OFFERING MEMORANDUM") DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF
THE NOTES PLACED HEREBY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL FOR SUCH PERSON TO MAKE AN OFFERING OR SOLICITATION. NEITHER THE
DELIVERY OF THIS OFFERING MEMORANDUM NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES IMPLY THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY OR THAT THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------
This Offering Memorandum is highly confidential and has been prepared by
the Company solely for use in connection with the placement of the Notes (this
"Offering"). The Company and [Banker], [Banker], [Banker] and [Banker], as
Initial Purchasers (together, the "Initial Purchasers"), reserve the right to
reject any offer to purchase, in whole or in part, for any reason, or to sell
less than all of the Notes offered hereby. This Offering Memorandum is personal
to the offeree to whom it has been delivered by the Initial Purchasers and does
not constitute an offer to any other person or to the public generally to
subscribe for or otherwise acquire the Notes. Distribution of this Offering
Memorandum to any person other than the offeree and those persons, if any,
retained to advise such offeree with respect thereto is unauthorized, and any
disclosure of any of its contents, without the prior written consent of the
Company, is prohibited. Each offeree, by accepting delivery of this Offering
Memorandum, agrees to the foregoing and to make no photocopies of this Offering
Memorandum or any documents referred to herein and, if the offeree does not
purchase the Notes or this Offering is terminated for any reason, to return
this Offering Memorandum
ii
<PAGE>
and all documents referred to herein to: [Banker] [Address], Attention:
Copies of the documents referred to
herein may be obtained from SFX Entertainment, Inc., 650 Madison Avenue,
New York, New York 10022, Attention: General Counsel.
Each person receiving this Offering Memorandum acknowledges that (1) such
person has been afforded an opportunity to request from the Company, and to
review, all additional information considered by it to be necessary to verify
the accuracy of, or to supplement, the information contained herein, (2) such
person has not relied on the Initial Purchasers or any person affiliated with
the Initial Purchasers in connection with its investigation of the accuracy of
such information or its investment decision and (3) no person has been
authorized to give any information or to make any representation concerning the
Company or the Notes other than as contained herein and, if given or made, any
such other information or representation should not be relied upon as having
been authorized by the Company or the Initial Purchasers.
------------
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THIS OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL
OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE
FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE
ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE
AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES
ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, IS MADE BY THE INITIAL
PURCHASERS AS TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION SET FORTH
HEREIN, AND NOTHING CONTAINED IN THIS OFFERING MEMORANDUM IS, OR SHALL BE
RELIED UPON AS, A PROMISE OR REPRESENTATION, WHETHER AS TO THE PAST OR THE
FUTURE. THE INITIAL PURCHASERS HAVE NOT INDEPENDENTLY VERIFIED ANY OF SUCH
INFORMATION AND ASSUME NO RESPONSIBILITY FOR ITS ACCURACY OR COMPLETENESS.
------------
SEE "RISK FACTORS," IMMEDIATELY FOLLOWING THE SUMMARY HEREIN, FOR A
DESCRIPTION OF CERTAIN FACTORS RELATING TO AN INVESTMENT IN THE NOTES OFFERED
HEREBY. NONE OF THE COMPANY, THE INITIAL PURCHASERS OR ANY OF THEIR RESPECTIVE
REPRESENTATIVES IS MAKING ANY REPRESENTATION TO ANY OFFEREE OR PURCHASER OF THE
NOTES OFFERED HEREBY REGARDING THE LEGALITY OF AN INVESTMENT BY SUCH OFFEREE OR
PURCHASER UNDER APPROPRIATE LEGAL INVESTMENT OR SIMILAR LAWS. EACH INVESTOR
SHOULD CONSULT WITH HIS OWN ADVISORS AS TO LEGAL, TAX, BUSINESS, FINANCIAL AND
RELATED ASPECTS OF A PURCHASE OF THE NOTES.
iii
<PAGE>
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT NOR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED
STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF THE STATE OF NEW HAMPSHIRE
THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING.
NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE
FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE OF THE STATE
OF NEW HAMPSHIRE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR
RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS
UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSEPCTIVE PURCHASER, CUSTOMER
OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS
PARAGRAPH.
------------
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain statements, estimates, predictions and projections contained
herein are "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These
forward-looking statements are prospective, involving risks and uncertainties.
While these forward-looking statements, and any assumptions upon which they are
based, are made in good faith and reflect the Company's current judgment
regarding the direction of its business, actual results will almost always
vary, sometimes materially, from any estimates, predictions, projections,
assumptions, or other future performance suggested herein. Some important
factors (but not necessarily all factors) that could affect the Company's
revenues, growth strategies, future profitability and operating results, or
that otherwise could cause actual results to differ materially from those
expressed in or implied by any forward-looking statement, include the
following: lack of operating history as an independent public company; failure
to consummate the Pending Acquisitions; inability to successfully implement
operating strategies (including the achievement of cost savings); failure to
derive anticipated benefits from its acquisitions; payments pursuant to
indemnification arrangements; seasonality of operations or financial results;
changes in economic conditions and consumer tastes; competition; regulatory
difficulties; and the other matters referred to herein, elsewhere in this
Offering Memorandum, including under the heading "Risk Factors," beginning on
page 13. Prospective investors are urged to carefully consider these factors in
connection with the forward-looking statements. The Company does not undertake
to release publicly any revisions to forward-looking statements that may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
INDUSTRY DATA
The industry data presented herein are based upon estimates by management
of the Company, utilizing various third party sources, where available. While
management believes that such estimates are reasonable and reliable, in certain
cases, such estimates cannot be verified by information available from
independent sources. Accordingly, no assurance can be given that such market
share data are accurate in all material respects.
iv
<PAGE>
SUMMARY
This summary highlights selected information from this Offering Memorandum
and may not contain all of the information that is relevant to a particular
investor. Each prospective investor is urged to read carefully the entire
Offering Memorandum. Unless otherwise indicated, the "Company" means SFX
Entertainment, Inc. and its subsidiaries, after giving effect to the Pending
Acquisitions. Unless otherwise indicated, the discussions on a pro forma basis
give effect to all completed acquisitions and Pending Acquisitions as if they
had occurred on January 1, 1997. However, the Pending Acquisitions might not be
consummated on the terms described herein or at all. See "Risk
Factors--Company-Specific Risks--Pending Acquisitions."
THE COMPANY
The Company is a leading integrated promoter, producer and venue operator
for live entertainment events. In addition, the Company is a leading
full-service marketing and management company specializing in the
representation of team sports athletes, primarily in professional basketball.
The Company owns (partially or entirely) and/or operates the largest network of
venues in the country used principally for music concerts and other live
entertainment events. The Company has, pro forma for the Pending Acquisitions,
69 venues either directly owned (partially or entirely) or operated under lease
or exclusive booking arrangements in 28 of the top 50 markets, including 14
amphitheaters in 9 of the top 10 markets. The Company also develops and manages
touring Broadway shows, selling subscription series in 37 markets that maintain
active touring schedules, with approximately 240,000 subscribers last year. The
Company operates an integrated franchise that promotes and produces a broad
variety of live entertainment events locally, regionally and nationally. During
1997, giving effect to the 1997 Acquisitions (as defined herein), the 1998
Acquisitions (as defined herein) and the Pending Acquisitions, approximately 30
million people attended 11,300 events promoted and/or produced by the Company,
including approximately 5,400 music concerts, 5,600 theatrical shows and over
200 specialized motor sports events. These events included:
o music concerts featuring artists such as The Rolling Stones, Phish,
Fleetwood Mac, Ozzy Osbourne and Alanis Morissette;
o music festivals such as the George Strait Country Music Festival;
o touring theatrical productions such as Jekyll & Hyde, Rent and The Magic of
David Copperfield; and
o specialized motor sports events, such as Truck Fest and American Motorcycle
Association Supercross racing events.
In addition, the Company's event marketing programs reached over 15
million people in 1997. The Company believes that its ability to provide
integrated live entertainment services will, among other things, encourage
wider use of its venues by performers and allow the Company to capture a
greater percentage of revenues from national tours and ancillary revenue
sources. See "Business."
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 (partially or entirely) and/or operated by the
Company and in third-party venues. As promoter, the Company typically:
o markets events and tours;
o sells tickets;
o rents or otherwise provides event venues; and
o arranges for local production services (such as stage, set, sound and
lighting).
As producer, the Company:
o creates tours for music concert, theatrical, specialized motor sports and
other events;
o develops and manages Broadway-style touring theatrical shows ("Touring
Broadway Shows"); and
o develops specialized motor sports and other live entertainment events.
1
<PAGE>
As a venue owner/operator, the Company books and promotes events in the
venues that it controls. The Company also receives ancillary revenues from
operations related to its live entertainment events, including the sale of
corporate sponsorships and advertising, the sale of concessions and the
merchandising of a broad range of products. In addition, the Company represents
over 100 professional athletes. See "Risk Factors--Risks Relating to the
Industry--Risks Related to the Representation of Athletes." On a pro forma
basis, the Company's music businesses, including venue operations, comprised
approximately 61% of net revenues, theater comprised approximately 21% of net
revenues, sports, including representation of professional athletes and
specialized motor sports operations, comprised approximately 10% of net
revenues and other operations comprised approximately 8% of the Company's net
revenues for the nine months ended September 30, 1998.
The Company has benefitted from significant growth in the live
entertainment industry over the last several years. Amusement Business, an
entertainment industry journal, states that ticket sales for North American
music concert tours have grown at a 10.9% compound annual growth rate ("CAGR")
since 1985, from approximately $321.7 million in 1985 to approximately $1.1
billion in 1997. Box office receipts from Touring Broadway Shows and Broadway
shows in the United States have grown at a 11.2% CAGR since the 1986-1987
season, from $431.5 million to $1.3 billion in the 1996-1997 season, according
to Variety Magazine. The increasing popularity of specialized motor sports over
the last several years has coincided with (and, in part, been due to) the
increased popularity of other professional motor sports events, such as
professional auto racing (including NASCAR, CART and Indy Car Racing).
VENUES
The Company believes that it owns (partially or entirely) and/or operates
the largest number of venues in the United States used principally for music
concerts and other live entertainment events. The following table summarizes
the 69 amphitheaters, theaters and other venues owned (partially or entirely)
and/or operated under lease or exclusive booking arrangements by the Company,
giving effect to the Pending Acquisitions. However, the Pending Acquisitions
might not be completed on the terms described herein or at all. See "Risk
Factors--Company-Specific Risks--Pending Acquisitions."
<TABLE>
<CAPTION>
NUMBER OF TOTAL
MARKET NUMBER OF THEATERS, CLUBS TOTAL SEATING
MARKET RANK(1) AMPHITHEATERS AND OTHER VENUES VENUES CAPACITY
- ------------------------------------------------ --------- --------------- ------------------ -------- ---------------
<S> <C> <C> <C> <C> <C>
New York--Northern New Jersey--Long Island ..... 1 2 4 6 42,340
Los Angeles--Riverside--Orange County .......... 2 2 1 3 42,300(2)
Chicago--Gary--Kenosha ......................... 3 -- 1(3) 1 2,350
Washington--Baltimore .......................... 4 1 -- 1 25,000(4)
San Francisco--Oakland--San Jose ............... 5 2 4 6 46,674
Philadelphia--Wilmington--Atlantic City ........ 6 1 -- 1 25,000
Boston--Worcester--Lawrence .................... 7 2 6 8 32,002
Detroit--Ann Arbor--Flint ...................... 8 2 2 4 42,265(4)
Dallas--Fort Worth ............................. 9 1 -- 1 20,500
Houston--Galveston--Brazoria ................... 10 1 1 2 15,800
Miami--Fort Lauderdale ......................... 11 -- 2 2 5,153(4)
Atlanta ........................................ 12 2 2 4 28,150(4)
Seattle--Tacoma--Bremerton ..................... 13 1 -- 1 20,000(5)
St. Louis ...................................... 17 1 2 3 24,100
Phoenix--Mesa .................................. 18 1 -- 1 19,900
Pittsburgh ..................................... 19 2 -- 2 26,735
Kansas City .................................... 24 1 2 3 30,000
Milwaukee--Racine .............................. 25 1 1 2 24,628(4)
Sacramento--Yolo ............................... 26 -- 1 1 245
Norfolk--Virginia Beach--Newport News .......... 27 1 2 3 23,360(4)
Indianapolis ................................... 28 1 1 2 23,700
Columbus ....................................... 30 1 -- 1 20,000
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF TOTAL
MARKET NUMBER OF THEATERS, CLUBS TOTAL SEATING
MARKET RANK(1) AMPHITHEATERS AND OTHER VENUES VENUES CAPACITY
- ---------------------------------------- --------- --------------- ------------------ -------- ----------------------
<S> <C> <C> <C> <C> <C>
Charlotte--Gastonia--Rock Hill ......... 33 1 -- 1 18,000(4)
Hartford ............................... 36 1 1 2 29,800
Rochester .............................. 39 1 -- 1 12,700
Nashville .............................. 41 1 -- 1 17,000
Raleigh--Durham--Chapel Hill ........... 47 1 -- 1 20,000
West Palm Beach--Boca Raton ............ 50 1 1 2 20,878
Richmond--Petersburg ................... 51 1 -- 1 11,000(4)
Springfield ............................ 70 1 -- 1 13,802
Reno ................................... 130 1 -- 1 8,500
- -- - --------
Total ................................. 35 34 69 691,882(2)(6)
</TABLE>
- ----------
(1) Based on the July 1994 population of metropolitan statistical areas as
set forth in the 1997 Statistical Abstracts of the United States. Does
not include venues in the 37 markets where the Company sells
subscriptions for touring Broadway-style shows. See "Business--Services
Provided--Production."
(2) Additional seating of approximately 40,000 is available for certain
events at the Glen Helen Blockbuster Pavilion.
(3) Venue is closed for renovation and is scheduled to re-open in May 1999.
(4) Includes venues to be acquired in the Cellar Door acquisition. See
"Business--Services Provided--Venue Operations."
(5) Venue is currently under development.
(6) Does not reflect club seating, which cannot be accurately determined
because clubs typically have either open or reserved seating for any
given event.
OPERATING STRATEGY
The Company's principal objectives are to maximize revenue and cash flow
growth opportunities by (1) being a leading promoter and producer of live
entertainment events and a leading provider of talent representation services
and (2) owning and/or operating leading live entertainment venues in the United
States. The Company's specific strategies include the following:
OWN AND/OR OPERATE LEADING LIVE ENTERTAINMENT VENUES IN NATION'S TOP 50
MARKETS
A key component of the Company's strategy is to own and/or operate a
network of leading live entertainment venues in the nation's top 50 markets.
The Company believes that this strategy will allow it to:
o utilize its nationwide venue footprint, significant industry expertise and
access to a large aggregate audience to secure more events and distribute
content on a national scale;
o sell additional products and maximize numerous other related revenue
sources, including sponsorships and other marketing opportunities;
o position itself to produce national tours by leading performers in order to
capture a greater percentage of revenues from those tours;
o encourage wider use by performers of the Company's venues by providing
centralized access to a nationwide network of venues; and
o take advantage of economies of scale to increase, for example, concession
revenues.
The Company believes that it controls the largest network of venues used
principally for music concerts and other live entertainment events in the
United States. Upon closing of the Pending Acquisitions, the Company will own
(partially or entirely) and/or operate under lease or exclusive booking
arrangements 69 venues in 28 of the top 50 markets, including 14 amphitheaters
in 9 of the top 10 markets.
MAXIMIZE ANCILLARY REVENUE OPPORTUNITIES
The Company intends to enhance revenues and cash flows by maximizing
revenue sources arising from and related to its leadership position in the live
entertainment business. Management believes that
3
<PAGE>
these related revenue sources generally have higher margins than promotion and
production revenues and include, among others, (1) the sale of corporate
sponsorship, naming and other rights, concessions, merchandise, parking and
other products and services and (2) the sale of rights to advertise to the
Company's large aggregate national audience. Categories available for
sponsorship arrangements include the naming of the venue itself (e.g., the PNC
Bank Arts Center) and the designation of "official" event or tour sponsors,
concessions providers (e.g., beer and soda), credit card companies, phone
companies, film manufacturers and radio stations, among others. Sponsorship
arrangements can provide significant additional revenues at negligible
incremental cost, and many of the Company's venues currently have no
sponsorship arrangements in many of the available categories (including naming
rights). The Company also intends to maximize related revenues by developing
and exploiting intellectual property rights associated with (1) its production
of musical concert tours and themed events (such as regional music festivals)
and (2) branded characters created as an integral part of the content,
marketing and merchandising of certain motor sports events.
EXPLOIT SYNERGIES OF THE ACQUIRED BUSINESSES
The Company plans to maximize revenues by exploiting synergies among, and
incorporating the best business practices of, its various businesses, including
the businesses to be acquired. For example, the Company believes that the radio
industry trade publications of Album Network, Inc. (another of the Company's
1998 acquisitions) will enable the Company to introduce new acts and new
musical releases to radio programming directors nationwide. This exposure can
enhance recorded music sales and, in turn, music concert attendance,
particularly for artists having relationships with the Company. The Company
believes that it will be able to capitalize on the cross-marketing
opportunities that may arise by virtue of representing prominent team athletes
while selling corporate sponsorships and other marketing rights at its existing
venues.
INCREASE USE OF VENUES; DIVERSIFICATION OF ACTS AND VENUES
Typically, a venue is not utilized for many of the dates available for
live entertainment events in any given season. The Company believes that it
will be able to increase the utilization of its venues through its ability to
affect scheduling on a nationwide basis, its local knowledge, relationships,
expertise and its presentation of a variety of additional events, including
comedy acts, magic acts, motivational speeches, national figure skating and
gymnastics competitions and exhibitions and bull riding competitions, among
others. The Company believes that a diversified portfolio of performers, events
and venues reduces reliance on the commercial success of any one performer,
event or venue.
INNOVATIVE EVENT MARKETING
The Company plans to use innovative event marketing to increase
admissions, sponsorship and advertising revenues and, to a limited extent,
average ticket prices at its venues. In particular, the Company believes that
it can increase the profitability of its venues by offering premium ticket
packages, including:
o season ticket packages that include amenities such as preferred seating, VIP
parking, waiter service, private club and/or "upscale" concession menus;
o subscription series packages allowing customers to purchase tickets for a
set of performances; and
o preferred seating, such as box seating and VIP seating areas, which
typically generate higher revenues per seat.
The Company acquired market research and audience demographics databases
through certain of its recent acquisitions. These databases, when combined with
the Company's existing audience data collection efforts, will permit
highly-effective targeted marketing, such as direct-mail and subscription
series campaigns, which the Company believes will increase ticket pre-sales and
overall sales in a cost-efficient manner.
4
<PAGE>
STRICT COST CONTROLS; NATIONALLY COORDINATED BOOKING, MARKETING &
ACCOUNTING
The Company's senior management imposes strict financial reporting
requirements and expense budget limitations on all of its businesses, enabling
senior management to monitor the performance and operations of all of its
businesses, to eliminate duplicative administrative costs and to realize
expense savings. Moreover, the Company believes that its size will enable it to
achieve substantial economies of scale by:
o implementing a nationally coordinated booking system (for contracting for
and scheduling acts), while continuing to utilize the substantial local
expertise of the Company;
o establishing a centralized marketing team to exploit ancillary revenue
streams on local, regional and national levels, including from sponsorship,
advertising and merchandising opportunities; and
o implementing a centralized accounting system.
PURSUE COMPLEMENTARY ACQUISITION OPPORTUNITIES
The live entertainment business is characterized by numerous participants,
including booking agents, promoters, producers, venue owners and venue
operators, many of which are entrepreneurial, capital-constrained local or
regional businesses that do not achieve significant economies of scale from
their operations. The Company believes that the fragmented nature of the
industry presents attractive acquisition opportunities, and that its larger
size will provide it with improved access to the capital markets that will give
it a competitive advantage in implementing its acquisition strategy. Through
consolidation, the Company believes that it will be better able to coordinate
negotiations with performers and talent agents, addressing what the Company
believes is a growing desire among performers and talent agents to deal with
fewer, more sophisticated promoters. The Company intends to pursue additional
strategic acquisitions of:
o amphitheaters and other live entertainment venues;
o local and regional promoters and producers of music concert, theatrical,
specialized motor sports and other live entertainment events; and
o companies in the sports marketing and talent representation industry.
The Company is currently in the process of negotiating certain additional
acquisitions of live entertainment and related businesses; however, it has not
entered into definitive agreements with respect to any of such acquisitions and
there can be no assurance that it will do so. See "--Pending Acquisitions" and
"Risk Factors--Company-Specific Risks--Expansion Strategy."
MANAGEMENT
Most of the Company's senior management team has worked together for a
number of years at SFX Broadcasting, Inc. ("Broadcasting"), the Company's
former parent, and has managed the concert promotion operations of
Delsener/Slater Enterprises, Ltd. ("Delsener/Slater"), the predecessor of the
Company, since its acquisition by Broadcasting in January 1997. Senior
management plans to continue to apply to its live entertainment businesses many
of the same operating strategies that it has successfully utilized in the radio
business, including a focus on revenue maximization and cash flow growth
through the cultivation of sponsorship and advertising relationships, cost
containment and other strategies. Moreover, senior management believes that the
Company will benefit from the consolidation of the live entertainment industry,
much as Broadcasting benefitted from the consolidation of the radio
broadcasting industry. The Company's senior management team consists of:
o Robert F.X. Sillerman, Executive Chairman and a Member of the Office of the
Chairman;
o Michael G. Ferrel, President, Chief Executive Officer and a Member of the
Office of the Chairman;
o Brian Becker, Executive Vice President and a Member of the Office of the
Chairman;
o David Falk, a Member of the Office of the Chairman;
o Howard J. Tytel, Executive Vice President, General Counsel and Secretary;
and
o Thomas P. Benson, Vice President and Chief Financial Officer.
5
<PAGE>
The Company has entered into employment agreements with each member of its
senior management team. See "Risk Factors--Company-Specific Risks--Control by
Management," "--Dependence on Key Personnel" and "Management." The Company has
also entered into long-term employment agreements with many of the senior
executives of the businesses it has acquired.
FORMATION OF THE COMPANY
Broadcasting formed the Company as its wholly-owned subsidiary in December
1997. Since its formation, Broadcasting principally acquired and operated radio
broadcasting stations. Broadcasting transferred all of its assets relating to
the entertainment business to the Company and, on April 27, 1998, distributed
the Company's common stock to stockholders of Broadcasting (the "Spin-Off").
The Spin-Off separated the Company's entertainment business from Broadcasting's
radio broadcasting business. Broadcasting subsequently merged into an affiliate
of Hicks, Muse, Tate & Furst Incorporated.
RECENT ACQUISITIONS
The Company has expanded through the acquisition of the stock or assets of
various companies, including:
"1997 ACQUISITIONS":
o Delsener/Slater Enterprises, Ltd.;
o Meadows Music Theater; and
o Sunshine Promotions, Inc. and certain related companies.
"1998 ACQUISITIONS":
o Westbury Music Fair;
o PACE Entertainment Corporation ("PACE");
o Pavilion Partners;
o Contemporary Group;
o BG Presents, Inc.;
o Album Network, Inc., SJS Entertainment Corporation and The Network 40;
o Concert/Southern Promotions;
o United States of America Motor Sports;
o Falk Associates Management Enterprises, Inc. and Financial Advisory
Management Enterprises, Inc. (collectively, "FAME");
o Oakdale Concerts, LLC and Oakdale Development Limited Partnership;
o Irvine Meadows Amphitheater, New Avalon, Inc., TBA Media, Inc. and West
Coast Amphitheater;
o Blackstone Entertainment, LLC ("Don Law");
o Magicworks Entertainment Incorporated; and
o seven other entertainment-related companies.
PENDING ACQUISITIONS
In addition, the Company has recently agreed to acquire the following
entities (the "Pending Acquisitions"):
MARQUEE
On July 23, 1998, the Company agreed to acquire The Marquee Group, Inc.
("Marquee") in a merger transaction (the "Marquee Acquisition"). Assuming an
SFX Stock Price (as defined herein) of $46.50 (the closing price of the
Company's Class A common stock on November 20, 1998), the outstanding shares of
Marquee's common stock will convert into the right to receive an estimated
1,758,139 shares of the Company's Class A common stock (subject to adjustment).
The Company will also be required to repay
6
<PAGE>
approximately $33.1 million of Marquee's debt at the time of the merger.
Marquee is a publicly traded company that provides integrated event management,
television production, marketing and consulting services in the sports, news
and entertainment industries. Robert F.X. Sillerman has an aggregate equity
interest of approximately 5.9% in Marquee and is the Chairman of its Board of
Directors, and Howard J. Tytel has an equity interest of approximately 1.0% in
Marquee and is one of its directors. See "Risk Factors--Company-Specific
Risks--Pending Acquisitions" and "Agreements Related to the Pending
Acquisitions--Marquee."
CELLAR DOOR
On August 13, 1998, the Company and the owner of the Cellar Door group of
companies (collectively, "Cellar Door") entered into a letter of intent with
respect to the Company's acquisition of all of the outstanding capital stock of
Cellar Door (the "Cellar Door Acquisition"). The Company anticipates that the
definitive agreement to acquire Cellar Door will provide that the aggregate
purchase price will be $70.0 million in cash payable at closing, Class A common
stock with a value of $20.0 million (up to $15.0 million of which may, at the
Company's option, be paid in cash) and $8.5 million payable in five equal
annual installments beginning one year after the closing date. In addition, the
Company will issue to the seller options to purchase 100,000 shares of the
Company's Class A common stock. Cellar Door is a leading promoter and producer
of live entertainment events held primarily in the Southeast and the Midwest.
See "Business--Pending Acquisitions--Cellar Door Acquisition."
The Company expects to consummate the Pending Acquisitions in the first
quarter of 1999. 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 (including the consent of the Company's lenders under the
Senior Credit Facility and, for the Cellar Door Acquisition, termination or
expiration of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended (the "HSR Act")). See
"Business--Regulatory Matters." The Pending Acquisitions might not be
consummated during the expected period, on the terms described herein or at
all. The Company is also currently negotiating additional acquisitions of live
entertainment and related businesses. However, it has not entered into
definitive agreements with respect to any additional acquisitions, and it may
be unable to do so. See "Risk Factors--Company-Specific Risks--Pending
Acquisitions" and "--Expansion Strategy; Need for Additional Funds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Pending Acquisitions" and "Agreements Related to the Pending
Acquisitions."
USE OF PROCEEDS
The net proceeds from this Offering will be used to repay substantially
all outstanding borrowings under the revolving portion of the Company's senior
credit facility (the "Senior Credit Facility"). The Company anticipates using
its additional borrowing availability under the Senior Credit Facility, in
part, to finance the cash consideration to be paid in the Cellar Door
Acquisition, to repay debt in connection with the Pending Acquisitions, to pay
certain related fees and expenses and to make certain other payments as
described herein. See "Use of Proceeds."
AMENDMENT TO SENIOR CREDIT FACILITY
The consummation of this Offering is conditioned upon receiving the
consent of the Company's lenders under the Senior Credit Facility. In
connection with obtaining such consent, the Company has agreed to pay certain
fees to the lenders and to amend the Senior Credit Facility to provide for an
increase in the applicable margins thereunder. See "Use of Proceeds" and
"Description of Other Indebtedness--Senior Credit Facility."
The address and telephone number of the Company's principal executive
offices are: 650 Madison Avenue, 16th Floor, New York, New York 10022; (212)
838-3100.
7
<PAGE>
THE OFFERING
Issuer...................... SFX Entertainment, Inc.
Securities Offered.......... $200,000,000 in aggregate principal amount of 9
1/8% Senior Subordinated Notes due 2008 (the
"Notes").
Maturity.................... December 1, 2008.
Interest.................... June 1 and December 1, commencing June 1, 1999.
Optional Redemption......... The Notes will not be redeemable at the
Company's option prior to December 1, 2003.
Thereafter, the Notes will be subject to
redemption at any time at the option of the
Company, in whole or in part, at the redemption
prices set forth herein plus accrued and unpaid
interest and Liquidated Damages, if any, thereon
to the applicable redemption date. In addition,
at any time prior to December 1, 2001, the
Company may on any one or more occasions redeem
up to 35% of the original aggregate principal
amount of Notes at a redemption price of 109.125%
of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
thereon to the date of redemption, with the net
cash proceeds of one or more offerings of common
equity of the Company; provided that at least 65%
of the original aggregate principal amount of
Notes remains outstanding immediately after each
occurrence of such redemption. See "Description
of the Notes--Optional Redemption."
Ranking..................... The Notes will be general unsecured obligations
of the Company, subordinate in right of payment
to all existing and future Senior Debt (as
defined herein) of the Company and senior in
right of payment to or pari passu with all other
indebtedness of the Company. On a pro forma basis
giving effect to this Offering, anticipated
borrowings under the Senior Credit Facility and
the consummation of the Pending Acquisitions, the
Company would have had $897.4 million of
indebtedness outstanding, of which $347.4 million
would have been Senior Debt (excluding letters of
credit) at September 30, 1998. The Notes will
rank pari passu with the Old Notes, which mature
on February 1, 2008. See "Risk Factors--Risks
Relating to the Notes--Substantial Leverage,"
"Capitalization" and "Description of the
Notes--Subordination."
Subsidiary Guarantees....... The Company's payment obligations under the
Notes will be jointly and severally guaranteed on
a senior subordinated basis (the "Subsidiary
Guarantees") by all current and future domestic
Restricted Subsidiaries (as defined herein) of
the Company, except for the Non-Guarantor
Subsidiaries. The Subsidiary Guarantees will rank
pari passu with the guarantees of the Old Notes.
See "Description of the Notes--Subsidiary
Guarantees."
8
<PAGE>
Change of Control........... Upon the occurrence of a Change of Control, the
Company will be required to make an offer to
repurchase the Notes at a price equal to 101% of
the principal amount thereof, together with
accrued and unpaid interest and Liquidated
Damages (as defined herein), if any, to the date
of purchase. See "Description of the
Notes--Optional Redemption" and "--Repurchase at
the Option of Holders--Change of Control."
Certain Covenants........... The indenture pursuant to which the Notes will
be issued (the "Indenture") will contain certain
covenants that, among other things, limit the
ability of the Company and its Subsidiaries to
incur additional Indebtedness (as defined herein)
and issue preferred stock, pay dividends or make
certain other restricted payments, create certain
Liens (as defined herein), enter into certain
transactions with affiliates, sell assets of the
Company or its Restricted Subsidiaries, issue or
sell Equity Interests (as defined herein) of the
Company's Restricted Subsidiaries or enter into
certain mergers and consolidations. See
"Description of the Notes--Certain Covenants." In
addition, under certain circumstances, the
Company will be required to offer to purchase
Notes at a price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, to the date of
purchase, with the proceeds of certain Asset
Sales (as defined herein). See "Description of
the Notes--Repurchase at the Option of
Holders--Asset Sales."
Transfer Restrictions....... The Notes have not been registered under the
Securities Act, and may not be offered or sold
except pursuant to an exemption from, or in a
transaction not subject to, the registration
requirements of the Securities Act. See "Transfer
Restrictions."
Use of Proceeds............. The net proceeds from this Offering will be
used to repay substantially all outstanding
borrowings under the revolving portion of the
Senior Credit Facility. The Company anticipates
using its additional borrowing availability under
the Senior Credit Facility, in part, to finance
the cash consideration to be paid in the Cellar
Door Acquisition, to repay debt in connection
with the Pending Acquisitions, to pay certain
related fees and expenses and to make certain
other payments as described herein. See "Use of
Proceeds."
Exchange Offer;
Registration Rights........ Pursuant to a registration rights agreement
(the "Registration Rights Agreement") among the
Company and the Initial Purchasers, the Company
will use its best efforts to file a registration
statement (the "Exchange Offer Registration
Statement") with respect to an offer to exchange
the Notes for a new issue of debt securities of
the Company (the "Exchange Notes") registered
under the Securities Act, with terms identical in
all material respects to those of the Notes (the
"Exchange Offer"). If (1) the Exchange Offer is
not permitted by applicable law or (2) any holder
of Transfer Restricted Securities (as defined
9
<PAGE>
herein) notifies the Company (a) that it is
prohibited by law or Commission policy from
participating in the Exchange Offer, (b) that it
may not resell the Exchange Notes acquired by it
in the Exchange Offer to the public without
delivering a prospectus and the prospectus
contained in the Exchange Offer Registration
Statement is not appropriate or available for
such resales or (c) that it is a broker-dealer
and holds Notes acquired directly from the
Company or an affiliate of the Company, the
Company will be required to provide a shelf
registration statement (the "Shelf Registration
Statement") to cover resales of the Notes by the
holders thereof. If the Company fails to satisfy
these registration obligations, it will be
required to pay liquidated damages ("Liquidated
Damages") to the Holders of Notes under certain
circumstances. See "Description of the Notes--
Registration Rights; Liquidated Damages."
Book-Entry, Delivery
and Form................... Notes sold in reliance on Rule 144A will be
represented by one or more permanent global Notes
in definitive, fully registered form without
interest coupons, deposited with the Trustee (as
defined herein) as custodian for, and registered
in the name of, a nominee of The Depository Trust
Company ("DTC"). Notes sold in offshore
transactions in reliance on Regulation S under
the Securities Act ("Regulation S") will be
represented by one or more permanent global Notes
in definitive, fully registered form deposited
with the Trustee as custodian for, and registered
in the name of, a nominee of DTC, for the
accounts of [Bank], as operator of the
Euroclear System ("Euroclear"), and Cedel Bank,
societe anonyme ("Cedel Bank"). Institutional
Accredited Investors that are not Qualified
Institutional Buyers will receive certificates
for the Notes owned by them, which cannot then be
traded through the facilities of DTC, except in
connection with a transfer to a Qualified
Institutional Buyer or a transfer pursuant to
Regulation S. See "Description of the Notes --
Book-Entry, Delivery and Form."
Governing Law............... The Indenture and the Notes will be governed
by, and construed in accordance with, the laws of
the State of New York.
RISK FACTORS
For a discussion of certain risk factors that should be considered in
connection with an investment in the Notes, see "Risk Factors."
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except share amounts)
The Summary Consolidated Financial Data of the Company includes the
historical financial statements of Delsener/Slater and affiliated companies,
the predecessor of the Company, for each of the four years ended December 31,
1996. The statement of operations data with respect to Delsener/Slater for the
year ended December 31, 1993, and the balance sheet data as of December 31,
1993 and 1994 is unaudited. The financial information presented below should be
read in conjunction with the information set forth in "Unaudited Pro Forma
Condensed Combined Financial Statements" and the notes thereto and the
historical financial statements and notes thereto of the Company, the 1997
Acquisitions, the 1998 Acquisitions and the Pending Acquisitions included
herein. The pro forma summary data for the year ended December 31, 1997 and the
nine months ended September 30, 1998 have been derived from the unaudited pro
forma condensed combined financial statements, which, in the opinion of
management, reflect all adjustments necessary for a fair presentation of the
transactions for which such pro forma financial information is given. Results
of operations for unaudited interim periods are not necessarily indicative of
the results that may occur for any other interim or annual period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1997
PRO FORMA
FOR THE 1997
ACQUISITIONS, THE
1998 ACQUISITIONS,
PREDECESSOR THE PENDING
---------------------------------------------- ACQUISITIONS AND
1993 1994 1995 1996 1997 THIS OFFERING
---------- ------------- ---------- ---------- -------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue ..................... $46,526 $92,785 $47,566 $ 50,362 $ 96,144 $ 1,001,732
Operating expenses .......... 45,635 90,598 47,178 50,686 83,417 889,860
Depreciation &
amortization (1) ........... 762 755 750 747 5,431 89,039
Corporate expenses (2) ...... -- -- -- -- 2,206 8,000
Non-cash charges ............ -- -- -- -- -- 1,367
------- ------- ------- -------- ------------ -----------
Operating income (loss) ..... 129 1,432 (362) (1,071) 5,090 13,466
Interest expense ............ (148) (144) (144) (60) (1,590) (80,147)
Other income ................ 85 138 178 198 295 4,280
Equity income (loss)
from investments ........... -- (9) 488 524 509 4,948
------- --------- ------- -------- ------------ -----------
Income (loss) before
income taxes ............... 66 1,417 160 (409) 4,304 (57,453)
Income tax provision ........ (57) (5) (13) (106) (490) (4,915)
------- --------- ------- -------- ------------ -----------
Net income (loss) ........... $ 9 $1,412 $ 147 $ (515) 3,814 (62,368)
======= ======== ======= ========
Accretion on temporary
equity--stock subject
to redemption (3) .......... -- (3,300)
------------ -----------
Net income (loss)
applicable to common
shares ..................... $ 3,814 $ (65,668)
============ ===========
Net income (loss) per
common share (4) ........... $ 0.26 $ (2.16)
------------ -----------
Weighted average
common shares
outstanding (4) ............ 14,626,061 30,941,441
OTHER OPERATING DATA:
EBITDA (5) .................. $ 891 $2,187 $ 388 $ (324) $ 10,521 $ 103,872
======= ======== ======= ======== ============ ===========
Cash flow from:
Operating activities ....... $2,959 $ (453) $ 4,214 $ 1,005
Investment activities ...... -- -- (435) (73,296)
Financing activities ....... (477) (216) (1,431) 78,270
Ratio of earnings to
fixed charges (6) ......... 1.2x 4.6x 1.4x -- 2.5x --
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------
1998
PRO FORMA
FOR THE 1997
ACQUISITIONS, THE
1998 ACQUISITIONS,
THE PENDING
ACTUAL ACTUAL ACQUISITIONS AND
1997 1998 THIS OFFERING
-------------- -------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue ..................... $ 74,396 $ 680,376 $ 1,037,148
Operating expenses .......... 63,045 602,538 910,631
Depreciation &
amortization (1) ........... 4,041 40,381 76,579
Corporate expenses (2) ...... 1,307 5,839 6,000
Non-cash charges ............ -- 32,895 33,262
------------ ------------ -----------
Operating income (loss) ..... 6,003 (1,277) 10,676
Interest expense ............ (956) (31,709) (60,110)
Other income ................ 213 2,152 1,703
Equity income (loss)
from investments ........... 1,344 3,964 5,968
------------ ------------ -----------
Income (loss) before
income taxes ............... 6,604 (26,870) (41,763)
Income tax provision ........ (2,952) (3,333) (4,617)
------------ ------------ -----------
Net income (loss) ........... 3,652 (30,203) $ (46,380)
===========
Accretion on temporary
equity--stock subject
to redemption (3) .......... -- (1,925) (2,475)
------------ ------------ -----------
Net income (loss)
applicable to common
shares ..................... $ 3,652 $ (32,128) $ (48,855)
============ ============ ===========
Net income (loss) per
common share (4) ........... $ 0.25 $ (1.38) $ (1.60)
------------ ------------ -----------
Weighted average
common shares
outstanding (4) ............ 14,382,778 23,262,122 30,941,441
OTHER OPERATING DATA:
EBITDA (5) .................. $ 10,044 $ 71,999 $ 120,517
============ ============ ===========
Cash flow from:
Operating activities ....... $ 789 $ 22,307
Investment activities ...... (71,997) (852,240)
Financing activities ....... 78,302 889,543
Ratio of earnings to
fixed charges (6) ......... 3.1x -- --
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1998
---------------------------------------------------------- --------------------------------
PRO FORMA
FOR THE PENDING
PREDECESSOR ACQUISITIONS
--------------------------------------------- AND THIS
1993 1994 1995 1996 1997 ACTUAL OFFERING
--------- --------- --------- --------- ---------- ------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets ................. $1,823 $4,453 $3,022 $6,191 $ 11,220 $ 165,727 $ 196,687
Property and equipment, net..... 4,484 3,728 2,978 2,231 59,685 275,000 312,881
Intangible assets, net ......... -- -- -- -- 60,306 904,929 1,088,640
Total assets ................... 6,420 8,222 6,037 8,879 146,942 1,391,548 1,651,636
Current liabilities ............ 4,356 3,423 3,138 7,973 21,514 166,540 163,470
Long-term debt, including
current portion ............... -- 1,830 -- -- 16,178 742,474 897,429
Temporary equity--stock
subject to redemption (3) ..... -- -- -- -- -- 16,500 19,920
Shareholders' equity ........... 6,420 2,969 2,900 907 102,144 396,211 497,958
</TABLE>
- ----------
(1) Depreciation and amortization includes $1,014,000 of integration costs
incurred during the nine months ended September 30, 1998.
(2) Corporate expenses are reduced by $1,794,000 and $398,000 for consulting
fees earned from Triathlon Broadcasting Company ("Triathlon") for the year
ended December 31, 1997 and for the nine months ended September 30, 1998,
respectively. The right to receive consulting fees payable under the
agreement with Triathlon was assigned to the Company by Broadcasting in
connection with the Spin-Off. Triathlon has agreed to be acquired by a
third party, and when acquired, it will cease paying consulting fees.
Should such acquisition not occur, future fees may vary, above the minimum
fee of $500,000, depending upon the level of acquisition and financing
activities of Triathlon.
(3) The PACE acquisition agreement provides that each PACE seller shall have an
option (a "Fifth Year Put 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 Company's Class A common stock received by that PACE seller
(representing 500,000 shares in the aggregate) for a cash purchase price
of $33.00 per share. With certain limited exceptions, the Fifth Year Put
Option rights are not assignable by the sellers. The maximum amount
payable under all Fifth Year Put Options ($16,500,000) has been recorded
as temporary equity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
(4) Includes 500,000 shares of the Company's Class A common stock issued to the
PACE sellers in connection with the Fifth Year Put Options; these shares
are not included in calculating the net loss per common share.
(5) "EBITDA" is defined as earnings before interest, taxes, non-cash charges,
other income, net equity income (loss) from investments and depreciation
and amortization. Although EBITDA is not a measure of performance
calculated in accordance with generally accepted accounting principles
("GAAP"), the Company believes that EBITDA is accepted by the
entertainment 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 which is
calculated in accordance with GAAP.
There are other adjustments that could affect EBITDA but have not been
reflected herein ("Adjusted EBITDA"). Had such adjustments been made,
Adjusted EBITDA on a pro forma basis would have been approximately
$117,164,000 for the year ended December 31, 1997 and $129,735,000 for the
nine months ended September 30, 1998. The adjustments include the expected
cost savings in connection with the 1998 Acquisitions and the Pending
Acquisitions associated with the elimination of duplicative staffing and
general and administrative expenses of $8,344,000 and $3,250,000, and
include equity income from investments of $4,948,000 and $5,968,000, for the
year ended December 31, 1997 and the nine months ended September 30, 1998,
respectively. While management believes that such cost savings are
achievable, the Company's ability to fully achieve such cost savings is
subject to numerous factors, certain of which may be beyond the Company's
control.
(6) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consists of earnings before income taxes and fixed charges.
"Fixed Charges" consists of interest on all indebtedness. Earnings were
insufficient to cover fixed charges by $393,000 for the year ended
December 31, 1996, $26,413,000 for the nine months ended September 30,
1998, $35,795,000 on a pro forma basis for the nine months ended
September 30, 1998, and $52,505,000 on a pro forma basis for the year
ended December 31, 1997.
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RISK FACTORS
Prospective purchasers of the Notes should carefully consider the risk
factors set forth below, as well as the other information appearing in this
Offering Memorandum, before making any investment in the Notes.
Certain statements, estimates, predictions and projections contained
herein under "Summary," "Risk Factors," "Business," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Agreements
Related to the Pending Acquisitions," in addition to certain statements
contained elsewhere herein, are "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. These
forward-looking statements are prospective, involving risks and uncertainties.
While these forward-looking statements, and any assumptions upon which they are
based, are made in good faith and reflect the Company's current judgment
regarding the direction of its business, actual results will almost always
vary, sometimes materially, from any estimates, predictions, projections,
assumptions, or other future performance suggested herein. Some important
factors (but not necessarily all factors) that could affect the Company's
revenues, growth strategies, future profitability and operating results, or
that otherwise could cause actual results to differ materially from those
expressed in or implied by any forward-looking statement, include the
following: lack of operating history as an independent public company; failure
to consummate any or all of the Pending Acquisitions; inability to successfully
implement operating strategies (including the achievement of cost savings);
failure to derive anticipated benefits from its acquisitions; payments pursuant
to indemnification arrangements; seasonality of operations or financial
results; changes in economic conditions and consumer tastes; competition;
regulatory difficulties; and the other matters referred to herein or elsewhere
in this Offering Memorandum, including those set forth below. Prospective
investors are urged to carefully consider these factors in connection with the
forward-looking statements. The Company does not undertake to release publicly
any revisions to forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RISKS RELATING TO THE NOTES
SUBSTANTIAL LEVERAGE
The Company is, and after this Offering will continue to be, highly
leveraged. As of September 30, 1998, the Company's consolidated indebtedness
would have been approximately $897.4 million on a pro forma basis giving effect
to this Offering and the application of the net proceeds therefrom, anticipated
borrowings under the Senior Credit Facility and the consummation of the Pending
Acquisitions, of which $350.0 million would have consisted of the 9 1/8% Senior
Subordinated Notes due February 1, 2008 (the "Old Notes"), $200.0 million would
have consisted of the Notes and the balance would have consisted of $290.4
million in debt under the Senior Credit Facility, $36.0 million in pre-existing
Senior Debt and $21.0 million in deferred purchase consideration. On such
basis, temporary equity would have been $19.9 million and stockholders' equity
would have been approximately $497.9 million. On a pro forma basis for this
Offering, anticipated borrowings under the Senior Credit Facility and the
Pending Acquisitions, the Company's ratio of total debt to capitalization as of
September 30, 1998 would have been 0.6 to 1, and earnings were insufficient to
cover fixed charges by $52.5 million for the year ended December 31, 1997 and
by $26.4 million for the nine months ended September 30, 1998. Certain of the
agreements relating to its acquisitions provide for purchase price adjustments
and future contingent payments in certain circumstances. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." In
addition, the Company may incur substantial additional indebtedness from time
to time to finance future acquisitions, for capital expenditures or for other
purposes. See "Capitalization," "Unaudited Pro Forma Condensed Combined Pro
Forma Financial Statements," "Description of Other Indebtedness" and
"Description of the Notes."
The Company's ability to make scheduled payments of principal of, to pay
interest on, to pay Liquidated Damages, if any, on or to refinance, its
indebtedness (including the Notes and the Old Notes), or to fund capital
expenditures will depend 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 in the Pending Acquisitions and their
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integration into the Company's operations. However, there can be no assurance
that the Company will be able to continue to meet the requirements for
additional borrowings under the Senior Credit Facility, that the Company's
business and the businesses to be acquired in the Pending Acquisitions will
generate sufficient cash flow from operations, that anticipated improvements in
operating results will be achieved or that future working capital borrowings
will be available in an amount sufficient to enable the Company to service its
indebtedness, including the Notes, to make necessary capital or other
expenditures or to fund its other liquidity needs. The Company may be required
to refinance a portion of the principal amount of its indebtedness prior to its
maturity. There can be no assurance that the Company will be able to effect any
such refinancing on commercially reasonable terms or at all. In addition,
future acquisitions may cause the Company to incur additional indebtedness. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The degree to which the Company will be leveraged following this Offering
could have important consequences to holders of the Notes, including, but not
limited to: (1) making it more difficult for the Company to satisfy its
obligations with respect to the Notes, (2) increasing the Company's
vulnerability to general adverse economic and industry conditions, (3) limiting
the Company's ability to obtain additional financing to fund future
acquisitions, working capital, capital expenditures and other general corporate
requirements, (4) requiring the dedication of a substantial portion of the
Company's cash flow from operations to the payment of principal of, and
interest on, its indebtedness, thereby reducing the availability of such cash
flow to fund working capital, capital expenditures, or other general corporate
purposes, (5) limiting the Company's flexibility in planning for, or reacting
to, changes in its business and the industry and (6) placing the Company at a
competitive disadvantage vis-a-vis less leveraged competitors. In addition, the
Senior Credit Facility and the Old Indenture contain, and the Indenture will
contain, financial and other restrictive covenants that will limit the ability
of the Company to, among other things, borrow additional funds for future
acquisitions or otherwise. See "--Restrictions Imposed by the Senior Credit
Facility, the Old Indenture and the Indenture." Failure by the Company to
comply with such covenants could result in an event of default which, if not
cured or waived, could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's
indebtedness under the Senior Credit Facility is secured by a pledge of the
stock of its subsidiaries and by liens on substantially all of its and its
subsidiaries' tangible assets. In addition, the degree to which the Company is
leveraged could prevent it from repurchasing all of the Notes tendered to it
upon the occurrence of a Change of Control. See "Description of Other
Indebtedness" and "Description of the Notes--Repurchase at Option of
Holder--Change of Control."
HOLDING COMPANY; DEPENDENCE ON SUBSIDIARIES
The Company is a holding company with no significant assets other than the
stock of its subsidiaries. In order to meet its financial needs, the Company
will rely exclusively on repayments of interest and principal on intercompany
loans made by the Company to its operating subsidiaries and income from
dividends and other cash flow from such subsidiaries. There can be no assurance
that the operating subsidiaries of the Company will generate sufficient net
income to pay upstream dividends or cash flow to make payments of interest and
principal to the Company in respect of its intercompany loans.
RANKING
The Notes, which will mature on December 1, 2008, will be subordinated in
right of payment to all current and future Senior Debt of the Company and the
Guarantors and will rank pari passu with the Old Notes, which mature on
February 1, 2008. However the Indenture will provide that the Company will not,
and will not permit any of the Guarantors to incur or otherwise become liable
for any indebtedness that is subordinate or junior in right of payment to any
Senior Debt and senior in any respect in right of payment to the Notes or any
of the Subsidiary Guarantees. Upon any distribution to creditors of the Company
in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, the holders of Senior Debt will be entitled to be paid
in full in cash or Cash Equivalents (as defined herein) before any payment may
be made with respect to the Notes. In addition, the subordination provisions of
the Indenture will provide that payments with respect to the Notes will be
blocked in the event of a payment default on Designated
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Senior Debt (as defined herein) and may be blocked for up to 179 days each year
in the event of certain non-payment defaults on Designated Senior Debt. In the
event of a bankruptcy, liquidation or reorganization of the Company, holders of
the Notes will participate ratably with all holders of subordinated
indebtedness of the Company that is deemed to be of the same class as the
Notes, and potentially with all other general creditors of the Company, based
upon the respective amounts owed to each holder or creditor, in the remaining
assets of the Company. In any of the foregoing events, there can be no
assurance that there would be sufficient assets to pay amounts due on the
Notes. As a result, holders of Notes may receive less, ratably, than the
holders of Senior Debt. See "Description of the Notes--Subordination."
The Company's obligations under the Notes are subordinate and junior in
right of payment to all existing and future Senior Debt of the Company. As of
September 30, 1998, on a pro forma basis giving effect to this Offering and the
application of the net proceeds therefrom, anticipated borrowings under the
Senior Credit Facility and the consummation of the Pending Acquisitions, the
Company and its subsidiaries would have had approximately $897.4 million of
indebtedness outstanding, of which approximately $347.4 million would have been
Senior Debt, including approximately $290.4 million of borrowings under the
Senior Credit Facility. The Indenture will permit the incurrence of substantial
additional indebtedness, including Senior Debt, by the Company and its
subsidiaries in the future. See "Description of Other Indebtedness."
The Notes will not be guaranteed by certain of the Company's subsidiaries
(the "Non-Guarantor Subsidiaries"). For the nine months ended September 30,
1998, on a pro forma basis for the 1998 Acquisitions and the Pending
Acquisitions, the Non-Guarantor Subsidiaries accounted for 2%, 3% and 3% of
revenues, EBITDA and assets, respectively. The Subsidiary Guarantees will be
subordinated to the guarantees of Senior Debt issued by the Guarantors under
the Senior Credit Facility and will be pari passu with the subsidiary
guarantees of the Old Notes. See "Description of the Notes--Subsidiary
Guarantees." The claims of creditors (including trade creditors) of any
Non-Guarantor Subsidiary will generally have priority as to the assets of such
subsidiaries over the claims of the holders of the Notes. On a pro forma basis,
giving effect to the Pending Acquisitions, the amount of liabilities of the
Non-Guarantor Subsidiaries, as of September 30, 1998, would have been
approximately $18.2 million.
RESTRICTIONS IMPOSED BY THE SENIOR CREDIT FACILITY, THE OLD INDENTURE AND
THE INDENTURE
The Senior Credit Facility and the Old Indenture contain, and the
Indenture will contain, a number of significant covenants that, among other
things, restrict the ability of the Company and its subsidiaries to dispose of
assets, incur additional indebtedness, repay indebtedness, pay dividends, make
certain investments, repurchase or redeem capital stock, engage in mergers or
consolidations, or engage in certain transactions with subsidiaries and
affiliates and that otherwise restrict corporate activities. There can be no
assurance that such restrictions will not adversely affect the Company's
ability to finance its future operations or capital needs or engage in other
business activities that may be in the interest of the Company. In addition,
the Senior Credit Facility also requires the Company to maintain compliance
with certain financial ratios, including a maximum Total Leverage Ratio (as
defined in the Senior Credit Facility), a maximum Senior Leverage Ratio (as
defined in the Senior Credit Facility), maintenance of a minimum Fixed Charges
Ratio (as defined in the Senior Credit Facility), maintenance of a minimum Pro
Forma Interest Expense Ratio (as defined in the Senior Credit Facility) and
maintenance of a minimum Debt Service Ratio (as defined in the Senior Credit
Facility). The ability of the Company to comply with such ratios and limits may
be affected by events beyond the Company's control. A breach of any of these
covenants or the inability of the Company to comply with the required financial
ratios or limits could result in an event of default under the Senior Credit
Facility. In the event of any such event of default, the lenders under the
Senior Credit Facility could elect to declare all borrowings outstanding under
the Senior Credit Facility, together with accrued interest and other fees, to
be due and payable, to require the Company to apply all of its available cash
to repay such borrowings or to prevent the Company from making debt service
payments on the Notes, any of which would be an Event of Default (as defined
herein) under the Notes. If the Company were unable to repay any such
borrowings when due, the lenders could proceed against their collateral. In
connection with the Senior Credit Facility, the Company and the Guarantors have
granted the lenders thereunder a continuing security interest in all of their
tangible
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assets and the capital stock of each Guarantor. If the indebtedness under the
Senior Credit Facility, the Old Notes or the Notes were to be accelerated,
there can be no assurance that the assets of the Company would be sufficient to
repay such indebtedness in full. See "--Company-Specific Risks--Pending
Acquisitions," "Description of Other Indebtedness" and "Description of the
Notes."
FRAUDULENT CONVEYANCE
Management believes that the indebtedness of the Company and the
Guarantors represented by the Notes is being incurred for proper purposes and
in good faith, and that the Company and the Guarantors are solvent, have
sufficient capital for carrying on their respective businesses and will be able
to pay their respective debts as they mature. Notwithstanding management's
belief, however, under federal and state fraudulent transfer laws, if a court
of competent jurisdiction in a suit by an unpaid creditor or a representative
of creditors (such as a trustee in bankruptcy or a debtor-in-possession) were
to find that, at the time of the incurrence of such indebtedness, the Company
was insolvent, was rendered insolvent by reason of such incurrence, was engaged
in a business or transaction for which its remaining assets constituted
unreasonably small capital, intended to incur, or believed that it would incur,
debts beyond its ability to pay such debts as they matured, or intended to
hinder, delay or defraud its creditors, and that the indebtedness was incurred
for less than reasonably equivalent value, then such court could, among other
things, (1) void all or a portion of the Company's or the Guarantors'
obligations to the Holders (as defined herein) of the Notes, the effect of
which would be that the Holders of the Notes might not be paid in full and/or
(2) subordinate the Company's or the Guarantors' obligations to the Holders of
the Notes to other existing and future indebtedness of the Company and the
Guarantors to a greater extent than would otherwise be the case, the effect of
which would be to entitle such other creditors to which the Notes were not
previously subordinated to be paid in full before any payment could be made on
the Notes. See "--Substantial Leverage."
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Guarantor would be considered
insolvent if (1) the sum of its debts, including contingent liabilities, were
greater than the saleable value of all of its assets at a fair valuation or if
the present fair saleable value of its assets were less than the amount that
would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature or (2) it
could not pay its debts as they become due.
The Company believes that, in accordance with the facts examined in
connection with this Offering, the Company and the Guarantors will be solvent
at the time of this Offering. There can be no assurance, however, as to what
standard a court would apply in making such determinations or that a court
would agree with the Company's or the Guarantors' conclusions in this regard.
POTENTIAL INABILITY TO FUND A CHANGE OF CONTROL OFFER
If Mr. Sillerman directly or indirectly owns less than 30% of the combined
voting power of the Company's common stock (and in certain other
circumstances), a "Change of Control" will occur under the Senior Credit
Facility. This would require the Company to repay all outstanding debt under
the Senior Credit Facility. Additionally, if anyone other than Mr. Sillerman
becomes the beneficial owner of over 35% of the voting power of the outstanding
Company common stock (and in certain other circumstances), then a "Change of
Control" will occur under the Old Indenture and the Indenture. This would
require the Company to offer to repurchase the outstanding Old Notes and Notes
at 101% of the principal amount thereof plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of repurchase. The Company may not have
sufficient funds available at the time of a Change of Control to perform these
obligations, and may otherwise be prevented from performing these obligations
by the terms of its indebtedness. Notwithstanding these provisions, the Company
could enter into certain transactions, including certain recapitalizations,
that would not constitute a Change of Control but would increase the amount of
debt outstanding at such time. See "Description of Other Indebtedness,"
"Description of the Notes--Repurchase at Option of Holders--Change of Control"
and "Principal Stockholders."
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DISCRETIONARY USE OF FUNDS
As described in "Use of Proceeds," the Company expects to use the proceeds
of this Offering to repay substantially all of its borrowings under the
revolving portion of the Senior Credit Facility. After such repayment, the
Company will have increased borrowing availability under the Senior Credit
Facility and will have wide discretion over the use of any funds it
subsequently borrows under the Senior Credit Facility. See "Use of Proceeds."
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
The Notes offered hereby have not been registered under the Securities
Act. Accordingly, the Notes may only be offered or sold pursuant to an
exemption from the registration requirements of the Securities Act or pursuant
to an effective registration statement. The Company is required to commence an
exchange offer for the Notes, or to register resales of the Notes under the
Securities Act, within certain time periods set forth herein. See "Description
of the Notes--Registration Rights; Liquidated Damages" and "Transfer
Restrictions." However, there is no existing market for the Notes and, although
the Notes are expected to be eligible for trading in PORTAL, there can be no
assurance as to the liquidity of any markets that may develop for the Notes,
the ability of holders of the Notes to sell their Notes, or the prices at which
holders would be able to sell their Notes. Future trading prices of the Notes
will depend on many factors, including, among other things, the Company's
ability to effect the Exchange Offer, prevailing interest rates, the Company's
operating results and the market for similar securities. The Initial Purchasers
have advised the Company that they currently intend to make a market in the
Notes offered hereby. However, they are not obligated to do so and any market
making may be discontinued at any time without notice. The Company does not
intend to apply for listing of the Notes on any securities exchange or
over-the-counter market.
COMPANY-SPECIFIC RISKS
ABSENCE OF COMBINED OPERATING HISTORY; POTENTIAL INABILITY TO INTEGRATE
ACQUIRED BUSINESSES
The business of the Company has been developed principally through the
acquisition of established live entertainment businesses, all of which have
been acquired since January 1997. Prior to their acquisition by the Company,
these acquired companies operated independently. In addition, both of the
businesses to be acquired in the Pending Acquisitions currently operate
independently. The Company's acquisitions have significantly increased, and the
Pending Acquisitions will further increase, the size and operations of the
Company. The Unaudited Pro Forma Condensed Combined Financial Statements
include the combined operating results of the acquired businesses and the
businesses to be acquired in Pending Acquisitions during periods when they were
not under common control or management, and therefore may not necessarily be
indicative of the results that would have been attained had the Company and
such businesses operated on a combined basis during those periods. On a pro
forma basis, as of and for the nine months ended September 30, 1998, the 1998
Acquisitions and the Pending Acquisitions represented 74% and 11% of the
Company's revenues and 67% and 16% of its assets, respectively. The Company's
prospects should be considered in light of the numerous risks commonly
encountered in business combinations. There can be no assurance that the
Company's management group will be able to effectively integrate the acquired
businesses and the businesses to be acquired in the Pending Acquisitions. The
Company's business, financial condition and results of operations could be
materially adversely affected if the Company is unable to retain the key
personnel that have contributed to the historical performances of the acquired
businesses, the Company or the businesses to be acquired in the Pending
Acquisitions. See "--Dependence on Key Personnel" and "Business."
PENDING ACQUISITIONS
Although management believes that the consummation of the Pending
Acquisitions is in the Company's best interests, it will involve substantial
expenditures and certain risks normally associated with acquisitions on the
part of the Company. There can be no assurance that the Pending Acquisitions
will be completed successfully or, if completed, will yield the expected
benefits to the Company or will not materially adversely affect the Company's
business, financial condition or results of operations.
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Financing Matters. The aggregate consideration to be paid in the Pending
Acquisitions is expected to consist of approximately $103.1 million in cash,
including the repayment of approximately $33.1 million in debt and the issuance
of approximately 2,188,246 shares of Class A common stock (of which 1,758,139
shares are estimated to be issued in the Marquee Acquisition, assuming an SFX
Stock Price of $46.50). See "Agreements Related to the Pending Acquisitions."
The Company intends to finance the cash portion of the purchase price with
borrowings under the Senior Credit Facility. The availability of funds under
the Senior Credit Facility is subject to certain financial covenants, and there
can be no assurance that the funds required to complete the Pending
Acquisitions will be available to the Company when needed. See "--Risks
Relating to the Notes--Substantial Leverage," "--Potential Conflicts of
Interest," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources," "Description of Other
Indebtedness" and "Agreements Related to the Pending Acquisitions."
Cellar Door. Although the Company has entered into a letter of intent to
acquire Cellar Door, it has not yet entered into a definitive agreement. It may
be unable to enter into such a definitive agreement, in which case it may be
unable to close the Cellar Door acquisition. If it is unable to complete the
Cellar Door acquisition, it may be required to pay the seller liquidated
damages of $10.0 million.
General. There can be no assurance as to when or which of the Pending
Acquisitions will be consummated or that they will be consummated on the terms
described herein or at all. Furthermore, the consummation of the Pending
Acquisitions may fail to conform to the assumptions used in the preparation of
the Unaudited Pro Forma Condensed Combined Financial Statements included
herein. Therefore, in analyzing the Unaudited Pro Forma Condensed Combined
Financial Statements and other information, holders of Notes should consider
that the Pending Acquisitions may not be consummated on the terms described
herein or at all. In addition, although the Company has conducted a due
diligence investigation of the businesses it has acquired, the scope of its
investigation has been limited. Although the agreements governing the Company's
acquisitions generally provide for indemnification from the sellers for a
limited period of time with respect to certain matters, such indemnification is
subject to thresholds and limitations, and it is possible that other material
matters not identified in due diligence will subsequently be identified or that
the matters heretofore identified will prove to be more significant than
currently expected.
Consummation of each of the Pending Acquisitions is subject to the
satisfaction or waiver of a number of closing conditions, certain of which are
beyond the Company's control, including approval of the lenders under the
Senior Credit Facility and, in the case of the Cellar Door Acquisition,
termination or expiration of the applicable waiting period under the HSR Act.
See "Business--Litigation" and "Agreements Related to the Pending
Acquisitions."
RE-PURCHASE RIGHTS FOR CERTAIN SUBSIDIARIES
The Company has granted rights to re-purchase certain of its subsidiaries,
which may discourage potential bidders for the affected assets from negotiating
with the Company. These rights include, among others:
PACE. In connection with the Company's acquisition of PACE, Brian Becker
received an option to acquire the Company's motor sports business (or, if that
business is sold, the Company's theatrical business) at its fair market value.
Mr. Becker may only exercise this option between February 25, 2000 and March
12, 2000. The exercise of this option would result in termination of Mr.
Becker's employment agreement. Mr. Becker's exercise of this option could
damage the Company's business, financial condition and results of operations.
In addition, from February 25, 1999 to February 25, 2000, Mr. Becker will
also have a right of first refusal under certain circumstances to acquire the
Company's theatrical or motor sports line of business at a price equal to 95%
of any proposed purchase price by a third party. On a pro forma basis for the
1998 Acquisitions and the Pending Acquisitions, specialized motor sports would
have accounted for approximately 5%, and theatrical operations would have
accounted for approximately 21%, of the Company's total net revenues for the
nine months ended September 30, 1998.
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Don Law. The Company has granted the Don Law seller a right of first
offer and refusal, with certain exceptions, over the assets the Company
acquired in the Don Law Acquisition if the Company elects to sell those assets
before July 2, 2000. See "Management--Employment Agreements and Arrangements
with Certain Officers and Directors."
BGP. The Company has also agreed that it will not sell the assets of BG
Presents, Inc. ("BGP") before February 24, 2001, without giving the BGP sellers
the opportunity to purchase the assets on the same terms.
EXPANSION STRATEGY; NEED FOR ADDITIONAL FUNDS
The Company is currently negotiating additional acquisitions and expects
to pursue additional acquisitions of live entertainment and related businesses
in the future. However, it may be unable to identify and acquire additional
suitable businesses or obtain the financing necessary to acquire the
businesses. After the borrowings under the Senior Credit Facility described in
"Use of Proceeds," the Company anticipates having approximately $55.6 million
of additional borrowing capacity available under the Senior Credit Facility,
and will likely require additional financing for any additional acquisitions.
Future acquisitions by the Company could result in (1) potentially dilutive
issuance of equity securities, (2) the incurrence of substantial additional
indebtedness and/or (3) 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.
Acquisitions involve numerous risks, including difficulties in the assimilation
of the operations, technologies, services and products of the acquired
companies and the diversion of management's attention from other business
concerns. If any acquisition occurs, the Company's business, financial
condition and results of operations may be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Each acquisition is subject to the prior approval of the Company's lenders
under the Senior Credit Facility, and financing for any future acquisitions may
be unavailable or restricted by the terms of the Senior Credit Facility, the
Old Indenture and the Indenture.
CONTROL OF VENUES
The Company operates a number of its live entertainment venues under
leasing or booking agreements, and accordingly the Company's long-term success
will depend in part on its ability to renew these agreements when they expire
or terminate. There can be no assurance that the Company will be able to renew
these agreements on acceptable terms or at all, or that it will be able to
obtain attractive agreements with substitute venues. See "Business--Services
Provided--Venue Operations."
CONTROL BY MANAGEMENT
Upon the consummation of the Pending Acquisitions, Mr. Sillerman will
beneficially own approximately 37.6% of the total voting power of the Company's
common stock, and all directors and executive officers together will
beneficially own approximately 43.2% of the total voting power of the Company's
common stock. Accordingly, these persons will have substantial influence over
the affairs of the Company, including the ability to control the election of a
majority of the Company's Board of Directors (the "Board"), the decision
whether to effect or prevent a merger or sale of assets (except in certain
"going private transactions") and other matters requiring stockholder approval.
Moreover, control by management may have the effect of discouraging certain
types of "Change of Control" transactions. See "Management" and "Principal
Stockholders."
Mr. Sillerman beneficially owns 1,524,168 shares of Class B common stock,
representing approximately 31.6% of the total voting power of the Company's
common stock after the completion of the Pending Acquisitions, which allow him
to exert substantial control in the election of directors. Each share of Class
B common stock automatically converts into a share of Class A common stock upon
(1) its sale, gift, or other transfer, voluntary or involuntary, to a party
that is not an Affiliate (as defined in the Certificate of Incorporation) of
Mr. Sillerman or of the Company or (2) the death of Mr. Sillerman, in the case
of any shares of Class B common stock held by Mr. Sillerman or any Affiliate of
Mr. Sillerman. The
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terms of the Certificate of Incorporation contemplate that the shares of Class
B common stock held by Mr. Sillerman could be transferred to an Affiliate (as
defined in the Certificate of Incorporation) of Mr. Sillerman or the Company
without losing their special voting rights. Changes in Mr. Sillerman's
ownership in the Company could result in a Change of Control under the terms of
the Indenture, the Old Indenture and the Senior Credit Facility. See
"--Potential Inability to Fund a Change of Control Offer."
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends substantially on the abilities and
continued service of certain of its (and its subsidiaries') executive officers
and directors. In particular, the Company will depend on the continued services
of Robert F.X. Sillerman, Michael G. Ferrel, Brian Becker, David Falk, Howard
J. Tytel and Thomas P. Benson. The Company has entered into employment
agreements with each of the members of its senior management team. See
"--Potential Conflicts of Interest" and "Management."
Furthermore, the operations of each of the businesses that the Company has
acquired are local in nature and depend to a significant degree on the
continued services of certain individuals at each business. See "Management"
and "Certain Relationships and Related Transactions." The loss of any of these
individuals' services could have a material adverse effect on the Company's
business, financial condition and results of operations. See "--Absence of
Combined Operating History; Potential Inability to Integrate Acquired
Businesses."
POTENTIAL CONFLICTS OF INTEREST
Marquee is a publicly-traded company that, among other things, provides
talent representation services to professional athletes and acts as booking
agent for tours and appearances for musicians and other entertainers. The
Company has agreed to acquire Marquee. See "Agreements Related to the Pending
Acquisitions--Marquee." Mr. Sillerman has an aggregate equity interest of
approximately 5.9% in Marquee and is the Chairman of its Board of Directors,
and Mr. Tytel has an equity interest in Marquee of approximately 1.0% and is
one of its directors. However, Messrs. Sillerman and Tytel did not represent
the interests of Marquee in negotiations with the Company relating to the
Marquee Acquisition. The Company may directly compete with Marquee prior to the
consummation of the Marquee Acquisition in obtaining representation agreements
with particular athletes and endorsement opportunities for its clients. In
addition, the Company anticipates that, from time to time, it will enter into
transactions and arrangements (particularly booking arrangements) with Marquee
and Marquee's clients. In any transaction or arrangement with Marquee prior to
the consummation of the Marquee Acquisition, Messrs. Sillerman and Tytel are
likely to have conflicts of interest as officers and directors of the Company.
These transactions or arrangements will be subject to the approval of a
committee of independent members of the boards of directors of each of the
Company and Marquee, except that booking arrangements in the ordinary course of
business will be subject to periodic review but not the approval of each
particular arrangement. Marquee also acts as a promoter of various sporting
events and sports personalities, and the Company produces ice skating and
gymnastics events that may compete prior to the Marquee Acquisition with events
in which Marquee is involved. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Relationships and
Related Transactions--Potential Conflicts of Interest."
The Sillerman Companies, Inc. ("TSC"), an entity controlled by Mr.
Sillerman and in which Mr. Tytel also has an equity interest, has provided and
will continue to provide financial consulting services to Marquee until the
consummation of the Marquee Acquisition. TSC's services are provided by certain
directors, officers and employees of the Company who are not separately
compensated for their services by TSC. In any transaction, arrangement or
competition with Marquee prior to the consummation of the Marquee Acquisition,
Messrs. Sillerman and Tytel are likely to have conflicts of interest between
their duties as officers and directors of the Company, on the one hand, and
their duties as directors of Marquee and their interests in TSC and Marquee, on
the other hand. See "Certain Relationships and Related Transactions--Triathlon
Fees."
20
<PAGE>
INDEMNIFICATION ARRANGEMENTS
The Company has certain arrangements with its directors and officers
providing for indemnification. See "Certain Relationships and Related
Transactions--Assumption of Employment Agreements; Certain Change of Control
Payments" and "--Indemnification of Mr. Sillerman."
COMPETITION
Competition in the live entertainment industry is intense and is
fragmented among a wide variety of entities. The Company competes on a local,
regional and national basis with a number of large venue owners and
entertainment promoters for the hosting, booking, promoting and producing of
music concerts, theatrical shows, motor sports events and other live
entertainment events. Moreover, the Company's marketing and consulting
operations compete with advertising agencies and other marketing organizations.
The Company and the businesses to be acquired in the Pending Acquisitions
compete not only with other live entertainment events, including sporting
events and theatrical presentations, but also with non-live forms of
entertainment, such as television, radio and motion pictures. The talent
representation industry is also highly competitive. The Company competes with
both larger and smaller entities. A number of the Company's competitors have
substantially greater resources than the Company. Certain of the Company's
competitors may also operate on a less leveraged basis, and have greater
operating and financial flexibility, than the Company. In addition, many of
these competitors also have long-standing relationships with performers,
producers, and promoters and may offer other services that are not provided by
the Company. There can be no assurance that the Company will be able to compete
successfully in this market or against these competitors. See "Business."
REGULATORY MATTERS
The Company's business is subject to extensive local, state and federal
regulatory, licensing, approval and permit requirements, including those
relating to zoning, operation of public facilities and consumer protection.
Certain large acquisitions must also comply with the HSR Act. The Company may
be unable to obtain the licenses, approvals and permits it requires (including
under the HSR Act) from time to time in order to acquire and operate live
entertainment businesses in accordance with its expansion strategy. See
"Business--Regulatory Matters."
The Federal Trade Commission and the Antitrust Division of the Department
of Justice have the authority to challenge the Company's acquisitions on
antitrust grounds before or after the acquisitions are completed. Each state in
which the Company has operations may also challenge an acquisition under state
or federal antitrust laws. In addition, the Company has received a preliminary
inquiry from the U.S. Department of Justice seeking information on the overall
scope of the Company's operations, including the Cellar Door Acquisition. While
the Company believes that its operations and its plan of acquisitions are in
compliance with applicable antitrust laws, there can be no assurance that the
results of such inquiry will not have a material adverse impact on the
Company's business, results of operations and financial condition or its
ability to close the Cellar Door Acquisition. See "Business--Regulatory
Matters."
ENVIRONMENTAL MATTERS
The Company has real property relating to its business, consisting of fee
interests, leasehold interests and other contractual interests. The Company's
properties are subject to foreign, federal, state and local environmental laws
and regulations regarding the use, storage, disposal, emission, release and
remediation of hazardous and non-hazardous substances, materials or wastes,
including laws relating to noise emissions (which may affect, among other
things, the hours of operation of the Company's venues). Further, under certain
of these laws and regulations, the Company could be held strictly, jointly and
severally liable for the remediation of hazardous substance contamination at
its facilities or at third-party waste disposal sites, and could also be held
liable for any personal or property damage related to any contamination. The
Company believes that it is in substantial compliance with all of these laws
and regulations, and has performed preliminary environmental assessments of all
of the properties that are wholly-owned, without identifying material
environmental hazards. Although the level of future expenditures cannot be
determined with certainty, the Company does not anticipate, based on currently
known facts, that its environmental costs are likely to have a material adverse
effect on the Company's business, financial condition and results of
operations.
21
<PAGE>
FUTURE CHARGES TO EARNINGS; FUTURE CONTINGENT PAYMENTS
Consummation of the 1997 and 1998 Acquisitions resulted in and, together
with the Pending Acquisitions, will continue to result in, substantial charges
to earnings relating to interest expense and the recognition and amortization
of goodwill and other intangible assets; these charges will increase the
Company's losses or reduce or eliminate its earnings, if any. As of September
30, 1998, on a pro forma basis, the Company had goodwill and other intangible
assets of approximately $1.1 billion. Goodwill and other intangible assets are
being amortized using the straight line method over 15 years. See "Unaudited
Pro Forma Condensed Combined Financial Statements" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." Additionally, certain options issued, or anticipated to be
issued, by the Company will require the Company to record future non-cash
charges to earnings. These non-cash charges to earnings will increase the
Company's losses or reduce or eliminate its earnings, if any. See "Certain
Relationships and Related Transactions," "Management--Employment Agreements and
Arrangements with Certain Officers and Directors" and "--Compensation of
Directors."
In addition, the Company is obligated to pay purchase price adjustments
relating to certain of its acquisitions and other future contingent payments
under certain circumstances. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Future Contingent Payments."
YEAR 2000 COMPLIANCE
Year 2000 issues exist when computers record dates using two digits
(rather than four) and then use the dates for arithmetic operations,
comparisons or sorting. A two-digit recording may recognize a date using "00"
as 1900 rather than 2000, which could cause computer systems to perform
inaccurate computations or to fail to operate.
The Company is currently working to resolve the Year 2000 problem in its
computer systems, and is in the process of installing new accounting and
reporting systems. These systems will provide better reporting and analysis
than the Company's current systems and also will be Year 2000 compliant. The
Company anticipates that implementing these systems will cost it approximately
$4.5 million, of which it already has spent approximately $2.4 million. The
Company anticipates addressing all material Year 2000 problems with its
computer systems before January 1, 2000.
In addition, Year 2000 problems of other companies with which it does
business may affect the Company. It is examining its vendors' Year 2000
compliance and is attempting to ensure that the companies on which it relies
heavily are Year 2000 compliant. However, the Company cannot predict the effect
of the Year 2000 problem on those companies or the economy in general, or the
resulting effect on it.
Although the Company does not anticipate being subject to a material
impact in this area, if it and the companies with which it does business do not
take adequate preventative action, then the Year 2000 problem could damage its
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance."
RISKS RELATING TO THE INDUSTRY
ECONOMIC CONDITIONS AND CONSUMER TASTES
The Company's operations are affected by general economic conditions and
consumer tastes. The demand for live entertainment tends to be highly sensitive
to consumers' disposable incomes, and thus a decline in general economic
conditions that generally reduces consumers' disposable incomes could, in turn,
materially adversely affect the Company's revenues. In addition, the
profitability of events promoted or produced by the Company is directly related
to the ancillary revenues generated by those events, and the ancillary revenues
decrease with lower attendance levels. The success of a music concert,
theatrical show or motor sports event depends on public tastes, which are
unpredictable and susceptible to change, and may also be significantly affected
by the number and popularity of competitive productions, concerts or events as
well as other forms of entertainment. It is impossible for the Company to
predict the success
22
<PAGE>
of any music concert, theatrical show or motor sports event. In addition,
decreased attendance, a change in public tastes or an increase in competition
could have a material adverse effect on the Company's business, financial
condition and results of operations.
AVAILABILITY OF ARTISTS AND EVENTS
The Company's success and ability to sell tickets (including
subscriptions) is highly dependent on the availability of popular musical
artists, Touring Broadway Shows and specialized motor sports talent, among
other performers of live entertainment. The Company's results of operations
have been adversely affected in periods where fewer popular musical artists
and/or popular theatrical productions were available for presentation. There
can be no assurance that popular musical artists, theatrical shows or
specialized motor sports talent will be available to the Company in the future.
The lack of availability of these artists and productions could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RISKS RELATED TO THE REPRESENTATION OF ATHLETES
With the consummation of the FAME acquisition, the Company became a
leading full-service marketing and management company specializing in the
representation of team sports athletes, primarily in professional basketball. A
significant portion of FAME's revenues to date has been derived from a small
number of clients in professional basketball. The Company estimates that five
of FAME's basketball clients accounted for approximately 78% of FAME's revenues
for the nine months ended September 30, 1998 and, on a pro forma basis, FAME's
EBITDA would have comprised approximately 3% of the Company's EBITDA for the
same period. The amount of endorsement and other revenues which these clients
generate is a function of, among other things, such clients' professional
performance and public appeal. Factors beyond the Company's control, such as a
client's injury, declining skill, declining public appeal or conduct in
violation of team or league policy, as well as labor unrest in the sports
industry, could have a material adverse affect on the Company's operations. In
the event of a labor interruption, for example, revenues related to the
negotiation of a client's contract (absent a retroactive payment for games
missed as part of any settlement) would generally cease for the duration of the
stoppage. Endorsement revenues, which generally require that a player be on an
active roster, might also be affected in the event of a labor interruption.
Representation agreements with clients are generally for a term equal to the
term of the player's professional sports contract, but are terminable on 15
days' notice (although FAME would continue to be entitled to the revenue
streams generated during the remaining term of any contracts which it
negotiated). The termination or expiration of contracts with certain clients
could also have a material adverse effect on the Company's operations and
results of operations.
The owners of the teams of the NBA have instituted a "lock-out" of the
basketball players on their respective teams, causing cancellation of some of
the games for the 1998-99 basketball season. If such NBA lock-out continues for
an extended period of time, it will have a significant negative impact on FAME.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Representation of Professional Athletes."
23
<PAGE>
USE OF PROCEEDS
The proceeds from this Offering of $200 million, net of approximately $7.5
million of discounts, fees and expenses (including fees to be paid in
connection with obtaining the consent of the lenders under the Senior Credit
Facility), will be used to repay substantially all outstanding borrowings under
the revolving portion of the Senior Credit Facility. The revolving debt to be
repaid bears interest (as of October 30, 1998) at a rate of 7.89%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company anticipates using its additional borrowing
availability under the Senior Credit Facility as follows:
<TABLE>
<S> <C>
Cash Portion of Cellar Door Acquisition(1) ....................... $ 70,000,000
Repayment of Debt of Marquee(2) .................................. 33,140,000
Fees and Expenses Related to the Pending Acquisitions(3) ......... 7,500,000
Other Payment(4) ................................................. 26,250,000
------------
Total Uses of Funds(5) ......................................... $136,890,000
============
</TABLE>
- ----------
(1) Includes the repayment of approximately $23.5 million of debt. The
Company has entered into a binding letter of intent to acquire Cellar
Door but has not yet entered into a definitive agreement. Assumes that
the Company does not elect to pay cash in lieu of issuing a portion of
the consideration in stock. There can be no assurance that the Cellar
Door acquisition will be consummated on the terms described herein or at
all. See "Agreements Related to the Pending Acquisitions."
(2) Payable in connection with repayment of Marquee indebtedness. Such amount
may vary depending on the date such acquisition is completed. There can
be no assurance that the Marquee acquisition will be consummated on the
terms described herein or at all. See "Agreements Related to the Pending
Acquisitions."
(3) Consists of fees and expenses in connection with the Pending
Acquisitions. The information relating to fees and expenses is based on
management's estimates, and may not be indicative of, and are likely to
vary from, the actual fees and expenses incurred by the Company relating
to this Offering and the Pending Acquisitions.
(4) Consists of a tax indemnity payment due on December 31, 1998.
Management's estimates of the amount of the indemnity payment are based
on assumptions that management believes are reasonable. However, upon the
completion of all final tax returns, including any potential tax audits,
such assumptions could be modified in a manner that would result in a
significant variance in the actual amount of the tax indemnity. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(5) Following the Company's borrowings under the Senior Credit Facility as
described above, the Company anticipates having approximately $55.6
million in remaining borrowing availability thereunder. The availability
of funds under the Senior Credit Facility is subject to certain financial
covenants, and there can be no assurance that funds will be available to
the Company thereunder when needed. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
If either of the Pending Acquisitions is not consummated, the Company will
be able to use the borrowing availability under the Senior Credit Facility for
any other purpose permitted by the terms of the Senior Credit Facility, the
Indenture and the Old Indenture.
24
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1998, (1) the
historical capitalization of the Company, (2) the pro forma capitalization of
the Company to reflect this Offering and the application of the proceeds and
(3) the pro forma capitalization of the Company to reflect this Offering,
anticipated borrowings under the Senior Credit Facility and the consummation of
the Pending Acquisitions. This information should be read in conjunction with
the financial statements and the related notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------------------------
(IN THOUSANDS)
PRO FORMA
FOR THIS
OFFERING
PRO FORMA AND THE
FOR THIS PENDING
ACTUAL OFFERING ACQUISITIONS
------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents ..................................... $ 65,589 $ 65,589 $ 78,202
========== ========== ==========
Debt:
Senior Credit Facility ........................................ $ 346,000 $ 153,500 $ 290,390
9 1/8% Senior Subordinated Notes due February 1, 2008 ......... 350,000 350,000 350,000
Notes offered hereby .......................................... -- 200,000 200,000
Other long-term debt .......................................... 23,122 23,122 23,122
Capital lease obligations ..................................... 12,922 12,922 12,922
Deferred purchase consideration ............................... 10,430 10,430 20,995
---------- ---------- ----------
Total debt ................................................... 742,474 749,974 897,429
---------- ---------- ----------
Temporary equity--stock subject to redemption(1) .............. 16,500 16,500 19,920
---------- ---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value, 25,000,000 shares
authorized, none outstanding as of September 30,
1998 actual and pro forma .................................... -- -- --
Class A common stock, $.01 par value, 100,000,000
shares authorized, 28,753,194 shares issued and
outstanding as of September 30, 1998 actual and pro
forma for this Offering, and 30,941,441 shares issued
and outstanding pro forma(2) ................................. 288 288 309
Class B common stock, $.01 par value, 10,000,000 shares
authorized, 1,697,037 shares issued and outstanding as
of September 30, 1998 actual and pro forma ................... 17 17 17
Additional paid-in capital .................................... 431,617 431,617 533,343
Deferred compensation ......................................... (7,397) (7,379) (7,397)
Accumulated deficit(3) ........................................ (28,314) (28,314 (28,314)
---------- ---------- ----------
Total stockholders' equity ................................... 396,211 396,211 497,958
---------- ---------- ----------
Total capitalization ........................................ $1,155,185 $1,162,685 $1,415,307
========== ========== ==========
</TABLE>
- ----------
(1) The PACE agreement provides that each PACE seller shall have an option,
exercisable during a period beginning on February 25, 2003 and ending 90
days thereafter, to require the Company to purchase up to one-third of
the shares of Class A common stock received by such PACE seller
(representing 500,000 shares in the aggregate) for a cash purchase price
of $33.00 per share. With certain limited exceptions, the option rights
are not assignable by the PACE sellers. The maximum amount payable under
the options ($16.5 million) has been presented as temporary equity in the
Company's historical balance sheet, and the increase on a pro forma basis
represents Marquee's potential obligation to repurchase 545,135 shares of
Marquee common stock issued in connection with certain of its
acquisitions, of which 59,027 shares are in escrow. Marquee has
determined that it is probable that the financial thresholds required to
be met for the release of these escrowed shares will be achieved in 1998.
These shares are not included in stockholders' equity.
(2) Gives effect on a pro forma basis to the issuance of (1) an aggregate of
1,758,138 shares of Class A common stock estimated to be issued in the
Marquee Acquisition and (2) an aggregate of 430,108 shares of Class A
common stock anticipated to be issued in the Cellar Door Acquisition.
Does not include (1) shares issuable, subject to certain conditions, upon
conversion of the Class B common stock or (2) shares issuable upon
exercise of outstanding options. See "Management--Employment Agreements
and Arrangements with Certain Officers and Directors" and "Certain
Relationships and Related Transactions--Issuance to Stock to Holders of
Broadcasting's Options and SARs."
<PAGE>
(3) Retained earnings (accumulated deficit) on a pro forma basis have not
been adjusted for future charges to earnings that will result from the
issuance of stock and options granted to certain executive officers and
other employees of the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Selected Consolidated Financial Data of the Company includes the
historical financial statements of Delsener/Slater, the predecessor of the
Company, for each of the four years ended December 31, 1996. The statement of
operations data with respect to Delsener/Slater for the year ended December 31,
1993, and the balance sheet data as of December 31, 1993 and 1994 is unaudited.
The financial information presented below should be read in conjunction with
the information set forth in "Unaudited Pro Forma Condensed Combined Financial
Statements" and the notes thereto and the historical financial statements and
notes thereto of the Company, the 1997 Acquisitions, the 1998 Acquisitions and
the Pending Acquisitions included herein. The pro forma summary data for the
year ended December 31, 1997 and the nine months ended September 30, 1998 have
been derived from the unaudited pro forma condensed combined financial
statements, which, in the opinion of management, reflect all adjustments
necessary for a fair presentation of the transactions for which such pro forma
financial information is given. Results of operations for unaudited interim
periods are not necessarily indicative of the results that may occur for any
other interim or annual period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1997
PRO FORMA
FOR THE 1997
ACQUISITIONS,
THE 1998
ACQUISITIONS,
THE PENDING
PREDECESSOR ACQUISITIONS
---------------------------------------------- AND THIS
1993 1994 1995 1996 1997 OFFERING
---------- ------------- ---------- ---------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue ......................... $46,526 $92,785 $47,566 $ 50,362 $ 96,144 $ 1,001,732
Operating expenses .............. 45,635 90,598 47,178 50,686 83,417 889,860
Depreciation &
amortization(1) ................ 762 755 750 747 5,431 89,039
Corporate expenses (2) .......... -- -- -- -- 2,206 8,000
Non-cash charges ................ -- -- -- -- -- 1,367
------- ------- ------- -------- ------------ -----------
Operating income (loss) ......... 129 1,432 (362) (1,071) 5,090 13,466
Interest expense ................ (148) (144) (144) (60) (1,590) (80,147)
Other income .................... 85 138 178 198 295 4,280
Equity income (loss) from
investments .................... -- (9) 488 524 509 4,948
------- --------- ------- -------- ------------ -----------
Income (loss) before income
taxes .......................... 66 1,417 160 (409) 4,304 (57,453)
Income tax provision ............ (57) (5) (13) (106) (490) (4,915)
------- --------- ------- -------- ------------ -----------
Net income (loss) ............... $ 9 $1,412 $ 147 $ (515) 3,814 (62,368)
======= ======== ======= ========
Accretion on temporary
equity--stock subject to
redemption (3) ................. -- (3,300)
------------ -----------
Net income (loss) applicable
to common shares ............... $ 3,814 $ (65,668)
============ ===========
Net income (loss) per
common share (4) ............... $ 0.26 $ (2.16)
Weighted average common
shares outstanding (4) ......... 14,626,061 30,941,441
OTHER OPERATING DATA:
EBITDA (5) ...................... $ 891 $2,187 $ 388 $ (324) $ 10,521 $ 103,872
======= ======== ======= ======== ============ ===========
Cash flow from:
Operating activities ........... $2,959 $ (453) $ 4,214 $ 1,005
Investment activities .......... -- -- (435) (73,296)
Financing activities ........... (477) (216) (1,431) 78,270
Ratio of earnings to fixed
charges (6) ................... 1.2x 4.6x 1.4x -- 2.5x --
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
1998
PRO FORMA
FOR THE 1997
ACQUISITIONS,
THE 1998
ACQUISITIONS,
THE PENDING
ACQUISITIONS
ACTUAL ACTUAL AND THIS
1997 1998 OFFERING
-------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue ......................... $ 74,396 $ 680,376 $ 1,037,148
Operating expenses .............. 63,045 602,538 910,631
Depreciation &
amortization(1) ................ 4,041 40,381 76,579
Corporate expenses (2) .......... 1,307 5,839 6,000
Non-cash charges ................ -- 32,895 33,262
------------ ------------ -----------
Operating income (loss) ......... 6,003 (1,277) 10,676
Interest expense ................ (956) (31,709) (60,110)
Other income .................... 213 2,152 1,703
Equity income (loss) from
investments .................... 1,344 3,964 5,968
------------ ------------ -----------
Income (loss) before income
taxes .......................... 6,604 (26,870) (41,763)
Income tax provision ............ (2,952) (3,333) (4,617)
------------ ------------ -----------
Net income (loss) ............... 3,652 (30,203) $ (46,380)
===========
Accretion on temporary
equity--stock subject to
redemption (3) ................. -- (1,925) (2,475)
------------ ------------ -----------
Net income (loss) applicable
to common shares ............... $ 3,652 $ (32,128) $ (48,855)
============ ============ ===========
Net income (loss) per
common share (4) ............... $ 0.25 $ (1.38) $ (1.60)
Weighted average common
shares outstanding (4) ......... 14,382,778 23,262,122 30,941,441
OTHER OPERATING DATA:
EBITDA (5) ...................... $ 10,044 $ 71,999 $ 120,517
============ ============ ===========
Cash flow from:
Operating activities ........... $ 789 $ 22,307
Investment activities .......... (71,997) (852,240)
Financing activities ........... 78,302 889,543
Ratio of earnings to fixed
charges (6) ................... 3.1x -- --
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1998
-------------------------------------------------- --------------------------------
PRO FORMA
FOR THE PENDING
PREDECESSOR ACQUISITIONS
--------------------------------------- AND THIS
1993 1994 1995 1996 1997 ACTUAL OFFERING
--------- --------- --------- --------- ---------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (UNAUDITED) (UNAUDITED)
Current assets ...................... $1,823 $4,453 $3,022 $6,191 $ 11,220 $ 165,727 $ 196,687
Property and equipment, net ......... 4,484 3,728 2,978 2,231 59,685 275,000 312,881
Intangible assets, net .............. -- -- -- -- 60,306 904,929 1,088,640
Total assets ........................ 6,420 8,222 6,037 8,879 146,942 1,391,548 1,651,636
Current liabilities ................. 4,356 3,423 3,138 7,973 21,514 166,540 163,470
Long-term debt, including
current portion .................... -- 1,830 -- -- 16,178 742,474 897,429
Temporary equity--stock subject
to redemption (3) .................. -- -- -- -- -- 16,500 19,920
Shareholders' equity ................ 6,420 2,969 2,900 907 102,144 396,211 497,958
</TABLE>
- ----------
(1) Depreciation and amortization includes $1,014,000 of integration costs
incurred during the nine months ended September 30, 1998.
(2) Corporate expenses are reduced by $1,794,000 and $398,000 for consulting
fees earned from Triathlon for the year ended December 31, 1997 and for
the nine months ended September 30, 1998, respectively. The right to
receive consulting fees payable under the agreement with Triathlon was
assigned to the Company by Broadcasting in connection with the Spin-Off.
Triathlon has agreed to be acquired by a third party, and when acquired,
it will cease paying consulting fees. Should such acquisition not occur,
future fees may vary, above the minimum fee of $500,000, depending upon
the level of acquisition and financing activities of Triathlon.
(3) The PACE acquisition agreement provides that each PACE seller has a Fifth
Year Put 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
Company's Class A common stock received by that PACE seller (representing
500,000 shares in the aggregate) for a cash purchase price of $33.00 per
share. With certain limited exceptions, the Fifth Year Put Option rights
are not assignable by the sellers. The maximum amount payable under all
Fifth Year Put Options ($16,500,000) has been recorded as temporary
equity. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
(4) Includes 500,000 shares of the Company's Class A common stock issued to the
PACE sellers in connection with the Fifth Year Put Options; these shares
are not included in calculating the net loss per common share.
(5) "EBITDA" is defined as earnings before interest, taxes, non-cash charges,
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 entertainment 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 which is
calculated in accordance with GAAP.
There are other adjustments that could affect EBITDA but have not been
reflected herein. Had such adjustments been made, Adjusted EBITDA on a pro
forma basis would have been approximately $117,164,000 for the year ended
December 31, 1997 and $129,735,000 for the nine months ended September 30,
1998. The adjustments include the expected cost savings in connection with
the 1998 Acquisitions and the Pending Acquisitions associated with the
elimination of duplicative staffing and general and administrative expenses
of $8,344,000 and $3,250,000, and include equity income from investments of
$4,948,000 and $5,968,000, for the year ended December 31, 1997 and the nine
months ended September 30, 1998, respectively. While management believes
that such cost savings are achievable, the Company's ability to fully
achieve such cost savings is subject to numerous factors, certain of which
may be beyond the Company's control.
(6) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consists of earnings before income taxes and fixed charges.
"Fixed Charges" consists of interest on all indebtedness. Earnings were
insufficient to cover Fixed Charges by $393,000 for the year ended
December 31, 1996, $26,413,000 for the nine months ended September 30,
1998, $35,795,000 on a pro forma basis for the nine months ended
September 30, 1998, and $52,505,000 on a pro forma basis for the year
ended December 31, 1997.
27
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Financial Statements
and notes thereto contain forward-looking statements that involve risks and
uncertainties, including those described in "Risk Factors" or elsewhere herein.
Therefore, the actual results of the Company may differ materially from those
discussed herein. See "Risk Factors." The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking
statements that may be made to reflect any future events or circumstances.
In the opinion of management, all adjustments necessary to fairly present
this pro forma information have been made. The Unaudited Pro Forma Condensed
Combined Financial Statements are based upon, and should be read in conjunction
with, the historical financial statements of the Company and certain of the
businesses previously acquired by the Company and the respective notes to such
financial statements contained elsewhere herein. The pro forma information is
based upon tentative allocations of purchase price and does not purport to be
indicative of the results that would have been reported had such events
actually occurred on the date specified, nor is it indicative of the Company's
future results. Purchase accounting is based upon preliminary asset valuations,
which are subject to change.
The Company entered the live entertainment business in January 1997 with
the acquisition of Delsener/Slater. In March 1997, the Company acquired the
Meadows Music Theater ("Meadows") and in June 1997 the Company acquired
Sunshine Promotions, Inc. and certain other related companies ("Sunshine
Promotions") (collectively, the "1997 Acquisitions").
In January 1998, the Company acquired Westbury Music Fair. In February
1998, the Company acquired PACE, Pavilion Partners ("Pavilion"), The
Contemporary Group of Companies, (collectively "Contemporary"), BG Presents,
Inc. ("BGP"), and Album Network, Inc., SJS Entertainment Corporation and the
Network 40 (collectively "Network"). In March 1998, the Company acquired
Concert/ Southern Promotions ("Concert/Southern") and United Sports of America
Motor Sports ("USA Motorsports"). In May 1998, the Company acquired Irvine
Meadows Amphitheater, New Avalon, Inc., TBA Media, Inc. and West Coast
Amphitheater (collectively "Avalon"). In June 1998, the Company acquired
Oakdale Concerts, LLC and Oakdale Development Limited Partnership (collectively
"Oakdale") and FAME. In July 1998, the Company acquired Don Law. In September
1998, the Company acquired Magicworks Entertainment Incorporated
("Magicworks"). During the third quarter of 1998, the Company acquired seven
companies (collectively the "Other Acquisitions") which operate in the
Company's theatrical and music segments. The acquisitions of Westbury Music
Fair, PACE, Pavilion, Contemporary, BGP, Network, Concert/Southern, USA
Motorsports, Avalon, Oakdale, FAME, Don Law, Magicworks, and the Other
Acquisitions are collectively referred to herein as the "1998 Acquisitions."
In addition, the Company has entered into the merger agreement, as
amended, with respect to the Marquee Acquisition. The Company expects to incur
approximately $6.0 million of fees and expenses related to this transaction.
The Company has also entered into a letter of intent to acquire all of the
outstanding capital stock of Cellar Door pursuant to the Cellar Door
Acquisition for an aggregate purchase price of $70.0 million in cash, Class A
common stock with a value of $20.0 million and $8.5 million payable in five
equal annual installments beginning on the first anniversary of the closing
date. In addition, the Company will issue to the seller options to purchase
100,000 shares of the Company's Class A common stock. The acquisitions of
Marquee and Cellar Door are collectively referred to herein as the "Pending
Acquisitions." See "Agreements Related to the Pending Acquisitions."
The Unaudited Pro Forma Condensed Combined Balance Sheet at September 30,
1998 is presented as if the Company had completed this Offering and the Pending
Acquisitions as of September 30, 1998.
The Unaudited Pro Forma Condensed Combined Statements of Operations for
the year ended December 31, 1997 and the nine months ended September 30, 1998
are presented as if the Company had completed the 1997 Acquisitions, the 1998
Acquisitions, this Offering and the Pending Acquisitions as of January 1, 1997.
In addition, the Unaudited Pro Forma Condensed Combined Financial
Statements do not reflect certain purchase price adjustments and future
contingent payments, which may be payable pursuant to the various acquisition
agreements. See "Risk Factors--Company-Specific Risks--Future Charges to
Earnings; Future Contingent Payments."
28
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PENDING ACQUISITIONS
I
-----------------------------------------------
SFX CELLAR PRO FORMA
ENTERTAINMENT DOOR MARQUEE ADJUSTMENTS
(ACTUAL) A B C
--------------- ------------- ------------- -------------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets ........................................ $ 165,727 $ (62,405) $ (17,275) $ 110,640(a)
Property and equipment, net ........................... 275,000 34,986 2,895 --
Intangible assets, net ................................ 904,929 65,635 110,576 7,500(b)
Other assets .......................................... 45,892 2,088 5,814 (366)(d)
---------- --------- --------- ----------
Total Assets .......................................... $1,391,548 $ 40,304 $ 102,010 $ 117,774
========== ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities ................................... $ 166,540 $ 11,729 $ 11,451 $ (26,250)(c)
Deferred taxes ........................................ 60,601 -- -- --
Senior Credit Facility ................................ 346,000 -- -- (55,610)(c)
Old Notes ............................................. 350,000 -- -- --
Notes offered hereby .................................. -- -- -- 200,000(a)
Other long-term debt .................................. 23,122 -- -- --
Capital lease obligations ............................. 12,922 -- -- --
Deferred Purchase Consideration ....................... 10,430 6,788 3,777 --
Other liabilities ..................................... 5,354 1,787 1,615 --
Minority interest ..................................... 3,868 -- -- (366)(d)
Temporary equity--stock subject to redemption ......... 16,500 -- 3,420 --
Stockholders' equity .................................. 396,211 20,000 81,747 --
---------- --------- --------- ----------
Total Liabilities & Stockholders' Equity .............. $1,391,548 $ 40,304 $ 102,010 $ 117,774
========== ========= ========= ==========
<CAPTION>
PRO FORMA
FOR THE PENDING
ACQUISITIONS AND
THIS OFFERING
-----------------
<S> <C>
ASSETS:
Current assets ........................................ $ 196,687
Property and equipment, net ........................... 312,881
Intangible assets, net ................................ 1,088,640
Other assets .......................................... 53,428
----------
Total Assets .......................................... $1,651,636
==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities ................................... $ 163,470
Deferred taxes ........................................ 60,601
Senior Credit Facility ................................ 290,390
Old Notes ............................................. 350,000
Notes offered hereby .................................. 200,000
Other long-term debt .................................. 23,122
Capital lease obligations ............................. 12,922
Deferred Purchase Consideration ....................... 20,995
Other liabilities ..................................... 8,756
Minority interest ..................................... 3,502
Temporary equity--stock subject to redemption ......... 19,920
Stockholders' equity .................................. 497,958
----------
Total Liabilities & Stockholders' Equity .............. $1,651,636
==========
</TABLE>
29
<PAGE>
I. PENDING ACQUISITIONS
A. CELLAR DOOR ACQUISITION
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998 (IN THOUSANDS)
--------------------------------------------------
PRO FORMA CELLAR DOOR
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------------- ------------
<S> <C> <C> <C>
ASSETS:
Current assets ................................... $ 9,095 $ (71,500)(a) $ (62,405)
Property and equipment, net ...................... 34,986 -- 34,986
Intangible assets, net ........................... 256 58,591 (b) 65,635
6,788 (c)
Other assets ..................................... 4,420 (2,332)(d) 2,088
------- ----------- ---------
Total Assets ..................................... $48,757 $ (8,453) $ 40,304
======= =========== =========
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities .............................. $16,130 $ (4,401)(d) $ 11,729
Long-term debt ................................... 23,500 (23,500) (a) --
Deferred Purchase Consideration .................. -- 6,788 (c) 6,788
Other Liabilities ................................ 1,787 -- 1,787
Stockholders' equity ............................. 7,340 (7,340)(e) 20,000
20,000 (a)
------- ----------- ---------
Total Liabilities & Stockholders' Equity ......... $48,757 $ (8,453) $ 40,304
======= =========== =========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) To reflect the Cellar Door Acquisition for $71,500,000 in cash
including the repayment of $23,500,000 of Cellar Door's debt and
$1,500,000 of fees and expenses, and the issuance of 430,108 shares
of the Company's Class A common stock valued at approximately
$20,000,000.
(b) To reflect the excess of the purchase price paid over the fair value
of net tangible assets acquired of $58,591,000.
(c) To reflect the issuance of an $8,500,000 promissory note to certain
sellers with a present value of $6,788,000.
(d) To reflect the elimination of related parties' notes.
(e) To reflect the elimination of Cellar Door's historical stockholders'
equity.
30
<PAGE>
B. MARQUEE ACQUISITION
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998 (IN THOUSANDS)
--------------------------------------------------
PRO FORMA MARQUEE
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------------- ------------
<S> <C> <C> <C>
ASSETS:
Current assets .......................................... $21,825 $ (39,100)(a) $ (17,275)
Property and equipment, net ............................. 2,895 -- 2,895
Intangible assets, net .................................. 59,648 50,928 (b) 110,576
Other assets ............................................ 5,814 -- 5,814
Total Assets ............................................ $90,182 $ 11,828 $ 102,010
======= ========== =========
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities ..................................... $11,451 $ -- $ 11,451
Long-term debt .......................................... 33,140 (33,140)(a) --
Deferred purchase consideration ......................... 3,777 -- 3,777
Other liabilities ....................................... 1,615 -- 1,615
Temporary equity -- stock subject to redemption ......... 3,420 -- 3,420
Stockholders' equity .................................... 36,779 (36,779)(c) 81,747
81,747 (a)
------- ---------- ---------
Total Liabilities & Stockholders' Equity ................ $90,182 $ 11,828 $ 102,010
======= ========== =========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) To reflect the issuance of 1,758,138 shares of the Company's Class A
common stock valued at $81,747,000 (which assumes that the SFX Stock
Price is $46.50 per share) and the repayment of $33,140,000 of the
Marquee's debt and $6,000,000 in cash for related fees and expenses.
(b) To reflect the excess of the purchase price paid over the fair value
of net tangible assets acquired of $50,928,000.
(c) To reflect the elimination of Marquee's stockholders' equity.
C. PRO FORMA ADJUSTMENTS:
(a) Represents the application of the net proceeds of this Offering to
repay substantially all of the revolving portion of the Senior
Credit Facility, and borrowings under such facility to finance the
cash purchase price of the Pending Acquisitions of $110,640,000,
including the repayment of Marquee's debt and related fees and
expenses. See "Use of Proceeds."
(b) To record debt issuance costs related to this Offering.
(c) Reflects the payment of the $26,250,000 tax indemnification
liability on December 31, 1998 and a $55,610,000 net paydown of
existing borrowings under the credit agreement.
(d) Reflects the elimination of PACE's minority interest due to the
Cellar Door Acquisition.
31
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SFX
ENTERTAINMENT 1997
(ACTUAL) ACQUISITIONS 1998 ACQUISITIONS
I II III
--------------- -------------- ------------------
<S> <C> <C> <C>
Revenue ....................................... $96,144 $14,243 $ 774,055
Operating expenses ............................ 83,417 13,293 688,757
Depreciation & amortization ................... 5,431 1,402 68,426
Corporate expenses, net of Triathlon fees ..... 2,206 -- 5,794
Non-cash charges .............................. -- -- --
------- ------- ---------
Operating income (loss) ....................... 5,090 (452) 11,078
Interest expense .............................. 1,590 171 59,168
Equity (income) loss from investments ......... (509) -- (4,813)
Other (income) expenses ....................... (295) (1) (2,640)
------- --------- ---------
Income/(loss) before
income tax expense ........................... 4,304 (622) (40,637)
Income tax expense (benefit) .................. 490 -- 4,367
------- -------- ---------
Net income (loss) ............................. $ 3,814 $ (622) $ 45,004
======== =========
Accretion on put option ....................... --
-------
Net income (loss) applicable to common
share ........................................ $ 3,814
=======
Net income (loss) per common share ............ $ .26
=======
Weighted average common shares
outstanding (1) .............................. 14,445
=======
<CAPTION>
PENDING ACQUISITIONS
IV
---------------------------------------
PRO FORMA
FOR THE 1997
PRO FORMA ACQUISITIONS, THE
FOR THE 1997 1998 ACQUISITIONS,
ACQUISITIONS PRO FORMA THIS OFFERING
AND THE 1998 CELLAR DOOR MARQUEE ADJUSTMENTS AND THE PENDING
ACQUISITIONS A B C ACQUISITIONS
-------------- ------------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Revenue ....................................... $ 884,442 $63,966 $ 53,324 $ -- $1,001,732
Operating expenses ............................ 785,467 58,165 46,228 -- 889,860
Depreciation & amortization ................... 75,259 5,595 7,685 500 89,039
--
Corporate expenses, net of Triathlon fees ..... 8,000 -- -- -- 8,000
Non-cash charges .............................. -- -- 1,367 -- 1,367
--------- ------- -------- --------- ----------
Operating income (loss) ....................... 15,716 206 (1,956) (500) 13,466
Interest expense .............................. 60,929 -- -- 19,218 80,147
Equity (income) loss from investments ......... (5,322) (601) -- 975 (4,948)
Other (income) expenses ....................... (2,936) (369) -- (975) (4,280)
--------- ------- -------- --------- ----------
Income/(loss) before
income tax expense ........................... (36,955) 1,176 (1,956) (19,718) (57,453)
Income tax expense (benefit) .................. 4,857 5 53 -- 4,915
--------- ------- -------- --------- ----------
Net income (loss) ............................. $ (41,812) $ 1,171 $ (2,009) $ (19,718) $ (62,368)
========= ======= ======== ========= ==========
Accretion on put option ....................... (3,300)
----------
Net income (loss) applicable to common
share ........................................ $ (65,668)
==========
Net income (loss) per common share ............ $ (2.16)
==========
Weighted average common shares
outstanding (1) .............................. $ 30,941
==========
</TABLE>
- -------
(1) Includes 500,000 shares of the Company's Class A common stock issued to
the PACE sellers in connection with the Fifth Year Put Option (such
shares are not included in calculating the net loss per common share).
32
<PAGE>
I. THE COMPANY'S ACTUAL OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997
EBITDA for the year ended December 31, 1997 was $10,521,000 and
$103,872,000 for the Company on an actual basis and a pro forma basis,
respectively. EBITDA is defined as earnings before interest, taxes, non-cash
charges, 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 entertainment 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 which is calculated in accordance
with GAAP.
There are other adjustments that could affect EBITDA but have not been
reflected herein. Had such adjustments been made, Adjusted EBITDA on a pro
forma basis would have been approximately $117,164,000 for the year ended
December 31, 1997. The adjustments include the expected cost savings in
connection with the 1998 Acquisitions and Pending Acquisitions associated with
the elimination of duplicative staffing and general and administrative expenses
of $8,344,000, and equity income from investments of $4,948,000. While
management believes that such cost savings are achievable, the Company's
ability to fully achieve such cost savings is subject to numerous factors,
certain of which may be beyond the Company's control. See "Risk Factors."
II. 1997 ACQUISITIONS
The Company acquired Delsener/Slater, Meadows and Sunshine Promotions on
January 2, 1997, March 20, 1997 and June 24, 1997, respectively. These
adjustments represent the historical operating results of Meadows and Sunshine
Promotions prior to their respective acquisitions by the Company.
33
<PAGE>
III. 1998 ACQUISITIONS
The Company acquired PACE (including USA Motor Sports), Pavilion,
Contemporary, BGP, Network and Concert/Southern on February 25, 1998, February
27, 1998, February 24, 1998, February 27, 1998 and March 4, 1998, respectively.
In June 1998, the Company acquired FAME, Avalon and Oakdale. In July 1998, the
Company acquired Don Law and in September 1998 the Company acquired Magicworks.
In addition, in the third quarter of 1998, the Company acquired seven other
companies herein defined as the Other Acquisitions. The following represents
the historical operating results of these companies prior to their acquisition
by the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-------------------------------------------------------------------------------------
PACE
AND CONCERTS
PAVILION CONTEMPORARY BGP NETWORK SOUTHERN FAME
ACQUISITIONS ACQUISITION ACQUISITION ACQUISITION ACQUISITION ACQUISITION
A B C D E F
-------------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue ..................... $284,360 $103,300 $105,553 $28,322 $14,797 $10,881
Operating expenses .......... 260,256 91,220 96,630 19,577 12,520 3,457
Depreciation &
amortization ............... 6,053 1,320 1,027 351 79 115
Corporate expenses .......... -- -- -- -- -- --
Other expenses .............. -- -- -- -- -- --
-------- -------- -------- ------- ------- -------
Operating income (loss) ..... 18,051 10,760 7,896 8,394 2,198 7,309
Interest expense ............ 6,772 266 917 195 -- 79
Equity (income) loss from
investments ................ (7,399) -- -- -- 48 --
Other (income) expenses...... 1,290 (357) (270) (78) (60) (143)
-------- -------- -------- ------- ------- -------
Income (loss) before
income tax expense ......... 17,388 10,851 7,249 8,277 2,210 7,373
Income tax expense
(benefit) .................. 3,569 -- 1,687 127 -- 700
-------- -------- -------- ------- ------- -------
Net income (loss) ........... $ 13,819 $ 10,851 $ 5,562 $ 8,150 $ 2,210 $ 6,673
======== ======== ======== ======= ======= =======
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-------------------------------------------------------------------------------------------
AVALON OAKDALE DON LAW MAGICWORKS OTHER PRO FORMA
ACQUISITION ACQUISITION ACQUISITION ACQUISITION ACQUISITIONS ADJUSTMENTS
G H I J K L
------------- ------------- ------------- ------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue ..................... $27,265 $16,435 $50,588 $39,504 $ 93,050 --
Operating expenses .......... 22,564 14,720 43,741 36,455 87,617 --
Depreciation &
amortization ............... 410 51 2,033 634 430 55,923 (a)
Corporate expenses .......... -- -- -- -- -- 5,794 (b)
Other expenses .............. -- -- -- -- -- --
------- ------- ------- ------- -------- ------
Operating income (loss) ..... 4,291 1,664 4,814 2,415 5,003 (61,717)
Interest expense ............ 94 1,508 1,072 686 254 47,325 (c)
Equity (income) loss from
investments ................ -- -- -- -- (1,561) 862 (d)
1,581 (e)
1,656 (f)
Other (income) expenses...... -- (79) (329) (135) 39 (862)(d)
(1,656)(f)
------- ------- ------- ------- -------- ----------
Income (loss) before
income tax expense ......... 4,197 235 4,071 1,864 6,271 (110,623)
Income tax expense
(benefit) .................. 949 -- -- 747 22 (2,834)(g)
(600)(h)
------- ------- ------- ------- -------- ----------
Net income (loss) ........... $ 3,248 $ 235 $ 4,071 $ 1,117 $ 6,249 $ (107,189)
======= ======= ======= ======= ======== ===========
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
(IN THOUSANDS)
--------------
PRO FORMA
FOR THE
1998
ACQUISITIONS
-------------
<S> <C>
Revenue ..................... $ 774,055
Operating expenses .......... 688,757
Depreciation &
amortization ............... 68,426
Corporate expenses .......... 5,794
Other expenses .............. --
---------
Operating income (loss) ..... 11,078
Interest expense ............ 59,168
Equity (income) loss from
investments ................ (4,813)
Other (income) expenses...... (2,640)
---------
Income (loss) before
income tax expense ......... (40,637)
Income tax expense
(benefit) .................. 4,367
---------
Net income (loss) ........... $ (45,004)
=========
</TABLE>
34
<PAGE>
A. PACE AND PAVILION ACQUISITIONS
Reflects the PACE Acquisition, the separate acquisition of two partners'
interest in the Pavilion partnership that owns certain amphitheaters operated
by PACE and the acquisition of USA Motor Sports by PACE in March 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-------------------------------------------------------------------------------
PACE AND
PACE PAVILION USA MOTOR PRO FORMA PAVILION
AS REPORTED AS REPORTED SPORTS ADJUSTMENTS ACQUISITIONS
------------- ------------- ----------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue .............................. $176,168 $ 98,632 $8,560 $ 1,000(a) $284,360
Operating expenses ................... 170,169 83,258 8,306 (1,477)(b) 260,256
Depreciation & amortization .......... 1,985 4,045 23 -- 6,053
Other expenses ....................... 1,139 -- -- (1,139)(c) --
-------- -------- ------ --------- --------
Operating income (loss) .............. 2,875 11,329 231 3,616 18,051
Interest expense ..................... 2,384 4,388 -- -- 6,772
Equity (income) loss from
investments ......................... (8,134) (1,831) -- 2,566 (d) (7,399)
Other (income) expenses .............. 53 1,304 (67) -- 1,290
-------- -------- ------ --------- --------
Income/(loss) before income tax
expense ............................. 8,572 7,468 298 1,050 17,388
Income tax expense (benefit) ......... 3,569 -- -- -- 3,569
-------- -------- ------ --------- --------
Net income ........................... $ 5,003 $ 7,468 $ 298 $ 1,050 $ 13,819
======== ======== ====== ========= ========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) To reflect non-cash revenue resulting from the Company granting
Blockbuster naming rights to three venues for two years for no
future consideration as part of its agreement to acquire
Blockbuster's indirect 33 1/3% interest in Pavilion.
(b) Reflects the elimination of $570,000 of certain officers' salaries
and bonuses which will not be paid under the Company's new
employment contracts and $907,000 of non-recurring costs incurred in
connection with PACE's previously planned initial public offering,
which was canceled. The amount of the pro forma adjustment to
eliminate salaries and bonuses is based on the Company's agreements
with the affected employees that a bonus will not be paid unless
there is a significant improvement in the results of the PACE
Acquisition. Accordingly, no such bonus is reflected in the pro
forma statement of operations because, if PACE's results were
similar to those in these pro forma statements of operations, the
Company would not be contractually obligated to pay a bonus.
(c) Reflects the elimination of non-recurring restricted stock
compensation to PACE executives.
(d) To eliminate PACE's income from its 33 1/3% equity investment in
Pavilion.
35
<PAGE>
B. CONTEMPORARY ACQUISITION
Reflects the Contemporary Acquisition and the separate acquisition of the
remaining 50% interest in Riverport Amphitheater Partners, a partnership that
owns an amphitheater in St. Louis, Missouri that is operated by Contemporary.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-------------------------------------------------------------------
CONTEMPORARY RIVERPORT PRO FORMA CONTEMPORARY
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITION
-------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Revenue ......................................... $ 89,053 $14,247 $ -- $103,300
Operating expenses .............................. 90,820 11,630 (11,230)(a) 91,220
Depreciation & amortization ..................... 541 779 -- 1,320
--------- ------- ---------- --------
Operating income (loss) ......................... (2,308) 1,838 11,230 10,760
Interest expense ................................ 192 74 -- 266
Equity (income) from investments ................ (1,002) -- 1,002 (b) --
Other (income) expenses ......................... (117) (240) -- (357)
--------- ------- ---------- --------
Income/(loss) before income tax expense ......... (1,381) 2,004 10,228 10,851
Income tax expense (benefit) .................... -- -- -- --
--------- ------- ---------- --------
Net income (loss) ............................... $ (1,381) $ 2,004 $ 10,228 $ 10,851
========= ======= ========== ========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses
and other consulting expenses which will not be paid under the
Company's new employment and other contracts. The amount of the pro
forma adjustment to eliminate salaries and bonuses is based on the
Company's agreements with the affected employees that a bonus will
not be paid unless there is a significant improvement in the results
of Contemporary. Accordingly, no such bonus is reflected in the pro
forma statement of operations because, if Contemporary's results
were similar to those in these pro forma statements of operations,
the Company would not be contractually obligated to pay a bonus.
(b) Reflects the elimination of Contemporary's equity income in
Riverport Amphitheater Partners. Contemporary has acquired its
partners' 50% interest in this venture.
36
<PAGE>
C. BGP ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
------------------------------------------------
AS REPORTED PRO FORMA BGP
(A) ADJUSTMENTS ACQUISITION
------------- ----------------- ------------
<S> <C> <C> <C>
Revenue ......................................... $105,553 $ -- $105,553
Operating expenses .............................. 99,958 (3,328)(b) 96,630
Depreciation & amortization ..................... 1,027 -- 1,027
-------- --------- --------
Operating income ................................ 4,568 3,328 7,896
Interest expense ................................ 917 -- 917
Other (income) expenses ......................... (270) -- (270)
-------- --------- --------
Income/(loss) before income tax expense ......... 3,921 3,328 7,249
Income tax expense (benefit) .................... 1,687 -- 1,687
-------- --------- --------
Net income ...................................... $ 2,234 $ 3,328 $ 5,562
======== ========= ========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects BGP's operating results for the twelve months ended January
31, 1998.
(b) Reflects the elimination of certain officers' salaries and bonuses
and other consulting expenses which will not be paid under the
Company's new employment and other contracts. The amount of the pro
forma adjustment to eliminate salaries and bonuses is based on the
Company's agreements with the affected employees that a bonus will
not be paid unless there is a significant improvement in the results
of BGP. Accordingly, no such bonus is reflected in the pro forma
statement of operations because, if BGP's results were similar to
those in these pro forma statements of operations, the Company would
not be contractually obligated to pay a bonus.
D. NETWORK ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
------------------------------------------------
PRO FORMA NETWORK
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ----------------- ------------
<S> <C> <C> <C>
Revenue ......................................... $28,322 $ -- $28,322
Operating expenses .............................. 26,903 (7,326)(a) 19,577
Depreciation & amortization ..................... 351 351
------- -------
Operating income (loss) ......................... 1,068 7,326 8,394
Interest expense, net ........................... 195 -- 195
Other (income) expenses ......................... (78) -- (78)
------- --------- -------
Income/(loss) before income tax expense ......... 951 7,326 8,277
Income tax expense (benefit) .................... 127 -- 127
------- --------- -------
Net income ...................................... $ 824 $ 7,326 $ 8,150
======= ========= =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENT:
(a) Reflects the elimination of certain officers' salaries and bonuses
which will not be paid under the Company's new employment contracts.
The amount of the pro forma adjustment to eliminate salaries and
bonuses is based on the Company's agreements with the affected
employees that a bonus will not be paid unless there is a
significant improvement in the results of the Network Acquisition.
Accordingly, no such bonus is reflected in the pro forma statement
of operations because, if Network's results were similar to those in
these pro forma statements of operations, the Company would not be
contractually obligated to pay a bonus.
37
<PAGE>
E. CONCERT/SOUTHERN ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
----------------------------------------------
CONCERT/
PRO FORMA SOUTHERN
AS REPORTED ADJUSTMENTS ACQUISITION
------------- --------------- ------------
<S> <C> <C> <C>
Revenue ....................................... $14,797 $ -- $14,797
Operating expenses ............................ 12,949 (429)(a) 12,520
Depreciation & amortization ................... 79 -- 79
------- ------- -------
Operating income .............................. 1,769 429 2,198
Other (income) expenses ....................... (60) -- (60)
Equity (income) loss from investments ......... 80 (32)(b) 48
------- ------- -------
Income before income tax expense .............. 1,749 461 2,210
Income tax expense (benefit) .................. -- -- --
------- ------- -------
Net income .................................... $ 1,749 $ 461 $ 2,210
======= ======= =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses
which will not be paid under the Company's new employment contracts.
The amount of the pro forma adjustment to eliminate salaries and
bonuses is based on the Company's agreements with the affected
employees that a bonus will not be paid unless there is a
significant improvement in the results of Concert/Southern.
Accordingly, no such bonus is reflected in the pro forma statement
of operations because, if Concert/Southern's results were similar to
those in these pro forma statements of operations, the Company would
not be contractually obligated to pay a bonus.
(b) Reflects the elimination of equity loss of a non-entertainment
affiliated entity which was not acquired by the Company.
F. FAME ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-------------------------------------------------
PRO FORMA FAME
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------------ ------------
<S> <C> <C> <C>
Revenue ......................................... $ 10,881 $ -- $10,881
Operating expenses .............................. 13,002 (10,595)(a) 3,457
1,050 (b)
Depreciation & amortization ..................... 115 115
-------- ---------- -------
Operating income (loss) ......................... (2,236) 9,545 7,309
Interest expense ................................ 79 79
Other (income) expenses ......................... (143) (143)
-------- ---------- -------
Income/(loss) before income tax expense ......... (2,172) 9,545 7,373
Income tax expense (benefit) .................... 700 (c) 700
-------- ---------- -------
Net income (loss) ............................... $ (2,172) $ 8,845 $ 6,673
======== ========== =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' distributions of
earnings which will not be paid under the Company's new employment
contracts. The FAME Acquisition agreement provides for payments by
the Company to the FAME sellers of additional amounts up to an
aggregate of $15.0 million in equal annual installments over 5 years
contingent on the achievement of certain financial targets and for
additional payments by the Company if FAME's financial performance
exceeds the target by certain amounts.
(b) Reflects salaries and officers' life insurance premiums to be paid
by the Company.
(c) Reflects an adjustment to the provision for state and local income
taxes.
38
<PAGE>
G. AVALON ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
---------------------------------------------------
PRO FORMA AVALON
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ----------------- ------------
<S> <C> <C> <C>
Revenue ......................................... $27,265 $ -- $27,265
Operating expenses .............................. 24,404 (1,840)(a) 22,564
Depreciation & amortization ..................... 410 410
Corporate expenses .............................. -- -- --
------- --------- -------
Operating income (loss) ......................... 2,451 1,840 4,291
Interest expense ................................ 94 -- 94
Other expenses .................................. 1,581 (1,581)(b) --
------- --------- -------
Income/(loss) before income tax expense ......... 776 3,421 4,197
Income tax expense (benefit) .................... 249 700 (c) 949
------- --------- -------
Net income ...................................... $ 527 $ 2,721 $ 3,248
======= ========= =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' bonuses and wages not
expected to be paid under the Company's new employment contracts for
Avalon. The amount of the pro forma adjustment to eliminate salaries
and bonuses is based on the Company's agreements with the affected
employees that a bonus will not be paid unless there is a
significant improvement in the results of Avalon. Accordingly, no
such bonus is reflected in the pro forma statement of operations
because, if Avalon's results were similar to those in these pro
forma statements of operations, the Company would not be
contractually obligated to pay a bonus.
(b) To reclassify PACE's equity income in Avalon following the Avalon
Acquisition.
(c) Reflects an adjustment to the provision for state and local income
taxes.
H. OAKDALE ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-----------------------------------------------
PRO FORMA OAKDALE
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------- ------------
<S> <C> <C> <C>
Revenue ......................................... $16,435 -- $16,435
Operating expenses .............................. 14,720 -- 14,720
Depreciation & amortization ..................... 51 -- 51
------- -- -------
Operating income (loss) ......................... 1,664 -- 1,664
Interest expense ................................ 1,508 -- 1,508
Other (income) expenses ......................... (79) -- (79)
Equity (income) loss from investments ........... --
-------
--
Income/(loss) before income tax expense ......... 235 -- 235
Income tax expense (benefit) .................... -- -- --
------- -- -------
Net income ...................................... $ 235 -- $ 235
======= == =======
</TABLE>
39
<PAGE>
I. DON LAW ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
------------------------------------------------
PRO FORMA DON LAW
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ----------------- ------------
<S> <C> <C> <C>
Revenue ......................................... $50,588 $ $50,588
Operating expenses .............................. 44,401 (610) (a) 43,741
(50) (b)
Depreciation & amortization ..................... 2,033 2,033
------- -------
Operating income (loss) ......................... 4,154 660 4,814
Interest expense ................................ 1,072 1,072
Other (income) expenses ......................... (329) -- (329)
------- -------- -------
Income/(loss) before income tax expense ......... 3,411 660 4,071
Income tax expense (benefit) .................... -- -- --
------- -------- -------
Net income ...................................... $ 3,411 $ 660 $ 4,071
======= ======== =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects adjustment to eliminate payments made to employees
associated with membership interest.
(b) Reflects the elimination of certain officer's bonuses and wages not
expected to be paid under the Company's new employment contracts.
The amount of the pro forma adjustment to eliminate salaries and
bonuses is based on the Company's agreements with the affected
employees that a bonus will not be paid unless there is a
significant improvement in the results of Don Law. Accordingly, no
such bonus is reflected in the pro forma statement of operations as
should Don Law's results be at a similar level to that in these pro
forma statements of operations no bonus would be paid, and the
Company would not be contractually obligated to pay a bonus.
J. MAGICWORKS ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
--------------------------------------------------
PRO FORMA MAGICWORKS
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------------- ------------
<S> <C> <C> <C>
Revenue ......................................... $63,916 $ (24,412)(a) $39,504
Operating expenses .............................. 60,475 (24,020)(a) 36,455
Depreciation & amortization ..................... 634 634
------- -------
Operating income (loss) ......................... 2,807 (392) 2,415
Interest expenses ............................... 686 686
Other (income) .................................. (150) 15 (a) (135)
Other expenses .................................. 407 (407)(a) --
------- ---------- -------
Income/(loss) before income tax expense ......... 1,864 1,864
Income tax expense .............................. 747 -- 747
------- ---------- -------
Net income ...................................... $ 1,117 $ -- $ 1,117
======= ========== =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENT:
(a) To reflect the deconsolidation of certain theatrical production
partnership and concert joint ventures in which Magicworks did not
control over a 50% interest.
40
<PAGE>
K. OTHER ACQUISITIONS
Reflects the historical combined operating results of the seven businesses
acquired by the Company in the third quarter of 1998. In the aggregate, such
acquisitions are not material to the Company's financial position or results of
operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-------------------------------------------------
PRO FORMA OTHER
AS REPORTED ADJUSTMENTS ACQUISITIONS
------------- ----------------- -------------
<S> <C> <C> <C>
Revenue ......................................... $ 93,050 $ -- $ 93,050
Operating expenses .............................. 89,240 (1,623)(a) 87,617
Depreciation & amortization ..................... 430 430
Corporate expenses .............................. -- -- --
Other expenses ..................................
Operating income (loss) ......................... 3,380 1,623 5,003
Interest expense ................................ 254 254
Equity (income) loss from investments ........... (1,561) -- (1,561)
Other (income) expenses ......................... 39 -- 39
-------- --------- --------
Income/(loss) before income tax expense ......... 4,648 1,623 6,271
Income tax expense (benefit) .................... 22 -- 22
-------- --------- --------
Net income ...................................... $ 4,626 $ 1,623 $ 6,249
======== ========= ========
</TABLE>
- ----------
PRO FORMA ADJUSTMENT:
(a) Reflects the elimination of consulting fees.
L. PRO FORMA ADJUSTMENTS
(a) Reflects the increase in depreciation and amortization resulting
from the preliminary purchase accounting treatment of the
acquisitions. The Company amortizes goodwill over 15 years.
(b) To record incremental corporate overhead charges associated with
headquarters personnel and general and administrative expenses that
management estimates will be necessary as a result of the the
Company's acquisitions.
(c) Reflects the incremental interest expense. Associated with
additional borrowing related to the 1998 Acquisitions.
(d) To reclassify Delsener/Slater's equity income in the PNC Bank Arts
Center venue following the acquisition of Pavilion, which owns the
other 50% equity interest in the venue.
(e) To reclassify PACE's equity income in Avalon following the Avalon
Acquisition.
(f) To reflect the elimination of PACE's equity income in Magicworks.
(g) Represents an adjustment to the provision for state and local income
taxes . The calculation treats all companies acquired as "C"
Corporations and reflects the impact of non-deductible goodwill and
tax savings related to the pro forma adjustments.
(h) To reflect the federal tax benefit for interest expense.
41
<PAGE>
IV. PENDING ACQUISITIONS
A. CELLAR DOOR ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
------------------------------------------------
PRO FORMA CELLAR DOOR
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ----------------- ------------
<S> <C> <C> <C>
Revenue ......................................... $63,966 $ -- $63,966
Operating expenses .............................. 61,225 (3,060)(a) 58,165
Depreciation & amortization ..................... 1,613 3,982 (b) 5,595
------- --------- -------
Operating income (loss) ......................... 1,128 (922) 206
Interest expense ................................ 2,398 (2,398)(c) --
Equity (income) loss from investments ........... (601) -- (601)
Other (income) expenses ......................... (369) -- (369)
------- --------- -------
Income/(loss) before income tax expense ......... (300) 1,476 1,176
Income tax expense (benefit) .................... 5 -- 5
------- --------- -------
Net income (loss) ............................... $ (305) $ 1,476 $ 1,171
======= ========= =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain management fees and certain
officers' salaries, bonuses and other compensation which will not be
paid under the Company's new employment agreements and other
contracts.
(b) Reflects the increase of $3,982,000 in depreciation and amortization
resulting from the preliminary purchase accounting treatment of
Cellar Door. The Company amortizes goodwill over 15 years.
(c) Reflects the elimination of $2,398,000 of historical interest
expense.
B. MARQUEE ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
---------------------------------------------------------------
PRO FORMA
FOR THE
MARQUEE 1997 MARQUEE
MARQUEE 1997 PRO FORMA 1997
AS REPORTED ACQUISITIONS(1) ADJUSTMENTS(2) ACQUISITIONS
------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C>
Revenues .......... $ 21,268 $13,685 $ -- $34,953
Operating
expenses ......... 20,775 13,053 (1,683)(a) 32,145
Depreciation
and
amortization ..... 371 105 953 (b) 1,429
Non-cash
charges .......... 1,367 110 (110)(a) 1,367
-------- ------- ---------- -------
Operating
income (loss) .... (1,245) 417 840 12
Interest expense
(income), net .... 22 120 (120)(c) 22
Income/(loss)
before income
taxes ............ (1,267) 297 960 (10)
Income taxes ...... 45 45 -- 90
-------- ------- ---------- -------
Net income/
(loss) ........... $ (1,312) $ 252 $ 960 $ (100)
======== ======= ========== =======
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-------------------------------------------------------------------------------
PRO FORMA
FOR THE
MARQUEE
1997
ACQUISITIONS,
MARQUEE
RECENT
ACQUISITIONS
AND THE
MARQUEE MARQUEE MARQUEE
RECENT PRO FORMA CREDIT PRO FORMA MARQUEE
ACQUISITIONS(3) ADJUSTMENTS(4) AGREEMENT ADJUSTMENTS(5) ACQUISITION
----------------- ---------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues .......... $18,371 $ -- $ 53,324 $ -- $ 53,324
Operating
expenses ......... 16,974 (2,641)(a) 46,478 (250)(a) 46,228
Depreciation
and
amortization ..... 132 3,000 (b) 4,561 3,124 (b) 7,685
Non-cash
charges .......... -- -- 1,367 -- 1,367
------- ---------- -------- ---------- --------
Operating
income (loss) .... 1,265 (359) 918 (2,874) (1,956)
Interest expense
(income), net .... (32) 233 (c) 3,323 (3,323)(c) --
3,100 (d)
Income/(loss)
before income
taxes ............ 1,297 (3,692) (2,405) 449 (1,956)
Income taxes ...... 287 (324)(e) 53 -- 53
------- ---------- -------- ---------- --------
Net income/
(loss) ........... $ 1,010 $ (3,368) $ (2,458) $ 449 $ (2,009)
======= ========== ======== ========== ========
</TABLE>
42
<PAGE>
(1) MARQUEE 1997 ACQUISITIONS:
Marquee acquired ProServ and QBQ in October 1997 and included the results of
their operations only from the acquisition date in its consolidated
results of operations for the year ended December 31, 1997. Therefore, for
pro forma purposes, the results of operations of the Marquee 1997
Acquisitions for the period prior to the acquisition date are presented
separately and are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN
THOUSANDS)
-------------------------------
PROSERV QBQ COMBINED
----------- --------- ---------
<S> <C> <C> <C>
Revenues .................................. $11,987 $1,698 $13,685
Operating expenses ........................ 12,166 887 13,053
Depreciation and amortization ............. 105 -- 105
Other non-cash expenses ................... 110 -- 110
------- ------ -------
Income/(loss) from operations ............. (394) 811 417
Interest expense (income), net ............ 152 (32) 120
------- ------ -------
Income/(loss) before income taxes ......... (546) 843 297
Income taxes .............................. 45 -- 45
------- ------ -------
Net income/(loss) ......................... $ (591) $ 843 $ 252
======= ====== =======
</TABLE>
(2) 1997 PRO FORMA ADJUSTMENTS:
(a) To reduce expenses to reflect contractually agreed to reductions in
personnel, officers' salaries, employee benefits and other costs in
connection with the Marquee 1997 Acquisitions for the period prior to the
acquisitions.
(b) To reflect full year amortization of intangibles arising from the Marquee
1997 Acquisitions.
(c) To reduce ProServ's interest expense to reflect the reduction in debt as a
result of the acquisition.
(3) MARQUEE RECENT ACQUISITIONS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
----------------------------------------------------------------------------------------
ALPHABET CITY CAMBRIDGE PAL(A) TOLLIN/ROBBINS TONY STEPHENS(A) COMBINED
--------------- ----------- ------------ ---------------- ------------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues ........................... $2,976 $1,319 $4,889 $5,073 $4,114 $18,371
Operating expenses ................. 2,216 768 3,775 3,648 3,388 13,795
General and administrative
expenses .......................... 653 571 813 846 296 3,179
------ ------ ------ ------ ------ -------
107 (20) 301 579 430 1,397
Depreciation and amortization ...... 4 9 23 75 21 132
------ ------ ------ ------ ------ -------
Income/(loss) from operations ...... 103 (29) 278 504 409 1,265
Interest expense (income), net ..... -- (12) (8) -- (12) (32)
------ ------ -------- ------ ------ -------
Income/(loss) before income
taxes ............................. 103 (17) 286 504 421 1,297
Income taxes ....................... 23 -- 74 80 110 287
------ ------ ------- ------ ------ -------
Net income/(loss) .................. $ 80 $ (17) $ 212 $ 424 $ 311 $ 1,010
====== ====== ======= ====== ====== =======
</TABLE>
- ----------
(a)--Translated from British Pounds at the average exchange rate for the
year.
(4) MARQUEE PRO FORMA ADJUSTMENTS:
(a) To adjust expenses to reflect compensation agreements entered into in
connection with the Marquee Recent Acquisitions.
(b) To record the amortization of the intangibles arising from the Marquee
Recent Acquisitions (over 10--15 years).
43
<PAGE>
(c) To record imputed interest expense on the obligations to certain sellers
in connection with the Marquee Recent Acquisitions.
(d) To reflect interest expense including the amortization of deferred
financing costs associated with the Marquee credit agreement used to
finance the Marquee Recent Acquisitions.
(e) To record the impact of the Marquee Recent Acquisitions pro forma
adjustments, net of the benefit of consolidated net operating loss
carryforwards.
(5) PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of expenses associated with Marquee's
status as a separate public company.
(b) Reflects the increase of $3,124,000 in depreciation and amortization
resulting from the preliminary purchase accounting treatment of
Marquee. The Company amortizes goodwill over 15 years.
(c) Reflects the elimination of $3,323,000 of historical interest
expense.
C. PRO FORMA ADJUSTMENT
Reflects the incremental depreciation and amortization expense and the
Company's interest expense associated with this Offering related to the
Pending Acquisitions and the elimination of Cellar Door's Equity Income in
certain PACE companies.
44
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SFX
ENTERTAINMENT
(ACTUAL) 1998 ACQUISTIONS
I II
-------------- ------------------
<S> <C> <C>
Revenue ........................ $ 680,376 $244,718
Operating expenses ............. 602,538 209,376
Depreciation & amortization,
including integration costs ... 40,381 25,788
Corporate expenses, net of
Triathlon fees ................ 5,839 161
Noncash charges ................ 32,895 --
--------- --------
Operating income (loss) ........ (1,277) 9,393
Interest expense ............... 31,709 13,988
Equity (income) loss from
investments ................... (3,964) (1,270)
Other (income) expenses ........ (2,152) 449
--------- --------
Income/(loss) before income
tax expense ................... (26,870) (3,774)
Income tax expense (benefit).... 3,333 280
--------- --------
Net income (loss) .............. $ (30,203) $ (4,054)
========= ========
Accretion on put option ........ (1,925)
---------
Net income (loss) applicable
to common shares .............. $ (32,128)
=========
Net income (loss) per
common share .................. $ (1.38)
=========
Weighted average common
shares outstanding (1) ........ 23,262
=========
<CAPTION>
PENDING ACQUISITIONS
III PRO FORMA
----------------------------------------- FOR THE 1998
ACQUISITIONS,
THIS OFFERING
CELLAR DOOR MARQUEE PRO FORMA AND THE
PRO FORMA FOR ACQUISITION ACQUISITION ADJUSTMENTS PENDING
THE 1998 ACQUISITIONS A B C ACQUISITIONS
----------------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue ........................ $ 925,094 $63,206 $48,848 $1,037,148
Operating expenses ............. 811,914 57,390 41,327 910,631
Depreciation & amortization,
including integration costs ... 66,169 4,196 5,839 $ 375 76,579
Corporate expenses, net of
Triathlon fees ................ 6,000 -- 6,000
Noncash charges ................ 32,895 367 33,262
--------- ------- ----------
Operating income (loss) ........ 8,116 1,620 1,315 (375) 10,676
Interest expense ............... 45,697 -- -- 14,413 60,110
Equity (income) loss from
investments ................... (5,234) (645) -- (89) (5,968)
Other (income) expenses ........ (1,703) (89) -- 89 (1,703)
--------- ------- ------- --------- ----------
Income/(loss) before income
tax expense ................... (30,644) 2,354 1,315 (14,788) (41,763)
Income tax expense (benefit).... 3,613 4 1,000 (4,617)
--------- ------- ------- ----------
Net income (loss) .............. $ (34,527) $ 2,350 $ 315 $ (14,788) (46,380)
========= ======= ======= ========= ==========
Accretion on put option ........ (2,475)
----------
Net income (loss) applicable
to common shares .............. (48,855)
==========
Net income (loss) per
common share .................. (1.60)
==========
Weighted average common
shares outstanding (1) ........ 30,941
==========
</TABLE>
<PAGE>
- -------
(1) Includes 500,000 shares of the Company's Class A common stock issued to
the PACE sellers in connection with the Fifth Year Put Option (such
shares are not included in calculating the net loss per common share).
45
<PAGE>
NOTES TO PRO FORMA STATEMENTS:
I. Represents the Company's actual operating results for the nine months ended
September 30, 1998.
EDITDA for the nine months ended September 30, 1998 was $71,999,000 and
$120,517,000 for the Company on an actual basis and a pro forma basis,
respectively. EBITDA is defined as earnings before interest, taxes,
non-cash charges, 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 entertainment 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 which is
calculated in accordance with GAAP. Cash flows from operating, investing
and financing activities for the Company for the nine months ended
September 30, 1998 were $22,307,000, ($852,240) and $889,543, respectively.
There are other adjustments that could affect EBITDA but have not been
reflected herein. Had such adjustments been made, Adjusted EBITDA on a pro
forma basis would have been approximately $129,735,000 for the nine months
ended September 30, 1998. The adjustments include the expected cost savings
in connection with the 1997 Acquisitions, the 1998 Acquisitions and the
Pending Acquisitions associated with the elimination of duplicative
staffing and general and administrative expenses of $3,250,000, and equity
income from investments of $5,968,000. While management believes that such
cost saving are achievable, the Company's ability to fully achieve such
cost savings is subject to numerous factors, certain of which may be beyond
the Company's control.
46
<PAGE>
II. 1998 ACQUISITIONS
The Company acquired PACE (including USA Motor Sports) Pavilion,
Contemporary, BGP, Network and Concert/Southern on February 25, 1998, February
27, 1998, February 24, 1998, February 27, 1998 and March 4, 1998, respectively.
In June 1998, the Company acquired FAME, Avalon and Oakdale. In July 1998 the
Company acquired Don Law and in September 1998 the Company acquired Magicworks.
In addition in the third quarter of 1998 the Company acquired seven other
companies herein defined as the Other Acquisitions. The following represents
the historical operating results of these companies prior to their acquisition
by the Company.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
-------------------------------------------------------------------------------------
PACE & CONCERT/
PAVILION COMTEMPORARY BGP NETWORK SOUTHERN FAME
ACQUISITIONS ACQUISITION ACQUISITION ACQUISITION ACQUISITION ACQUISITION
-------------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue ....................... $ 86,206 $7,882 $ 16,075 $4,154 $ 524 $2,144
Operating expenses ............ 85,650 8,255 16,801 3,949 638 2,037
Depreciation &
amortization ................. 1,049 254 213 51 9 27
Corporate expenses ............ -- -- -- -- -- --
-------- ------ -------- ------ ------ ------
Operating income (loss) ....... (493) (627) (939) 154 (123) 80
Interest expense .............. 1,148 -- 165 37 -- 42
Equity (income) loss from
investments .................. 549 -- -- -- 20 --
Other (income) expenses ....... (176) (122) 67 (14) -- (26)
Income/(loss) before
income tax expense ........... (2,014) (505) (1,171) 131 (143) 64
Income tax expense
(benefit) .................... (475) -- -- 3 -- --
-------- ------ -------- ------ ------ ------
Net income (loss) ............. $ (1,539) $ (505) $ (1,171) $ 128 $ (143) $ 64
======== ====== ======== ====== ====== ======
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
------------------------------------------------------------------------------------------
PRO FORMA
AVALON OAKDALE DON LAW MAGICWORKS OTHER ADJUSTMENTS
ACQUISITION ACQUISITION ACQUISITION ACQUISITION ACQUISITIONS A
------------- ------------- ------------- ------------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue ....................... $ 2,269 $5,982 $20,566 $54,547 $44,369 $ --
Operating expenses ............ 3,805 5,322 17,035 52,362 26,444 (13,185)(a)
263 (b)
Depreciation &
amortization ................. 220 28 2,661 -- 191 21,085 (c)
Corporate expenses ............ -- -- -- -- -- 161 (d)
-------- ------ ------- ------- ------- -----------
Operating income (loss) ....... (1,756) 632 870 2,185 17,734 (8,324)
Interest expense .............. 404 12,192 (e)
Equity (income) loss from
investments .................. (370) -- -- (235) (958) (276)(f)
Other (income) expenses ....... -- -- (166) -- 240 370 (g)
276 (f)
-----------
Income/(loss) before
income tax expense ........... (1,386) 632 1,036 2,420 18,048 (20,886)
Income tax expense
(benefit) .................... -- -- -- 950 -- (198)(h)
-------- ------ ------- ------- ------- -----------
Net income (loss) ............. $ (1,386) $ 632 $ 1,036 $ 1,470 $18,048 $ (20,688)
======== ====== ======= ======= ======= ===========
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
1998
(IN THOUSANDS)
--------------
PRO FORMA
FOR THE
1998
ACQUISITIONS
-------------
<S> <C>
Revenue ....................... $244,718
Operating expenses ............ 209,376
Depreciation &
amortization ................. 25,788
Corporate expenses ............ 161
--------
Operating income (loss) ....... 9,393
Interest expense .............. 13,988
Equity (income) loss from
investments .................. (1,270)
Other (income) expenses ....... 449
Income/(loss) before
income tax expense ........... (3,774)
Income tax expense
(benefit) .................... 280
--------
Net income (loss) ............. $ (4,054)
========
</TABLE>
- -------
A. PRO FORMA ADJUSTMENTS:
(a) To reflect the elimination of $10,723,000 of PACE's non-cash stock
and other non-recurring compensation, $1,173,000 and $1,289,000 of
Network's and FAME's excess compensation, respectively.
(b) Reflects salaries and officers' life insurance premiums to be paid
by the Company.
(c) Reflects the increase of $21,085,000 in depreciation and
amortization resulting from the preliminary purchase accounting
treatment of the 1998 Acquisitions. The Company amortizes goodwill
over 15 years.
(d) To record incremental corporate overhead, personnel and
administrative expenses that management estimates will be necessary
as a result of the Company's acquisitions.
(e) Reflects the incremental interest expense associated with additional
borrowing related to the 1998 Acquisitions.
(f) Reflects the elimination of PACE's equity income in certain
Magicworks tours.
(g) To reclassify $370,000 of PACE's equity income in Avalon following
the Avalon acquisition.
(h) Represents an adjustment to the provision for state and local income
taxes and a Federal tax benefit for interest expense at Magicworks.
The calculation treats all companies to be acquired as "C"
Corporations and reflects the impact of non-deductible goodwill.
47
<PAGE>
III. PENDING ACQUISITIONS
A. CELLAR DOOR ACQUISITION
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 (IN
THOUSANDS)
--------------------------------------------
PRO FORMA CELLAR DOOR
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ----------------- ------------
<S> <C> <C> <C>
Revenue ..................................... $63,206 $ -- $63,206
Operating expenses .......................... 58,020 (630)(a) 57,390
Depreciation & amortization ................. 1,272 2,924 (b) 4,196
------- --------- -------
Operating income (loss) ..................... 3,914 (2,294) 1,620
Interest expense ............................ 1,610 (1,610)(c) --
Equity (income) loss from investments ....... (645) -- (645)
Other income ................................ (89) -- (89)
------- --------- -------
Income/(loss) before income tax expense ..... 3,038 (684) 2,354
Income tax expense (benefit) ................ 4 -- 4
------- --------- -------
Net income (loss) ........................... $ 3,034 $ (684) $ 2,350
======= ========= =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain management fees which will not
be paid under the Company's new agreements.
(b) Reflects the increase of $2,924,000 in depreciation and amortization
resulting from the preliminary purchase accounting treatment of
Cellar Door. The Company amortizes goodwill over 15 years.
(c) Reflects the elimination of $1,610,000 of historical interest
expense.
B. MARQUEE ACQUISITION
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 (IN
THOUSANDS)
--------------------------------------------
MARQUEE
RECENT PRO FORMA
AS REPORTED ACQUISITIONS(1) ADJUSTMENT
------------- ----------------- ------------
<S> <C> <C> <C>
Revenue ......................... $35,470 $13,378 $ --
Operating expenses .............. 31,965 11,370 (1,563)
(181)
(164)
Depreciation &
amortization ................... 1,463 66 2,044
Corporate expenses .............. -- -- --
Non cash charges ................ 367 --
------- -------
Operating income (loss) ......... 1,675 1,942 (132)
Interest expense ................ 120 (17) 176
Equity (income) loss from
investment ..................... -- -- --
Other (income) expenses ......... -- -- --
------- ------- --------
Income/(loss) before
income tax expense ............. 1,555 1,959 (2,388)
Income tax expense
(benefit) ...................... 541 161 --
------- ------- --------
Net income (loss) ............... $ 1,014 $ 1,798 $ (2,686)
======= ======= ========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 (IN THOUSANDS)
---------------------------------------------------------
PRO FORMA
FOR THE MARQUEE
RECENT ACQUISITIONS AND
THE MARQUEE CREDIT PRO FORMA MARQUEE
AGREEMENT ADJUSTMENTS(2) ACQUISITION
------------------------ ------------------- ------------
<S> <C> <C> <C>
Revenue ......................... $48,848 $ -- $48,848
Operating expenses .............. 41,427 (100)(a) 41,327
Depreciation &
amortization ................... 3,569 2,270 (b) 5,839
Corporate expenses .............. -- -- --
Non cash charges ................ 367 -- 367
------- ----------- -------
Operating income (loss) ......... 3,485 (2,170) 1,315
Interest expense ................ 2,359 (2,359))(c) --
Equity (income) loss from
investment ..................... -- -- --
Other (income) expenses ......... -- -- --
------- ----------- -------
Income/(loss) before
income tax expense ............. 1,126 189 1,315
Income tax expense
(benefit) ...................... 1,000 -- 1,000
------- ----------- -------
Net income (loss) ............... $ 126 $ 189 $ 315
======= =========== =======
</TABLE>
48
<PAGE>
(1) MARQUEE RECENT ACQUISITIONS:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 (IN THOUSANDS)
------------------------------------------------------------------------------------
TONY
ALPHABET CITY CAMBRIDGE PAL (A) TOLLIN/ROBBINS STEPHENS (A) COMBINED
--------------- ----------- ------------ ---------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues .................................. $1,476 $691 $2,576 $5,509 $3,126 $13,378
Operating expenses ........................ 1,532 459 2,872 3,683 2,824 11,370
Depreciation and amortization ............. 4 2 -- 50 10 66
------ ---- ------ ------ ------ -------
Income/(loss) from operations ............. (60) 230 (296) 1,776 292 1,942
Interest expense (income), net ............ -- (1) (8) -- (8) (17)
------ ------ -------- ------ -------- -------
Income/(loss) before income taxes ......... (60) 231 (288) 1,776 300 1,959
Income taxes .............................. 20 85 (30) -- 86 161
------ ----- ------- ------ ------- -------
Net income/(loss) ......................... $ (80) $146 $(258) $1,776 $ 214 $ 1,798
====== ===== ======= ====== ======= =======
</TABLE>
(a)--Translated from British Pounds at the average translation rate for the
period.
- ----------
(2) PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of expenses associated with Marquee's
status as a separate public company.
(b) Reflects the increase of $2,270,000 in depreciation and amortization
resulting from the preliminary purchase accounting treatment of
Marquee. The Company amortizes goodwill over 15 years.
(c) Reflects the elimination of $2,359,000 of historical interest
expense.
C. PRO FORMA ADJUSTMENTS
To reflect the elimination of Cellar Door's equity income in certain PACE
businesses.
Reflects the incremental amortization expense associated with the fees and
expenses incurred in connection with the Pending Acquisitions and the
Company's incremental interest expense.
49
<PAGE>
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 included in this Offering
Memorandum. 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 are discussed in "Risk Factors" and elsewhere
in this Offering Memorandum. 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, non-cash charges, 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 for the 1998 Acquisitions and the Pending
Acquisitions, the Company's music businesses, including venue operations,
comprised approximately 61% of net revenues, theatrical comprised approximately
21% of net revenues, sports, including representation of professional athletes
and specialized motor sports, comprised approximately 10% of net revenues and
other operations comprised approximately 8% of the Company's net revenues for
the nine months ended September 30, 1998.
Promotion of events involves booking talent, renting or providing the
event venue, marketing the event to attract ticket buyers and providing for
local services required in the production of the event, such as security and
stage hands. Promoters generally receive revenues from the sale of tickets and
sponsorships. When an event is promoted at a venue owned or managed by the
promoter, the promoter also generally receives a percentage of revenues from
concessions, merchandising, parking, premium box seats and ticket rebates. The
Company earns promotion revenues principally by promoting (1) music concerts,
(2) Touring Broadway Shows and (3) 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:
o Touring Broadway Shows;
o specialized motorsports events; and
o other proprietary and non-proprietary entertainment events.
THE SPIN-OFF
On April 27, 1998, the Company was spun off from its former parent,
Broadcasting, a company primarily engaged in the radio broadcasting business.
In connection with the Spin-Off, the Company and Broadcasting entered into a
distribution agreement (as amended, the "Distribution Agreement"), a tax
50
<PAGE>
sharing agreement (as amended, the "Tax Sharing Agreement") and an Employee
Benefits Agreement (the "Employee Benefits Agreement"), each of which provides
for certain indemnification obligations by the Company. See "--Liquidity and
Capital Resources--Spin-Off."
FINANCINGS
OLD NOTE OFFERING
On February 11, 1998, the Company completed an offering of $350.0 million
in principal amount of 9 1/8% Senior Subordinated Notes due February 1, 2008.
Interest is payable on the Old Notes on February 1 and August 1 of each year.
The proceeds from the Old Note offering and the initial borrowings under the
Senior Credit Facility were used to consummate certain of the 1998
Acquisitions. On July 15, 1998, the Company consummated the exchange of
substantially identical publicly registered Old Notes for all outstanding Old
Notes. All original Old Notes were tendered for exchange and were canceled upon
the issuance of the same principal amount of exchange Old Notes.
SENIOR CREDIT FACILITY
On February 26, 1998, the Company executed a Credit and Guarantee
Agreement which established a $300.0 million Senior Credit Facility comprised
of (1) a $150.0 million eight-year term loan (the "Term Loan") and (2) a $150.0
million seven-year reducing revolver credit facility (the "Revolver"). On
September 10, 1998, the Company entered into an agreement with The Bank of New
York to increase its borrowing availability under the Revolver portion of the
Senior Credit Facility for an aggregate amount of borrowing availability of
$350.0 million. The Company will be required to obtain the consent of the
lenders under the Senior Credit Facility in order to consummate this Offering.
In connection therewith, the Company has agreed to amend the applicable margins
under the Senior Credit Facility. See "Use of Proceeds" and "--Sources of
Liquidity."
EQUITY OFFERING
On May 27, 1998, the Company consummated an offering of 8,050,000 shares
of its Class A common stock at an offering price of $43.25 per share (the
"Equity Offering") and received net proceeds of approximately $329.0 million.
The Company used a portion of the proceeds to consummate certain of the 1998
Acquisitions and to pay fees and other expenses. See "--Liquidity and Capital
Resources."
1997 ACQUISITIONS
The Company entered the live entertainment business in January 1997 with
Broadcasting's acquisition of Delsener/Slater, a New York-based concert
promotion company, for an aggregate 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, a 25,000-seat
indoor/outdoor complex located in Hartford, Connecticut. In June 1997,
Broadcasting acquired Sunshine Promotions, a concert promoter in the Midwest,
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, and 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. See "Business--1997
Acquisitions."
The cash portion of the purchase price for the 1997 Acquisitions was
financed through capital contributions from Broadcasting.
1998 ACQUISITIONS
In January 1998, the Company acquired Westbury Music Fair. From February
to June 1998, the Company acquired PACE, Pavilion, Contemporary, BGP, Network,
Concert/Southern, USA Motor
51
<PAGE>
Sports, FAME, assets of Oakdale and Avalon. Since June 30, 1998, the Company
has completed the acquisition of Don Law, Magicworks and seven other
entertainment-related companies. See "Business-- 1998 Acquisitions."
ACQUISITION OF WESTBURY
On January 8, 1998, the Company acquired a long-term lease for Westbury
Music Fair, located in Westbury, New York (the "Westbury Acquisition"), for an
aggregate consideration of approximately $3.0 million and 75,019 shares of
Class A common stock (which are subject to certain put and call rights). 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.
ACQUISITION OF PACE AND PAVILION PARTNERS
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, a partnership that owns
interests in ten venues, one-third through the acquisition of PACE and
two-thirds through separate agreements between PACE and Blockbuster and between
PACE and Sony (the acquisition of such two-thirds interest, the "Pavilion
Acquisition"). The total consideration for the PACE Acquisition was
approximately $109.5 million in cash, the repayment of approximately $20.6
million of debt and the issuance of 1.5 million shares of Class A common stock.
The total consideration for the Pavilion Acquisition was approximately $90.6
million, comprised of $41.4 million in cash, the repayment of $43.1 million of
debt and the assumption of approximately $6.1 million of debt related to a
capital lease. See "--Liquidity and Capital Resources--Future Contingent
Payments." The purchase price was financed from borrowings under the Senior
Credit Facility and with a portion of the proceeds of the Old Note offering.
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.
In October 1998, Universal Concerts II, Inc. ("Universal"), PACE's partner
brought suit in the Superior Court of Los Angeles against PACE Amphitheaters,
Inc., PACE Entertainment Group, Inc., the Company, Brian Becker and Allen
Becker alleging, among other things, that the Company's acquisitions of PACE
and Concert/Southern caused breaches of PACE's various agreements with
Universal. The complaint seeks damages in an unspecified amount. Because the
defendants have not answered the complaint and there has been no discovery, it
is impossible to predict the likely outcome of the case. In management's view,
however, the realistic amount in controversy is not material to the business or
prospects of the Company. See "Business--Litigation."
ACQUISITION OF CONTEMPORARY
On February 27, 1998, the Company acquired Contemporary (the "Contemporary
Acquisition"). The Contemporary Acquisition involved the merger of Contemporary
International Productions Corporation with and into the Company, the
acquisition by a wholly-owned subsidiary of the Company of substantially all of
the assets, excluding certain cash and receivables, of the remaining members of
Contemporary and the acquisition of the 50% interest in the Riverport
Amphitheatre Joint Venture not owned by Contemporary. The total consideration
for 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. See "--Liquidity and Capital Resources--Future
Contingent Payments." In
52
<PAGE>
May 1998, the Company and the Contemporary sellers agreed to place 140,000 of
the shares issued in connection with the Contemporary Acquisition into an
escrow account. The Company may, at any time prior to May 18, 1999, cancel the
escrowed shares in full settlement of certain claims which the Company has made
against the Contemporary sellers. The purchase price was financed from
borrowings under the Senior Credit Facility and with a portion of the proceeds
of the Old Note offering.
ACQUISITION OF BGP
On February 24, 1998, the Company acquired all of the outstanding capital
stock of BGP for a total consideration of $60.8 million in cash, $12.0 million
in repayment of debt, which amount was at least equal to BGP's working capital
(as defined in the acquisition agreement), and 562,640 shares of Class A common
stock (the "BGP Acquisition"). The purchase price was financed from borrowings
under the Senior Credit Facility and with a portion of the proceeds of the Old
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
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. The total purchase price paid was approximately $52.0
million in 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 an
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
$14.0 million (if such EBITDA is greater than $11.0 million), and is payable in
Class A common stock, or in certain circumstances in cash, by no later than
March 20, 1999. See "--Liquidity and Capital Resources--Future Contingent
Payments." 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 from borrowings under the Senior Credit Facility and with a portion of
the proceeds of the Old Note offering. In connection with the Network
Acquisition, the selling stockholders were reimbursed working capital (as
defined in the acquisition agreement) in excess of $500,000.
ACQUISITION OF CONCERT/SOUTHERN
On March 4, 1998, the Company acquired Concert/Southern, 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 from the
borrowings under the Senior Credit Facility and with a portion of the proceeds
of the Old Note offering.
ACQUISITION OF USA MOTOR SPORTS
On March 25, 1998, PACE acquired a 67% interest in certain assets and
liabilities of USA Motor Sports for an aggregate cash consideration of
approximately $4.0 million. The remaining 33% interest is held by Contemporary.
ACQUISITION OF AVALON
On May 14, 1998, the Company acquired all the outstanding equity interests
in Avalon for a total cash purchase price of $26.8 million, including
approximately $300,000 that the Company paid to reimburse the Avalon sellers'
third party out of pocket costs and expenses incurred with the development of
the Camarillo Creek Amphitheater (the "Avalon Acquisition"). The purchase price
was financed with borrowings under the Senior Credit Facility which were
subsequently repaid from a portion of the proceeds from the Equity Offering.
53
<PAGE>
ACQUISITION OF OAKDALE
On June 3, 1998, the Company acquired certain assets of Oakdale for a
purchase price of $9.4 million in cash and the assumption of $2.5 million of
liabilities (the "Oakdale Acquisition"). At the closing, the Company also made
a non-recourse loan to the Oakdale sellers in the amount of $11.4 million, a
portion of which was used to repay outstanding indebtedness. In addition, if
the combined EBITDA (as defined in the acquisition agreement) for Oakdale and
Meadows exceeds $5.5 million in 1999, the Company will be obligated to pay the
amount of such excess multiplied by a factor of between 5.0 and 5.8. The
purchase price was financed from a portion of the proceeds from the Equity
Offering.
ACQUISITION OF FAME
On June 4, 1998, the Company acquired all of the outstanding capital stock
of FAME (the "FAME Acquisition"). The aggregate purchase price for FAME was
approximately $82.2 million in cash (including $7.9 million which the Company
paid in connection with certain taxes to which FAME will be subject and
excluding approximately $4.7 million of taxes paid which will be refunded to
the Company in 1999) and 1.0 million shares of Class A common stock. Under the
agreement governing the FAME Acquisition, the Company is obligated to pay to
the FAME sellers additional amounts up to an aggregate of $15.0 million in
equal annual installments over 5 years contingent on the achievement of certain
EBITDA targets. See "--Liquidity and Capital Resources--Future Contingent
Payments." 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 made within 120 days after the end of the year to
which they relate. The purchase price was financed from a portion of the
proceeds from the Equity Offering.
ACQUISITION OF DON LAW
On July 2, 1998, the Company acquired certain assets of Don Law, for an
aggregate consideration of approximately $92.2 million, including the repayment
of approximately $7.0 million in debt. The purchase price was financed from a
portion of the proceeds of the Equity Offering.
ACQUISITION OF MAGICWORKS
On September 11, 1998, the Company purchased all of the outstanding shares
of common stock of Magicworks, a publicly traded company, for a total
consideration of approximately $120.0 million in cash. The acquisition was
consummated by means of a tender offer (in which the Company purchased
approximately 98.7% of the Magicworks shares) followed by a merger (in which
the remaining shares were converted into cash consideration). The acquisition
was financed with available cash and borrowings under the Senior Credit
Facility.
OTHER ACQUISITIONS
In July, August and September 1998, the Company completed the acquisition
of seven companies in the theatrical and music segments, principally in the
areas of programming, touring and merchandising. The aggregate purchase price
was $104.7 million in cash and 300,000 shares of Class A common stock (with
such shares being subject to piggyback and demand registration rights). The
Company may also be required to make additional payments to the sellers of
certain of the acquired companies based on the companies' EBITDA for the years
1998 through 2000. The purchase prices were financed with available cash and a
portion of the proceeds of the Equity Offering.
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 publicly available. See "Available
Information." Pursuant to the acquisition agreements and related agreements,
the Company:
o under certain circumstances, may be required to repurchase shares of
its Class A common stock or make additional payments in connection
therewith (See "--Liquidity and Capital Resources--Future Contingent
Payments");
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o has granted certain rights of first refusal, certain of which are
exercisable at 95% of the proposed purchase price; and
o in connection with the PACE Acquisition, has granted Brian Becker, an
Executive Vice President, a Member of the Office of the Chairman and a
Director of the Company, the option to acquire, after February 25, 2000,
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. See
"Management--Employment Agreements and Arrangements with Certain
Officers and Directors--Becker Employment Agreement."
See "Risk Factors--Company Specific Risks--Re-Purchase Rights for Certain
Subsidiaries."
The 1998 Acquisitions were accounted for using the purchase method of
accounting, and the intangible assets created in the purchase transactions will
generally be amortized against future earnings, if any, 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.
The consummation of the acquisitions by the Company and other future
acquisitions will result in substantial charges to earnings relating to
interest expense and the recognition and amortization of goodwill and other
intangible assets. As of September 30, 1998, the Company's goodwill was
approximately $905.0 million. This balance will increase due to the Pending
Acquisitions. Goodwill and other intangible assets are being amortized using
the straight-line method over periods up to 15 years.
MARQUEE ACQUISITION
On July 23, 1998, the Company and Marquee entered into the merger
agreement whereby a wholly owned subsidiary of the Company will be merged with
and into Marquee and Marquee will become a wholly owned subsidiary of the
Company. The merger agreement, as amended, provides that each share of Marquee
common stock will be converted into a number of Class A common stock based on
the Exchange Ratio (as defined herein). The applicable waiting period under the
HSR Act for the Marquee Acquisition has expired. See "Risk
Factors--Company-Specific Risks--Potential Conflicts of Interest,"
"Business--Litigation" and "Agreements Related to the Pending
Acquisitions--Marquee."
CELLAR DOOR ACQUISITION
On August 13, 1998, the Company and the owner of Cellar Door entered into
a letter of intent with respect to the Company's acquisition of all of the
outstanding capital stock of Cellar Door. The Company anticipates that the
definitive agreement to acquire Cellar Door will provide that the aggregate
purchase price will be $70.0 million in cash (less an amount equal to Cellar
Door's "secured fund" indebtedness and capitalized leases) payable at closing,
shares of Class A common stock with a value of $20.0 million (up to $15.0
million of which the Company may elect to pay in cash) and $8.5 million payable
in five equal annual installments beginning on the first anniversary of the
closing date. In addition, the Company will issue to the seller options to
purchase 100,000 shares of the Company's Class A common stock. See
"Business--Regulatory Matters."
The foregoing description does not purport to be a complete description of
the terms of the letter of intent and is qualified by reference to the letter
of intent, a copy of which is publicly available and is incorporated herein by
reference. See "Agreements Related to the Pending Acquisitions" and "Available
Information."
The Company expects to complete the Pending Acquisitions during the first
quarter of 1999. 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 (including the approval of the lenders under the Senior
Credit Facility, and with respect to the Cellar Door Acquisition, termination
or expiration of the applicable waiting period under the HSR Act), and there
can be no assurance that either of the Pending Acquisitions will be consummated
during such period, on the terms described herein, or at all. In connection
with the HSR Act filing for the Marquee Acquisition, the Company received
notice of a
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preliminary inquiry from the Antitrust Division of the U.S. Department of
Justice relating to the Cellar Door Acquisition and seeking information on the
overall scope of the Company's operations. The Company intends to cooperate
with the Department of Justice inquiry. While the Company believes that the
Cellar Door Acquisition, along with the Company's overall business and plan of
acquisitions, are in compliance with applicable antitrust laws, there can be no
assurance that the results of such inquiry will not have a material adverse
impact on the Company's ability to consummate the Cellar Door Acquisition or
its business, results of operations and financial condition.
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 consummation of the acquisitions by the Company and other future
acquisitions will result in substantial charges to earnings relating to
interest expense and the recognition and amortization of goodwill and other
intangible assets. As of September 30, 1998, the Company's goodwill was
approximately $894.9 million. This balance will increase due to the Pending
Acquisitions. Goodwill is being amortized using the straight-line method over
15 years.
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. See "Risk
Factors--Company-Specific Risks--Expansion Strategy; Need for Additional
Funds."
AGREEMENT WITH TICKETMASTER
On November 16, 1998, the Company and Ticketmaster entered into a binding
letter of intent pursuant to which the Company has granted Ticketmaster the
exclusive right to sell and distribute tickets for the Company's events
worldwide. The Company anticipates that the revenues associated with its ticket
sales will increase in 1999 as a result of such agreement. The Company is
currently evaluating its existing internal ticketing operations which were
acquired in the 1998 Acquisitions; however, the Company does not believe that
its ticketing operations are material to its financial condition or results of
operations.
PROPOSED STOCK OPTION PLAN
Following a recommendation of the Company's compensation committee, the
Company has, subject to stockholder approval, adopted a new incentive stock
option plan covering options to acquire up to three million shares of Class A
common stock. The plan will be designed to broaden the equity ownership of the
Company's employees at all levels. The Company anticipates that the proposed
stock option plan will be submitted to a vote of the stockholders at the
Company's first annual meeting scheduled to be held in the spring of 1999.
RESULTS OF OPERATIONS
The Company's operations consist primarily of (1) concert promotion and
venue operation, (2) the promotion and production of theatrical events,
particularly Touring Broadway Shows, (3) the promotion and production of motor
sports events and (4) representation of professional athletes. The Company also
engages in various other activities ancillary to its live entertainment
businesses.
CONCERT PROMOTION/VENUE OPERATION
The Company's concert promotion and venue operation business consists
primarily of the promotion of concerts and operation of venues primarily for
use in the presentation of musical events. The Company's primary source of
revenues from its concert promotion activities is from ticket sales at events
promoted by the Company. As a venue operator, the Company's primary sources of
revenue are sponsorships, concessions, parking and other ancillary services,
derived principally from events promoted by the Company.
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Revenue from ticket sales is affected primarily by the number of events
the Company promotes, the average ticket price and the number of tickets sold.
The average ticket price depends on the popularity of the artist whom the
Company is promoting, the size and type of venue and the general economic
conditions and consumer tastes in the market where the event is being held.
Revenue and margins are also affected significantly by the type of contract
entered into with the artist or the artist's representative. Generally, the
promoter or venue operator will agree to pay the artist the greater of a
minimum guarantee or a profit sharing payment based on ticket revenue, less
certain show expenses. The promoter or venue operator assumes the financial
risk of ticket sales and is responsible for local production and advertising of
the event. However, in certain instances, the promoter agrees to accept a fixed
fee from the artist for its services, and the artist assumes all financial
risk. When the promoter or venue operator assumes the financial risk, all
revenue and expenses associated with the event are recorded. When the artist
assumes the risk, only the fee is recorded. As a result, operating margins
would be significantly greater for fee-based events as opposed to events for
which the Company assumes the risk of ticket sales, although profits per event
would tend to be lower. Operating margins can vary from period to period.
The Company's most significant operating expenses are talent fees,
production costs, venue operating expenses (including rent), advertising costs
and insurance expense. The booking of talent in the concert promotion business
generally involves contracts for limited engagements, often involving a small
number of performances. Talent fees depend primarily on the popularity of the
artist, the ticket price that the artist can command at a particular venue and
the expected level of ticket sales. Production costs and venue operating
expenses have substantial fixed cost components and lesser variable costs
primarily related to expected attendance.
THEATRICAL
The Company's theatrical operations are directed mainly towards the
promotion and production of Touring Broadway Shows, which generate revenues
primarily from ticket sales and sponsorships. The Company may also participate
in ancillary revenues, such as concessions and merchandise sales, depending on
its agreement with a particular local promoter/venue operator. Revenue from
ticket sales is primarily affected by the popularity of the production and the
general economic conditions and consumer tastes in the particular market and
venue where the production is presented. In order to reduce its dependency on
the success of any single touring production, the Company sells advance annual
subscriptions that provide the purchaser with tickets for all of the shows that
the Company intends to tour in the particular market during the touring season.
Historically, approximately 28% 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 as
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merchandising and video rights associated with producing motor sports events.
Ticket prices for these events are generally lower than for theatrical or music
concert events, generally ranging from $5 to $30. Revenue from these sources is
primarily affected by the type of event and the general economic conditions and
consumer tastes in the particular markets and venues where the events are
presented. Event-related revenues received prior to the event date are
initially recorded on the balance sheet as deferred revenue; after the event
occurs, they are recorded on the statement of operations as gross revenue.
Expenses are deferred on the balance sheet as prepaid expenses until the event
occurs.
Operating expenses associated with motor sports activities include talent,
rent, track preparation costs, security and advertising. These operating
expenses are generally fixed costs that vary based on the type of event and
venue where the event is held.
Under certain circumstances, the Company may be required to sell either
its motor sports or theatrical lines of business. See "Risk
Factors--Company-Specific Risks--Re-Purchase Rights for Certain Subsidiaries."
REPRESENTATION OF PROFESSIONAL ATHLETES
Through FAME, the Company's talent representation activities consist
principally of the representation of team sports athletes, primarily in the
NBA, in player contract and endorsement negotiations. FAME also provides
certain investment advisory services to its clients through an affiliate. FAME
typically receives a percentage of monies earned by a player, generally
approximately 4% of a player's sports contract and typically from 15% to 25% of
endorsement deals. Revenue from these sources is recognized as the player
receives his salary or endorsement payments based on the terms of the
negotiated agreement. Revenue from these sources is dependent upon a number of
variables, many of which are outside the Company's control, including a
player's skill, health, public appeal and the appeal of the sport in which the
player participates. Principal operating expenses include salaries, wages and
travel and entertainment expenses.
On a pro forma basis for the 1998 Acquisitions, FAME's EBITDA would have
comprised approximately 3% of the Company's EBITDA for the nine months ended
September 30, 1998. The owners of the teams in the NBA have instituted a
"lock-out" of the basketball players on their respective teams, causing
cancellation of some of the games for the 1998-99 basketball season. If such
NBA lock-out continues for an extended period of time, it will have a
significant negative impact on FAME's revenues and EBITDA.
OTHER BUSINESSES
The Company's other principal businesses include (1) the production and
distribution of radio industry trade magazines, (2) the production of radio
programming content and show-prep material and (3) the provision of radio air
play and music retail research services. The primary sources of revenues from
these activities include (1) the sale of advertising space in its publications
and the sale of advertising time on radio stations that carry its syndicated
shows, (2) subscription fees for its trade publications and (3) 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
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spring. Similarly, the musical concerts that the Company promotes largely occur
in the second and third quarters. The Company's entertainment marketing and
consulting in connection with musical concerts also predominantly generate
revenues in the second and third quarters. Therefore, the seasonality of the
Company's business causes (and, upon closing of the Pending Acquisitions, will
probably continue to cause) a significant variation in the Company's quarterly
operating results. These variations in demand could have a material adverse
effect on the timing of the Company's cash flows and, therefore, on its ability
to service its obligations with respect to its indebtedness. However, the
Company believes that this variation may be somewhat offset with the
acquisition of typically non-summer seasonal businesses in the 1998
Acquisitions, such as motor sports (which is winter-seasonal) and Touring
Broadway Shows (which typically tour between September and May).
HISTORICAL RESULTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
The Company's revenue increased by $606.0 million to $680.4 million for
the nine months ended September 30, 1998, compared to $74.4 million for the
nine months ended September 30, 1997, primarily as a result of 1998
Acquisitions and the acquisitions of the Meadows in March 1997 and Sunshine
Promotions in June 1997. The 1998 Acquisitions significantly increased the
concert promotion and venues operation business and expanded the Company's
business to include theatrical promotion and production, motor sports promotion
and production, representation of professional athletes and radio magazine
publishing, programming and research. On a pro forma basis, assuming all
companies owned as of September 30, 1998 were owned as of January 1, 1998,
revenue for the nine months ended September 30, 1998 would have been $925.1
million.
Cost of revenue increased by $539.5 million to $602.5 million for the nine
month period ended September 30, 1998, compared to $63.0 million for the nine
months ended September 30, 1997, primarily as a result of the 1998 Acquisitions
and the acquisition of Sunshine Promotions in June 1997. On a pro forma basis,
cost of revenue, including certain cost savings the Company anticipates
realizing related to the acquisitions, would have been $811.9 million for the
nine month period ended September 30, 1998.
Depreciation and amortization expense increased to $40.3 million for the
nine month period ended September 30, 1998 compared to $4.0 million for the
nine month period ended September 30, 1997, due to the inclusion of
depreciation and amortization expense related to the 1998 Acquisitions, the
acquisition of Sunshine Promotions in June 1997 and the completion of capacity
expansion projects at two amphitheaters. In addition, the Company recorded $1.3
million of integration costs for the nine month period ended September 30,
1998. The Company recorded the fixed assets of the 1998 Acquisitions and the
Sunshine Promotions acquisition at fair value and recorded intangible assets
equal to the excess of purchase price over the fair value of the net tangible
assets, which are being amortized over a 15 year period.
Corporate expenses were $5.8 million for the nine month period ended
September 30, 1998, net of $398,000 fees received from Triathlon, compared to
$1.3 million for the nine months ended September 30, 1997, net of Triathlon
fees of $1.7 million. The increase in corporate expense reflects the growth of
the Company's operations and the formation of SFX Live, the national marketing
division of the Company.
Non-cash charges recorded in the second and third quarter of 1998 of $32.9
million consisted of (1) $23.9 million of compensation related to the sale of
650,000 shares of Class B common stock and 190,000 shares of Class A common
stock at a purchase price of $2.00 per share to certain executive officers
pursuant to employment agreements, (2) $7.5 million associated with the
issuance of 247,177 shares of Class A common stock to Mr. Sillerman in
connection with the repurchase (the "Meadows Repurchase") of shares of
Broadcasting issued to the sellers of Meadows and (3) $1.5 million related to
the issuance of stock options to certain executive officers pursuant to
employment agreements exercisable for an aggregate of 352,500 shares of Class A
common stock. Of these options, 345,000 vest over three years and have an
exercise price of $5.50 per share. The Company is recording non-cash
compensation charges of approximately $3.3 million annually over the three-year
exercise period. See "Management--Executive Compensation" and "Certain
Relationships and Related Transactions--Meadows Repurchase."
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The operating loss was $1.3 million for the nine month period ended
September 30, 1998, compared to income of $6.0 million for the nine months
ended September 30, 1997, due to the results discussed above.
Interest expense, net of investment income, was $28.2 million in the nine
months ended September 30, 1998, compared to $743,000 for the nine months ended
September 30, 1997, primarily as a result of incurrence of additional debt
related to the 1998 Acquisitions and the debt assumed in connection with the
Meadows and Sunshine Promotions acquisitions.
Minority interest was $1.3 million for the nine months ended September 30,
1998 as a result of the 1998 Acquisitions.
Income from equity investees was $4.0 million for the nine months ended
September 30, 1998 as a result of the 1998 Acquisitions.
Income tax expense was $3.3 million for the nine month period ended
September 30, 1998. The provision is primarily for state and local taxes and
reflects the impact of non-deductible goodwill amortization and other non-cash
charges. No federal tax benefit has been recognized due to the uncertainty of
realizing a tax benefit for the Company's losses.
The Company's net loss increased to $30.2 million for the nine month
period ended September 30, 1998, as compared to net income of $3.7 million for
the nine months ended September 30, 1997, due to the factors discussed above.
EBITDA (excluding non-cash charges) increased to $72.0 million for the
nine month period ended September 30, 1998, compared to $10.0 million for the
nine months ended September 30, 1997, primarily as a result of the 1998
Acquisitions and the acquisition of Sunshine Promotions in June 1997. On a pro
forma basis, EBITDA, including equity income from investments and certain cost
savings related to the 1998 Acquisitions, would have been $112.4 million for
the nine month period ended September 30, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
The Company's concert promotion revenue increased by 91% to $96.1 million
for the year ended December 31, 1997, compared to $50.4 million for the year
ended December 31, 1996, as a result of the acquisitions of Sunshine Promotions
and Meadows, which increased concert promotion revenue by $45.5 million. On a
pro forma basis, assuming the acquisitions had been completed as of January 1,
1997, revenue for the year ended December 31, 1997 would have been $884.4
million.
Concert promotion operating expenses increased by 65% to $83.4 million for
the year ended December 31, 1997, compared to $50.7 million for the year ended
December 31, 1996, primarily as a result of the acquisitions of Sunshine
Promotions and Meadows, which increased concert operating expenses revenue by
$37.1 million, which was offset in part by decreased officer salary expense
paid to the former owners of Delsener/Slater. On a pro forma basis, assuming
that those acquisitions had been completed as of January 1, 1997, operating
expenses would have been $785.5 million for the year ended December 31, 1997.
Depreciation and amortization expense increased to $5.4 million for the
year ended December 31, 1997, compared to $747,000 for the year ended December
31, 1996, due to the inclusion of $2.6 million of depreciation and amortization
expense related to the acquisitions of Sunshine Promotions and Meadows and the
additional depreciation and amortization recorded in 1997 related to the
purchase of Delsener/Slater on January 2, 1997. In 1997, the Company recorded
the fixed assets of Delsener/Slater at fair value and recorded an intangible
asset equal to the excess of purchase price over the fair value of net tangible
assets of Delsener/Slater, which was amortized over a 15-year period.
Corporate expenses were $2.2 million for the year ended December 31, 1997,
net of $1.8 million in fees received from Triathlon, compared to no corporate
expenses for the year ended December 31, 1996. These expenses represent the
incremental costs of operating the Company's corporate offices, and therefore
did not exist in 1996. The fees receivable from Triathlon are based on
consulting services provided by or on behalf of SCMC, a private investment
company in which Messrs. Sillerman and Tytel
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have economic interests, that makes investments in and provides financial
consulting services to companies engaged in the media business. These fees
fluctuate (above the minimum annual fee of $500,000) based on the level of
acquisition and financing activities of Triathlon. SCMC previously assigned its
rights to receive fees payable from Triathlon to Broadcasting, and Broadcasting
assigned its rights to receive the fees to the Company, pursuant to the
Distribution Agreement. Triathlon has announced that it has agreed to be
acquired by a third party. When Triathlon is acquired, it will cease paying
consulting fees. See "Certain Relationships and Related Transactions--Triathlon
Fees."
Operating income was $5.1 million for the year ended December 31, 1997,
compared to a loss of $1.1 million for the year ended December 31, 1996, due to
the results discussed above.
Interest expense, net of investment income, was $1.3 million in the year
ended December 31, 1997, compared to net interest income of $138,000 for the
year ended December 31, 1996, primarily as a result of assumption of additional
debt related to the acquisitions of the Meadows and Sunshine Promotions.
Equity income in unconsolidated subsidiaries decreased 3% to $509,000 for
the year ended December 31, 1997, compared to $524,000 for the year ended
December 31, 1996.
Income tax expense increased to $490,000 for the year ended December 31,
1997, compared to $106,000 for the year ended December 31, 1996, primarily as a
result of higher operating income.
The Company's net income increased to $3.8 million for the year ended
December 31, 1997, as compared to a net loss of $515,000 for the year ended
December 31, 1996, due to the factors discussed above.
EBITDA increased to $10.5 million for the year ended December 31, 1997,
compared to a negative $324,000 for the year ended December 31, 1996, as a
result of the 1997 Acquisitions, the reduction in officers' salary expense and
improved operating results.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
The Company's concert promotion revenue increased by 5.9% to $50.4 million
for the year ended December 31, 1996, compared to $47.6 million for the year
ended December 31, 1995, primarily as a result of an increase in concerts
promoted and an increase in ticket prices.
Concert promotion operating expenses increased by 7.2% to $50.6 million
for the year ended December 31, 1996, compared to $47.2 million for the year
ended December 31, 1995, primarily as a result of an increase in concert
activity.
Depreciation and amortization expense decreased slightly to $747,000 for
the year ended December 31, 1996, compared to $750,000 for the year ended
December 31, 1995.
The Company's operating loss was $1.1 million for the year ended December
31, 1996, compared to an operating loss of $362,000 for the year ended December
31, 1995, due to the results discussed above.
Interest income, net of interest expense, increased by 306% to $138,000
for the year ended December 31, 1996, compared to $34,000 for the year ended
December 31, 1995.
Equity income in unconsolidated subsidiaries increased 8% to $524,000 for
the year ended December 31, 1996, compared to $488,000 for the year ended
December 31, 1995, primarily as a result of the investment in the PNC Bank Arts
Center, offset by lower income from the Company's other equity investments.
The Company's state and local income tax expense increased to $106,000 for
the year ended December 31, 1996, compared to $13,000 for the year ended
December 31, 1995. This increase was primarily the result of the higher
operating income.
The Company's net loss was $515,000 for the year ended December 31, 1996,
compared to net income of $147,000 for the year ended December 31, 1995, due to
the factors discussed above.
EBITDA was a negative $324,000 for the year ended December 31, 1996,
compared to $388,000 for the year ended December 31, 1995, primarily as a
result of higher officers' salary expense partially offset by lower general and
administrative expenses.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for funds has been for acquisitions, interest
expense, working capital needs, certain payments in connection with the
Spin-Off and, to a lesser extent, capital expenditures. The Company's principal
sources of funds have been proceeds from the Old Note offering and the Equity
Offering, and borrowings under the Senior Credit Facility and cash flows from
operations. The Company will use the net proceeds from this Offering to repay
substantially all of the revolving portion of the Senior Credit Facility and
intends to use the additional borrowing availability under the Senior Credit
Facility to complete the Pending Acquisitions and to make certain other
payments as discussed below. See "Use of Proceeds."
HISTORICAL CASH FLOWS
Net cash provided by operations was $22.3 million for the nine months
ended September 30, 1998 as compared to $789,000 for the nine months ended
September 30, 1997. The increase was primarily attributable to an increase in
operating income, before depreciation, amortization and non-cash charges of
$40.4 million related to the 1998 Acquisitions, partially offset by other
changes in working capital.
Net cash used in investing activities for the nine months ended September
30, 1998 was $852.2 million as compared to $72.0 million for the nine months
ended September 30, 1997. The increase was primarily the result of the 1998
Acquisitions. During the nine months ended September 30, 1997, the Company
completed the acquisitions of Delsener/Slater, the Meadows and Sunshine
Promotions.
Net cash provided by financing activities for the nine months ended
September 30, 1998 was $889.5 million as compared to $78.3 million for the nine
months ended September 30, 1997. During 1998, the Company completed the Old
Note offering for $350.0 million, borrowed $346.0 million under the Senior
Credit Facility and completed the Equity Offering for $329.0 million, net,
offset by tax indemnification payments and Spin-Off related payments to
Broadcasting of $113.9 million and the payment of debt issuance costs of $17.5
million.
PENDING ACQUISITIONS
The aggregate cash consideration in the Cellar Door Acquisition is
expected to consist of approximately $78.5 million (including $8.5 million to
be paid over five years). In addition, the Company will be required to
refinance approximately $33.1 million of Marquee's debt. The Company expects to
incur approximately $7.5 million in fees and expenses related to the Pending
Acquisitions.
The Company expects to complete the Pending Acquisitions during the first
quarter of 1999. However, the timing and completion of the Pending Acquisitions
are subject to a number of closing conditions, certain of which are beyond the
control of the Company (including obtaining consent of the lenders under the
Senior Credit Facility and, with respect to the Cellar Door Acquisition,
termination or expiration of the applicable waiting period under the HSR Act).
No assurance can be given that the Company will be able to complete the Pending
Acquisitions on the terms described herein or at all. See "Risk
Factors--Company-Specific Risks--Expansion Strategy; Need for Additional
Funds."
FUTURE CONTINGENT PAYMENTS
Certain of the agreements relating to the 1998 Acquisitions provide for
purchase price adjustments and other future contingent payments under certain
circumstances. The PACE Acquisition agreement provides that each PACE seller
will have an option, exercisable for 90 days after the fifth anniversary of the
closing of the PACE Acquisition, to require the Company to repurchase up to
500,000 shares of the Class A common stock received by that seller for $33.00
in cash per share (an aggregate of up to $16.5 million). Pursuant to the terms
of Brian Becker's employment agreement with the Company, during the period
between December 12, 1999 and December 27, 1999, Mr. Becker, an Executive Vice
President, a 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. Exercise of such option would result in termination of Mr. Becker's
employment agreement. See "Management--Employment Agreements and Arrangements
with Certain Officers and Directors--Becker Employment Agreement."
Moreover, if the average trading price of the Company's Class A common
stock 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 of the 1,402,850 shares issued in the
acquisition and still 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: (1) by $4.0 million if
the 1998 EBITDA equals or exceeds $9.0 million, (2) by an additional $4 for
each $1 of additional 1998 EBITDA between $9.0 million and $10.0 million and
(3) by an additional $6 for each $1 of additional 1998 EBITDA between $10.0
million and $11.0 million. This contingent consideration of up to $14.0 million
is payable in shares of Class A common stock or, in certain circumstances, in
cash by no later than March 20, 1999.
Pursuant to the agreement relating to the acquisition of FAME, the Company
is obligated to pay to the FAME sellers additional amounts up to $15.0 million
in equal annual installments over five years contingent on the achievement by
FAME of certain EBITDA targets (as defined in the acquisition agreement). The
FAME agreement also provides for additional payments by the Company to the FAME
sellers if FAME's EBITDA performance exceeds the targets by certain amounts.
Furthermore, 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.
Pursuant to the agreement relating to the acquisition of 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.
In addition, pursuant to the agreement relating to the acquisition of one
of the seven companies in the theatrical and music segments in July, August and
September 1998, if the EBITDA (as defined in the acquisition agreement) exceeds
$14.3 million in 1998 and $30.0 million in 1999, the Company will be obligated
to pay the sellers such excess.
Certain of the 1998 Acquisitions provide for additional future payments
based on the acquired companies' performance. No assurance can be given that
the Company will have sufficient cash or other available sources of capital to
make any or all of the future or contingent payments described above.
SPIN-OFF
In connection with the Spin-Off, the Company entered into the Tax Sharing
Agreement with Broadcasting. Pursuant to such agreement, the Company is
responsible for certain taxes incurred by Broadcasting, including income taxes
imposed with respect to income generated by the Company for periods prior to
the Spin-Off and taxes resulting from gain recognized by Broadcasting in the
Spin-Off. The Company believes that the amount of taxes it will be required to
pay in connection with the Spin-Off will be approximately $120.0 million, of
which $93.7 million was paid as of September 30, 1998. The remaining
approximately $26.3 million portion of the tax indemnity payment is payable on
December 31, 1998. See "Use of Proceeds." Management's estimates of the amount
of the indemnity payment are based on assumptions which management believes are
reasonable. However, upon the completion of all final tax returns, including
any potential tax audits, such assumptions could be modified in a manner that
would result in a significant variance in the actual amount of the tax
indemnity.
INTEREST ON OLD NOTES AND BORROWINGS UNDER THE SENIOR CREDIT FACILITY
On February 11, 1998, the Company completed the private placement of the
Old Notes, which were subsequently exchanged for the publicly registered Old
Notes on July 15, 1998. Interest is payable on the
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exchange Old Notes on February 1 and August 1 of each year. In addition, as of
October 30, 1998, the Company had borrowed $346.0 million under the Senior
Credit Facility, at an interest rate of approximately 7.89% (which would be
approximately 8.65% if the anticipated amendment to the Senior Credit Facility
were in effect), to fund a portion of the 1998 Acquisitions. The net proceeds
of this Offering will be used to repay substantially all outstanding borrowings
under the revolving portion of the Senior Credit Facility. See "Use of
Proceeds."
The degree to which the Company will be leveraged following this Offering,
anticipated borrowings under the Senior Credit Facility and the Pending
Acquisitions could have important consequences to holders of the Notes,
including, but not limited to: (1) making it more difficult for the Company to
satisfy its obligations with respect to the Notes, (2) increasing the Company's
vulnerability to general adverse economic and industry conditions, (3) limiting
the Company's ability to obtain additional financing to fund future
acquisitions, working capital, capital expenditures and other general corporate
requirements, (4) requiring the dedication of a substantial portion of the
Company's cash flow from operations to the payment of principal of, and
interest on, its indebtedness, thereby reducing the availability of such cash
flow to fund working capital, capital expenditures, or other general corporate
purposes, (5) limiting the Company's flexibility in planning for, or reacting
to, changes in its business and the industry and (6) placing the Company at a
competitive disadvantage vis-a-vis less leveraged competitors. In addition, the
Senior Credit Facility and the Old Indenture contain, and the Indenture will
contain, financial and other restrictive covenants that will limit the ability
of the Company to, among other things, borrow additional funds for future
acquisitions or otherwise. Failure by the Company to comply with such covenants
could result in an event of default which, if not cured or waived, could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's indebtedness under the Senior Credit
Facility is secured by a pledge of the stock of its subsidiaries and by liens
on substantially all of its and its subsidiaries' tangible assets. In addition,
the degree to which the Company is leveraged could prevent it from repurchasing
all of the Notes tendered to it upon the occurrence of a Change of Control. See
"Risk Factors--Risks Relating to the Notes--Substantial Leverage" and
"--Company-Specific Risks--Control by Management."
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 Senior 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 its
maturity. 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 $44.6 million for the nine months ended
September 30, 1998. The Company expects to fund its remaining capital
expenditures for 1998 (estimated by the Company to be approximately $3.4
million (including $2.4 million of major projects and $1.0 million of other
capital expenditures)) from its cash on hand.
YEAR 2000 COMPLIANCE
The Company is currently working to resolve the potential impact of the
Year 2000 on the processing of date-sensitive information by the Company's
computer systems. The Year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the applicable
year. Any of the Company's programs that have time-sensitive software may
recognize a date using "00" as the Year 1900 rather than the Year 2000, which
could result in miscalculations or system failures.
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The Company's exposure to potential Year 2000 problems exists in two
general areas: technological operations which are in the sole control of the
Company, and technological operations which are dependent in some way on one or
more third parties. Failure to achieve high levels of Year 2000 compliance in
either area could have a material adverse impact on the Company.
In the area of technological operations which are under the Company's
exclusive control, the Company is currently involved in the identification and
remediation of affected technological functions. The Company is addressing 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 will provide improved reporting, allow for
more detailed analysis, handle the 1998 Acquisitions and the Pending
Acquisitions and be Year 2000 compliant. The Company anticipates that the cost
of implementing these systems will be approximately $4.5 million, of which
approximately $2.4 million has been spent to date. The Company expects that
business segments representing 88% of the Company's pro forma revenue for the
year ended September 30, 1998 will have had the new Year 2000 compliant
accounting and financial systems installed as of January 1, 1999. At present,
it is anticipated that the Company's action plan for addressing Year 2000
problems will be successfully completed in all material respects in advance of
January 1, 2000.
In the area of technological operations dependent in some way on one or
more third parties, the situation is much less in the Company's ability to
predict or control, although the Company has been in the process of examining
Year 2000 compliance issues with respect to its vendors. The Company is making
efforts to ensure that the third parties on which it is heavily reliant are
Year 2000 compliant, but cannot predict the likelihood of such compliance
occurring nor the direct or indirect costs to the Company of non-compliance by
those third parties or of securing such services from compliant third parties.
However, the Company does not anticipate that it will be subject to a material
impact in this area.
SOURCES OF LIQUIDITY
As of September 30, 1998, the Company's cash and cash equivalents totaled
$65.6 million, and its working capital was a negative $8.0 million. In February
1998, the Company received the proceeds from the $350.0 million offering of Old
Notes and borrowed $150.0 million under the Senior Credit Facility. On May 27,
1998, the Company received approximately $326.5 million in net proceeds from
the Equity Offering. A portion of the proceeds from the Equity Offering were
used to repay certain indebtedness and consummate the FAME Acquisition and the
Oakdale Acquisition. In the third quarter of 1998, the Company used the
remaining proceeds of the Equity Offering and borrowed an additional $196.0
million under the Senior Credit Facility to complete the Don Law Acquisition,
the Magicworks Acquisition and the acquisition of the seven companies in the
theatrical and music segments. The Company will receive approximately $192.5
million in net proceeds from this Offering. See "Use of Proceeds."
The Company has incurred and will continue to incur substantial amounts of
indebtedness. As of September 30, 1998, on a pro forma basis giving effect to
this Offering, and the application of the net proceeds therefrom, the
consummation of the Pending Acquisitions and anticipated borrowings under the
Senior Credit Facility, the Company's consolidated debt would have been
approximately $897.4 million. On the same basis, the Company's consolidated
debt would consist of (1) $350.0 million of 9 1/8% Senior Subordinated Notes
due February 1, 2008, (2) $200.0 million of the Notes, (3) $290.4 million in
borrowings under the Senior Credit Facility and (4) $57.0 million in other
debt. The Company's temporary equity would have been $19.9 million, and its
stockholders' equity would have been approximately $497.9 million. The
Company's ratio of total debt to total capitalization as of September 30, 1998
would have been approximately 0.6 to 1, and its earnings would have been
insufficient to cover fixed charges by $52.5 million for the year ended
December 31, 1997, and by $26.4 million for the nine months ended September 30,
1998. See "Unaudited Pro Forma Condensed Combined Financial Statements." The
Company may incur indebtedness from time to time to finance future
acquisitions, for capital expenditures or for other purposes. See "Risk
Factors--Risks Relating to the Notes--Substantial Leverage."
The Senior Credit Facility originally consisted of a $150.0 million
seven-year reducing revolving facility and a $150.0 million eight-year term
loan. On September 10, 1998, the Company entered into an agreement with The
Bank of New York to increase its borrowing availability under the Revolver
portion
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of the Senior Credit Facility by an additional $50.0 million, which increased
the aggregate amount of borrowing availability under the Senior Credit Facility
to approximately $350.0 million. As of November 13, 1998, the Company had
outstanding approximately $346.0 million of borrowings under the Senior Credit
Facility. Upon consummation of this Offering and the application of the
proceeds therefrom, anticipated borrowings under the Senior Credit Facility and
consummation of the Pending Acquisitions, the Company expects to have $290.4
million outstanding under the Senior Credit Facility. See "Use of Proceeds."
Loans outstanding under the Senior Credit Facility, as expected to be amended,
will bear interest, at the Company's option, at 1.625 to 3.625 percentage
points over LIBOR or the greater of the Federal Funds rate plus 0.50% or The
Bank of New York's prime rate. The interest rate spreads on the Term Loan and
the Revolver will be adjusted based on the Company's Total Leverage Ratio (as
defined in the Senior Credit Facility). 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 Total Leverage Ratio is greater than or equal to 4.0
to 1.0), or 0.375% (if such ratio is less than 4.0 to 1.0) and a per annum
letter of credit fee equal to the Applicable LIBOR Margin (as defined in the
Senior Credit Facility) for the Revolver then in effect.
The Revolver and Term Loan contain usual and customary covenants,
including limitations on:
o line of business;
o additional indebtedness;
o liens;
o acquisitions;
o asset sales;
o dividends, repurchases of stock and other cash distributions;
o total leverage;
o senior leverage; and
o ratios of Operating Cash Flow (as defined in the Senior Credit Facility) to
pro forma interest expense, debt service and fixed charges.
The Company's obligations under the Revolver and Term Loan are secured by
substantially all of its assets, including property, stock of subsidiaries and
accounts receivable and are guaranteed by the Company's subsidiaries.
The consummation of this Offering is conditioned upon the receipt of the
consent of the lenders under the Senior Credit Facility. In connection with
such consent, the Company has agreed to increase the applicable margins as
described above. The Company will pay a consent fee to each consenting lender
of 0.25% of such lender's commitment amount. See "Description of Other
Indebtedness."
The aggregate consideration to be paid in the Pending Acquisitions is
expected to consist of approximately $103.1 million in cash, including the
repayment of approximately $33.1 million in debt, and the issuance of
approximately 2.2 million shares of the Company's Class A common stock. The
Company intends to finance the cash portion of the purchase price with
borrowings under the Senior Credit Facility. The availability of funds under
the Senior Credit Facility is subject to compliance with certain financial
covenants, and there can be no assurance that the funds required to complete
the Pending Acquisitions will be available to the Company when needed. If the
Company is unable to complete the Cellar Door Acquisition, it may be required
to pay the seller $10.0 million as liquidated damages. See "Risk
Factors--Company-Specific Risks--Pending Acquisitions" and "Agreements Related
to the Pending Acquisitions."
The Company intends to finance the final tax indemnity payment due on
December 31, 1998 (approximately $26.3 million) with borrowings under the
Senior Credit Facility. See "--Liquidity and Capital Resources--Spin-Off."
Management's estimates of the amount of the indemnity payment are based on
assumptions that management believes are reasonable. However, upon the
completion of all final tax returns, including any potential tax audits, such
assumptions could be modified in a manner that would result in a significant
variance in the actual amount of the tax indemnity.
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Furthermore, certain agreements of the Company, including the Distribution
Agreement, the Tax Sharing Agreement, Employee Benefits Agreement, certain
employment agreements and the agreements relating to the completed acquisitions
and the Pending Acquisitions provide for tax and other indemnities, purchase
price adjustments, repurchase of the Company stock and future contingent
payments in certain circumstances. There can be no assurance that the Company
will have sufficient sources of funds to make such payments should they come
due.
In addition, consistent with its operating strategy, the Company is
currently negotiating additional acquisitions and expects to pursue additional
acquisitions in the live entertainment business in the future. However, the
Company has not entered into any definitive agreements with respect to such
acquisitions and there can be no assurance that it will do so. Any such
acquisitions could result in the Company (1) issuing more of its stock (which
may dilute the value of existing stock of the Company), (2) incurring a
substantial amount of additional debt and/or (3) amortizing expenses related to
goodwill and other intangible assets. However, there can be no assurance that
the Company will be able to obtain financing for such acquisitions on terms
acceptable to the Company or at all. Any or all of these actions could have a
material adverse impact on the Company's business, financial condition and
results of operations. See "Risk Factors--Company-Specific Risks--Expansion
Strategy; Need for Additional Funds."
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 for fiscal year 1998. Management
has completed its review of FAS 131 and has preliminarily determined that its
reportable segments will be music, theater, sports and other.
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OVERVIEW OF THE LIVE ENTERTAINMENT INDUSTRY
CONCERT PROMOTION INDUSTRY
The concert promotion industry consists primarily of regional promoters
focused generally in one or two major metropolitan markets. According to
Amusement Business, industry gross box office receipts for North American
concert tours totaled $1.1 billion in 1997, compared to $321.7 million in 1985,
representing a compounded annual growth rate of approximately 10.9%. The
Company believes that overall increases in ticket sales during the last several
years are in part due to the increasing popularity of amphitheaters as live
entertainment venues, as well as an increasing number of tours that attract
older audiences who did not previously attend musical concerts.
Typically, in order to initiate a music concert or other live
entertainment event or tour, a booking agent contracts with a performer to
arrange a venue and date, or series of venues and dates, for the performer's
event. The booking agent in turn contacts a promoter or promoters in the
locality or region of the relevant venue or venues. The promoter markets the
event, sells tickets, rents or otherwise provides the event venue or venues and
arranges for local production services (such as stage, set, sound and
lighting). In certain instances, particularly in connection with music
festivals, a promoter may also provide limited production services. Individual
industry participants, such as the Company, often perform more than one of the
booking, promotion and venue operation functions.
The booking agent generally receives a fixed fee for its services, or in
some cases, a fee based on the success of the event or events, in each case
from the artist. The promoter typically agrees to pay the performer the greater
of a guaranteed amount and a profit-sharing payment based on gross ticket
revenues, therefore assuming the risk of an unsuccessful event. The promoter
sets ticket prices and advertises the event in order to cover expenses and
generate profits. If the event is unprofitable, a promoter will sometimes
renegotiate a lower guarantee in order to lessen the promoter's losses (in a
process known as "settlement"). In some instances, the promoter agrees to
accept a fee from the booking agent for the promoter's services, and the
booking agent bears the financial risk of the event.
A venue operator typically contracts with a promoter to rent its venue for
a specific event on a specific date or dates. The venue operator provides
services such as concessions, parking, security, ushers and ticket-takers, and
receives revenues from concessions, merchandise, sponsorships, parking and
premium box seats. A venue operator will typically receive (for each event it
hosts) a fixed fee or percentage of ticket sales for use of the venue, as well
as a fee representing between 40-50% of total concession sales from the vendors
and 10-25% of total merchandise sales from the performer.
Concert venues are generally comprised of stadiums (typically 32,000 seats
or more), amphitheaters or arenas (typically 5,000 to 32,000 seats), clubs
(typically less than 2,000 seats) and theaters (typically 100 to 5,000 seats).
Amphitheaters are generally outdoor venues that are used primarily in the
summer season. They have become increasingly popular venues for concerts
because the seating configuration is designed specifically for concert events,
often resulting in more available seats, fewer obstructed seats, better lines
of sight to the stage and superior acoustics. In addition, because they
typically cost less to construct, maintain and operate than traditional
multi-purpose stadiums and arenas, amphitheaters often are able to host
concerts and other events that would not be profitable in a stadium or arena.
THEATRICAL INDUSTRY
The audience for live professional theater has increased significantly in
the last two decades. According to Variety Magazine, gross ticket sales for the
entire industry of Touring Broadway Shows and Broadway shows have increased
from $431.5 million during the 1986-7 season to $1.3 billion during the 1996-7
season, a compounded annual growth rate of 11.2%. During this time, the number
of touring weeks and markets where Touring Broadway Shows could profitably be
presented have expanded. Sales for Touring Broadway Shows have grown as a
percentage of total industry gross ticket sales, from approximately 52% in the
1986-7 season to approximately 60% in the 1996-7 season. The growth of the
national theatrical industry has resulted, in part, from the development of
local subscription series for Touring Broadway Shows, the construction of new
performing arts centers with seating capacities of 2,500
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or more in many municipalities and an increase in the quality of Touring
Broadway Shows and in the number of multiple-week engagements produced for
presentation outside of New York City. Touring Broadway Shows are typically
revivals of previous commercial successes or reproductions of theatrical shows
currently playing on Broadway in New York City ("Broadway Shows").
Live professional theater consists mainly of the production of existing
musical and dramatic works and the development of new works. In general,
musicals require more investment of time and capital than dramatic productions.
For an existing musical work (which is more likely to be presented as a Touring
Broadway Show), a period of 12 to 24 months typically elapses between the time
a producer acquires the theatrical stage rights and the date when the musical
is first performed before the public. During this time, a touring company is
assembled, and the show is readied for the road. By comparison, dramatic
productions typically have smaller production budgets, shorter pre-production
periods and lower operating costs, and tend to occupy smaller theaters for
shorter runs.
A producer of a Broadway Show or a Touring Broadway Show first acquires
the rights to the work from its owners, who typically receive royalty payments
in return. The producer then assembles the cast of the play, hires a director
and arranges for the design and construction of sets and costumes. The producer
of a Touring Broadway Show also must arrange transportation and schedule the
show with local promoters. The local promoter of a Touring Broadway Show, who
generally operates or has relationships with venues in individual markets,
provides all local services such as selling tickets, hiring local personnel,
buying advertising and paying a fixed guarantee (typically between $100,000 and
$400,000) to the producer of the show for each week that the show is presented.
The promoter is then entitled to recover the amount of the guarantee plus its
local costs from ticket revenues. Any remaining ticket revenues are shared by
the promoter and the producer, with the producer typically receiving
approximately 60% of the profits. Although Touring Broadway Shows are generally
substantially less expensive to produce than Broadway Shows, they may be
financed through a limited partnership with third-party investors who receive a
profit interest in the production. Often, investors in Touring Broadway Shows
will also invest in the underlying Broadway Show, in part to help secure
touring rights. After investors have received the complete return of their
investment, net profits are split between the limited partners and the show's
producer. The amount of net profits allocated to the show's producer, including
fees and royalties, varies somewhat, but is normally in the range of 50% after
certain profit participations are deducted. After certain net profits, a
producer may also receive a production fee and royalties. A typical Touring
Broadway Show requires 45 playing weeks with a weekly guarantee from the local
promoter of approximately $250,000 to recoup production and touring costs; more
elaborate touring productions with larger casts or sets, such as The Phantom of
the Opera or Miss Saigon, generally require significantly higher weekly
revenues and additional playing weeks in order to recoup production and touring
costs.
Tickets for Touring Broadway Shows often are sold through "subscription
series," which are pre-sold season tickets for a defined package of shows to be
presented in a given venue.
MOTOR SPORTS INDUSTRY
Specialized motor sports events make up a growing segment of the live
entertainment industry. This growth has resulted from additional demand in
existing markets and new demand in markets where new arenas and stadiums have
been built. The increasing popularity of specialized motor sports over the last
several years has coincided with (and, in part, been due to) the increased
popularity of other professional motor sports events, such as professional auto
racing (including NASCAR, CART and Indy Car Racing). A number of specialized
motor sports events are televised on several of the major television networks
and are also shown on television in markets outside of the United States.
In general, one to four motor sports events will be produced and presented
each year in a market, with larger markets hosting more performances. Stadiums
and arenas typically work with producers and promoters to manage the scheduling
of events to maximize each event's results and each season's revenues. The cost
of producing and promoting a typical single stadium event ranges from $300,000
to $600,000, and the cost of producing and presenting a typical single arena
event ranges from $50,000 to $150,000. Monster trucks, demolition derbies,
thrill acts, air shows and other motor sports concepts and events are typically
created and financed by third parties and hired to perform in an individual
event or
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season of events. As in other motor sports, corporate sponsorships and
television exposure are important financial components that contribute to the
success of a single event or season of events.
TALENT REPRESENTATION INDUSTRY
The talent representation industry generally encompasses the negotiation
of employment agreements and the creation and evaluation of endorsement,
promotional and other business opportunities for the client. A provider in this
industry may also provide ancillary services, such as financial advisory or
management services to its clients in the course of the representation.
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BUSINESS
The Company files annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information the Company files at the SEC's public reference
room located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You
can request copies of these documents, upon payment of a duplicating fee, by
writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. The Company's SEC
filings are also available to the public on the SEC's Internet site
(http://www.sec.gov).
GENERAL
The Company is a leading integrated promoter, producer and venue operator
in the live entertainment industry. In addition, with its recent acquisition of
FAME, The Company became a leading full-service marketing and management
company specializing in the representation of team sports athletes, primarily
in professional basketball. The Company believes that it currently controls the
largest network of venues used principally for music concerts and other live
entertainment events in the United States, with, on a pro forma basis, 69
venues either directly owned (partially or entirely) or operated under lease or
exclusive booking arrangements in 28 of the top 50 markets, including 14
amphitheaters in 9 of the top 10 markets, giving effect to the Pending
Acquisitions. Through its large number of venues, its strong, branded presence
in each market served and its long operating history, the Company is able to
provide an integrated offering of promotion and production services across a
broad variety of live entertainment events locally, regionally and nationally.
During 1997, approximately 30 million people attended 11,300 events promoted
and/or produced by the Company, the acquired businesses and the businesses to
be acquired in the Pending Acquisitions, including approximately 5,400 music
concerts, 5,600 theatrical shows and over 200 specialized motor sports events.
The Company also represents many prominent and prestigious athletes and
broadcasters for contract and marketing services. These events included:
o music concerts featuring artists such as The Rolling Stones, Phish,
Fleetwood Mac, Ozzy Osbourne and Alanis Morissette;
o music festivals such as the George Strait Country Music Festival;
o touring theatrical productions such as Jekyll & Hyde, Rent and The Magic of
David Copperfield; and
o specialized motor sports events, such as Truck Fest and American Motorcycle
Association Supercross racing events.
In addition, the Company's event marketing programs reached over 15
million people in 1997. The Company believes that its ability to provide
integrated live entertainment services will, among other things, encourage
wider use of its venues by performers and allow the Company to capture a
greater percentage of revenues from national tours and ancillary revenue
sources.
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 (partially or entirely) and/or operated by the
Company and in third-party venues. As promoter, the Company typically markets
events and tours, sells tickets, rents or otherwise provides event venues and
arranges for local production services (such as stage, set, sound and
lighting). As producer, the Company:
o creates tours for music concert, theatrical, specialized motor sports and
other events;
o develops and manages Touring Broadway Shows; and
o develops specialized motor sports and other live entertainment events.
As a venue owner/operator, the Company books and promotes events in the
venues which it controls. The Company also receives ancillary revenues from
operations related to its live entertainment events, including the sale of
corporate sponsorships and advertising, the sale of concessions and the
merchandising of a broad range of products. In addition, the Company represents
over 100 professional athletes, many of whom are professional basketball
players. On a pro forma basis, the Company's music businesses, including venue
operations, comprised approximately 61% of net revenues, theater comprised
approxi-
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mately 21% of net revenues, sports, including representation of professional
athletes and specialized motor sports operations, comprised approximately 10%
of net revenues and other operations comprised approximately 8% of the
Company's net revenues for the nine months ended September 30, 1998.
BROADCASTING MERGER AND THE SPIN-OFF
Broadcasting was formed in 1992 principally to acquire and operate radio
broadcasting stations. On May 29, 1998, Broadcasting was merged with and into
an affiliate of Hicks, Muse Tate & Furst Incorporated ("Broadcasting Buyer")
(the "Broadcasting Merger"). As a condition to the Broadcasting Merger,
Broadcasting contributed to the Company all of its assets relating to its
entertainment business, and, on April 27, 1998, distributed the Company common
stock to certain stockholders of Broadcasting on a pro rata basis. The Spin-Off
separated Broadcasting's entertainment business from its radio-broadcasting
business and enabled Broadcasting Buyer to acquire only Broadcasting's radio
broadcasting business in the Broadcasting Merger.
In conjunction with the Broadcasting Merger and the Spin-Off, the Company,
Broadcasting and Broadcasting Buyer entered into the Distribution Agreement,
the Tax Sharing Agreement and the Employee Benefits Agreement. Each of these
agreements provides for certain indemnification obligations by the Company and
Broadcasting. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources--Spin-Off."
1997 ACQUISITIONS
The Company was formed as a wholly-owned subsidiary of Broadcasting in
December 1997 as the parent company of Concerts. Concerts was formed by
Broadcasting in January of 1997 to acquire and hold Broadcasting's live
entertainment operations.
DELSENER/SLATER
In January 1997, Concerts acquired Delsener/Slater, a leading concert
promotion company. Delsener/
Slater has long-term leases or is the exclusive promoter for several 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, Concerts acquired the stock of certain companies which own
and operate the Meadows, a 25,000-seat indoor/outdoor complex located in
Hartford, Connecticut. See "Certain Relationships and Related
Transactions--Meadows Repurchase."
SUNSHINE PROMOTIONS
In June 1997, Concerts acquired the stock of Sunshine Promotions, one of
the largest concert promoters in the Midwest. Sunshine Promotions owns the Deer
Creek Music Theater, a 21,000-seat complex located in Indianapolis, Indiana,
and the Polaris Amphitheater ("Polaris"), 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.
1998 ACQUISITIONS
In January, February and March of 1998, the Company completed its
acquisitions of Westbury Music Fair, BGP, PACE, Pavilion, Contemporary,
Network, Concert/Southern and certain related entities and USA Motor Sports. In
May and early June 1998, the Company consummated the Avalon, Oakdale and FAME
Acquisitions. In July, August and September 1998, the Company completed the Don
Law Acquisition and the acquisition of seven companies in the theatrical and
music segments, principally in the areas of programming, touring and
merchandising. In September 1998, the Company acquired Magic-
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<PAGE>
works. The aggregate purchase price of these acquisitions was approximately
$882.6 million in cash (including repaid debt and payments for working
capital), $7.8 million in assumed debt, the issuance of an aggregate of
approximately 5.6 million shares of Class A common stock and approximately
$10.0 million in deferred payments. Following is a brief description of the
acquired businesses. The following descriptions are not intended to be complete
descriptions of the terms of the acquisition agreements and are qualified by
reference to the acquisition agreements, copies of which were filed with the
SEC and are incorporated herein by reference. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Available
Information."
WESTBURY
On January 8, 1998, the Company acquired a long-term lease for Westbury
Music Fair, located in Westbury, New York. During the period between the
closing and January 8, 2000, the Company has the right to repurchase all of
such shares for an aggregate consideration of $2.0 million and the seller has
the right to require the Company to purchase all of such shares for an
aggregate consideration of $750,000.
BGP
On February 24, 1998, the Company acquired BGP, one of the oldest
promoters and producers of live entertainment in the United States and the
principal promoter of live entertainment in the San Francisco Bay area.
PACE AND PAVILION
On February 25, 1998, the Company acquired all of the outstanding capital
stock of PACE, one of the largest diversified promoters and producers of live
entertainment in the United States. PACE has what the Company believes to be
the largest distribution network in each of its music concerts, theatrical
shows and motor sports events business segments. In connection with the
acquisition of PACE, the Company has obtained 100% of Pavilion, a partnership
that owns interests in 10 of the 41 venues owned by the Company, by acquiring
one-third of Pavilion through the acquisition of PACE and the remaining
two-thirds of Pavilion from Sony and Blockbuster. Under certain circumstances,
the Company may be required to sell either its motor sports or theatrical lines
of business. See "Risk Factors--Company-Specific Risks--Re-Purchase Rights for
Certain Subsidiaries" and "Management--Employment Agreements and Arrangements
with Certain Officers and Directors."
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.
In October 1998, Universal, PACE's partner, brought suit in the Superior
Court of Los Angeles against PACE Amphitheaters, Inc., PACE Entertainment
Group, Inc., the Company, Brian Becker and Allen Becker alleging, among other
things, that the Company's acquisitions of PACE and Concert/ Southern caused
breaches of PACE's various agreements with Universal. The complaint seeks
damages in an unspecified amount. Because the defendants have not answered the
complaint and there has been no discovery, it is impossible to predict the
likely outcome of the case. In the Company management's view, however, the
realistic amount in controversy is not material to the business or prospects of
the Company. See "Business--Litigation."
CONTEMPORARY
On February 27, 1998, the Company acquired by merger and asset
acquisition, the music concert, live entertainment, event marketing,
computerized ticketing and related businesses of Contemporary and the 50%
interest in the Riverport Amphitheater Joint Venture not owned by Contemporary.
Contemporary
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is a vertically-integrated live entertainment and special event promoter and
producer, venue operator and consumer marketer. Contemporary is also one of the
top special event sales promotion and marketing companies in the country.
Contemporary develops programs for national consumer product companies and for
demonstrating, sampling and selling products to consumers. Contemporary's
clients have included AT&T, CBS TV, Radio Shack, Coca Cola USA, Reebok, Nabisco
and the National Basketball Association.
NETWORK
On February 27, 1998, the Company acquired Album Network, Inc., SJS
Entertainment Corporation and the assets of The Network 40 as well as an office
building and related property. Network is engaged in music marketing, research
and artist development activities and is a publisher of trade magazines for
radio broadcasters, music retailers, performers and record industry executives.
CONCERT/SOUTHERN
On March 4, 1998, the Company acquired Concert/Southern, a promoter of
live entertainment in the Atlanta metropolitan area.
USA MOTOR SPORTS
On March 25, 1998, PACE acquired a 67% interest in certain assets and
liabilities of USA Motor Sports. The remaining 33% interest is held by
Contemporary.
AVALON
On May 14, 1998, the Company acquired Avalon, a leading music concert
producer and promoter in the Los Angeles area.
OAKDALE
On June 3, 1998, the Company acquired certain assets of Oakdale. Oakdale
is a promoter and producer of concerts in Connecticut and the owner of the
Oakdale Theater, a new 4,800 seat facility located in Wallingford, Connecticut.
FAME
On June 4, 1998, the Company acquired all of the outstanding capital stock
of FAME, a leading full-service marketing and management company which
specializes in the representation of team sports athletes, primarily in
professional basketball. FAME was founded in 1992 by David Falk and Curtis Polk
and currently represents some of the premier athletes in professional team
sports, including, among others, Michael Jordan, Patrick Ewing, Alonzo
Mourning, Juwan Howard and Allen Iverson. In addition, FAME provides
specialized financial advisory services to its clients. Mr. Falk continues to
serve as the Chairman of FAME and was appointed as a Member of the Office of
the Chairman and a Director of the Company. The Company believes that, through
its acquisition of FAME, it will be able to capitalize on the cross-marketing
opportunities that may arise by virtue of representing prominent team athletes
while selling corporate sponsorships and other marketing rights at its existing
venues. See "Risk Factors--Company-Specific Risks--Risks Related to the
Representation of Athletes."
DON LAW
On July 2, 1998, the Company acquired certain assets of Don Law, a concert
and theater promoter in New England. Don Law currently owns and/or operates
three venues in New England with an aggregate seating capacity of 27,400. See
"--Services Provided--Venue Operations." Don Law also acts as the sole ticket
operator for all of its own venues as well as third party venues. The purchase
price was financed from the proceeds of the Equity Offering.
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<PAGE>
MAGICWORKS
On September 11, 1998, the Company purchased all of the outstanding shares
of common stock of Magicworks, a publicly-traded company. Magicworks
specializes in the production and promotion of live entertainment events such
as theatrical shows, musical concerts, ice skating shows and other forms of
live entertainment. Magicworks also provides personal representation and sports
marketing services to professional athletes in such sports as figure skating
and tennis.
OTHER ACQUISITIONS
In July, August and September 1998, the Company completed the acquisition
of seven companies in the theatrical and music segments, principally in the
areas of programming, touring and merchandising.
PENDING ACQUISITIONS
MARQUEE ACQUISITION
On July 23, 1998, the Company and Marquee entered into a merger agreement
whereby a wholly owned subsidiary of the Company will be merged with and into
Marquee and Marquee will become a wholly owned subsidiary of the Company. The
merger agreement, as amended, provides that each share of Marquee common stock
will be converted into a number of Class A common stock based on the Exchange
Ratio (as defined herein). See "Agreements Related to the Pending
Acquisitions--Marquee." Marquee provides integrated event management,
television programming and production, marketing, talent representation and
consulting services in the sports, news and other entertainment industries.
CELLAR DOOR ACQUISITION
On August 13, 1998, the Company and the beneficial owner of all of the
outstanding equity interests of Cellar Door entered into a letter of intent
with respect to the Company's acquisition of all of the outstanding capital
stock of Cellar Door. See "Agreements Related to the Pending
Acquisitions--Cellar Door." The closing is expected to be subject to customary
closing conditions, including the entry into a definitive acquisition agreement
and the termination or expiration of the applicable waiting period under the
HSR Act. See "--Regulatory Matters." Cellar Door is a leading promoter and
producer of live entertainment events.
The Company expects to complete the Pending Acquisitions during the first
quarter of 1999. 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 the Pending Acquisitions
will be consummated during such period, on the terms described herein, or at
all. See "Risk Factors--Risks Relating to the Notes--Substantial Leverage" and
"--Company-Specific Risks--Expansion Strategy; Need for Additional Funds."
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.
AGREEMENT WITH TICKETMASTER
On November 13, 1998, the Company and Ticketmaster entered into a binding
letter of intent pursuant to which the Company has granted Ticketmaster the
exclusive right to sell and distribute tickets for the Company's events
worldwide. The Company anticipates that the revenues associated with its ticket
sales will increase in 1999 as a result of such agreement. The Company is
currently evaluating its existing internal ticketing operations which were
acquired in the 1998 Acquisitions; however, the Company does not believe that
its ticketing operations are material to its financial condition or results of
operations.
SERVICES PROVIDED
The Company is engaged in (1) the booking, promotion and production of
live entertainment events and tours, (2) the ownership and/or operation of
concert and other entertainment venues, (3) the representation of professional
athletes and (4) the sale of corporate sponsorships and advertising and
provision of marketing and consulting services to third-parties.
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<PAGE>
BOOKING AND PROMOTION
The Company books and promotes music concerts, theatrical events,
specialized motor sports and other live entertainment events and tours such as
music festivals, comedy tours, figure skating shows, gymnastics tours,
motivational speaking tours and other special events. The Company books and
promotes events in a number of types of venues (including amphitheaters,
theaters, clubs, arenas and stadiums) that are owned and/or operated by the
Company or by third parties. See "--Venue Operations." The Company primarily
promotes concerts performed by newer groups having widespread popularity (e.g.,
Phish, Dave Matthews and Hootie & the Blowfish) and by more established groups
having relatively long-standing and more stable bases of popularity (e.g.,
James Taylor and Jimmy Buffett). The Company believes that its large
distribution network will enable it to set an aggregate guarantee for a series
of shows, mitigating the risk of loss associated with a single show. The
Company also believes that the market research and audience demographics
database that it acquired in the 1998 Acquisitions, when combined with its
existing audience data collection efforts, will permit highly-effective,
targeted marketing, such as direct-mail and subscription series campaigns,
which the Company believes will increase ticket pre-sales and overall sales in
a cost-efficient manner.
The following table identifies artists whose events were recently promoted
by the Company (on a pro forma basis):
<TABLE>
<S> <C> <C>
Aerosmith Elton John Phil Collins
Alabama Fleetwood Mac* Pink Floyd
Alanis Morissette James Taylor Phish
Bette Midler Janet Jackson R.E.M.
Billy Joel Jerry Seinfeld* Rod Stewart
Brooks & Dunn Jimmy Buffett The Rolling Stones
Chris Rock* Live Seal
Clint Black Melissa Etheridge Sheryl Crow
Crosby, Stills & Nash Metallica Smashing Pumpkins
Dave Matthews Michael Bolton Stone Temple Pilots
Depeche Mode Ozzy Osbourne* Tim Allen*
The Eagles Pearl Jam Tina Turner
Earth, Wind & Fire Peter Gabriel U2
</TABLE>
- ----------
* National tour produced by the Company.
PRODUCTION
The Company is currently involved in the creation of tours for music
concert and other live entertainment events. The Company's production
activities include (1) the creation of tours for music concert, theatrical,
specialized motor sports and other live entertainment events, (2) the
development and management of Touring Broadway Shows and (3) the development of
specialized motor sports shows, proprietary characters and television
programming. The acquired businesses produce tours on a national or regional
basis and, in 1997, structured national tours for Fleetwood Mac and Ozzy
Osbourne, among others. The Company plans to increase its production of
national music tours. PACE (one of the acquired businesses) also produces
Touring Broadway Shows, acquiring the stage and touring rights from a show's
owner, assembling the touring cast, hiring a director and arranging for the
construction and design of sets and costumes. Touring Broadway Shows are
typically revivals of previous commercial successes or reproductions of
theatrical shows currently playing on Broadway in New York City. PACE also
produces and makes small investments (i.e., from approximately $150,000 to
$600,000) as a limited partner in the creation of a small number of original
Broadway Shows in exchange for obtaining touring rights and favorable
scheduling for those shows.
The Touring Broadway Show production and promotion industry is highly
fragmented. The Company believes it is the largest multiple-market presenter of
Touring Broadway Shows in the United States. The Company competes with other
producers and presenters to obtain presentation arrangements with venues and
performing arts organizations in various markets, including in markets that
have more
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than one venue suitable for presenting a Touring Broadway Show. The Company's
competitors, some of whom have also been partners of PACE and Magicworks in
certain theater investments from time to time, include a number of New
York-based production companies that also promote Touring Broadway Shows and a
number of regional presenters. On a pro forma basis, the Company would have had
a producing interest or investment in the following shows for 1997 and/or 1998,
among others:
<TABLE>
<CAPTION>
SHOW TITLE TYPE THE COMPANY'S INVOLVEMENT
- --------------------------------- -------------------- --------------------------
<S> <C> <C>
Big Touring Production
Cabaret Touring Production
Damn Yankees Touring Production
Death Trap Touring Production
Evita Touring Production
Funny Girl Touring Production
The Gin Game Touring Production
Harmony Development Production
Jekyll & Hyde Broadway Production
Kiss of the Spiderwoman Touring Production
Lord of the Dance Touring (Europe) Production
The Magic of David Copperfield Touring Production
Man of La Mancha Touring Production
Smokey Joe's Cafe Touring Production
The Sound of Music Touring Production
Victor, Victoria Touring Production and Investment
West Side Story Touring Production
A Chorus Line Touring (US & UK) Investment
Annie Broadway Investment
Carousel Touring Investment
Cirque Broadway & Touring Investment
Chicago Broadway & Touring Investment
How to Succeed in Business Broadway & Touring Investment
Martin Guerre West End (UK) Investment
Rent Broadway & Touring Investment
Steel Pier Broadway Investment
Triumph of Love Broadway Investment
West Side Story Touring (UK) Investment
</TABLE>
The Company believes that there are approximately 50 domestic markets that
can provide the potential audience and gross ticket revenues for a full-scale
Touring Broadway Show to be profitable, and an additional 50 markets where
smaller scale productions with shorter runs can be presented profitably. In
most of these cities, there are a limited number of venues that can accommodate
a Touring Broadway Show.
The Company currently sells subscription series for its Touring Broadway
Shows in the following 37 markets that maintain active touring schedules:
<TABLE>
<S> <C> <C>
Albuquerque, NM Indianapolis, IN Palm Beach, FL
Atlanta, GA Long Beach, CA Phoenix, AZ
Austin, TX Louisville, KY Pittsburgh, PA
Baltimore, MD Miami, FL Portland, OR
Boise, ID Milwaukee, WI Salt Lake City, UT
Chicago, IL Minneapolis, MN San Antonio, TX
Cincinnati, OH Myrtle Beach, SC Seattle, WA
Columbus, OH Nashville, TN Tampa, FL
Dallas, TX New Orleans, LA Tuscon, AZ
Eugene, OR Omaha, NE Wichita, KS
Ft. Lauderdale, FL Orange County, CA Ottawa, Canada
Green Bay, WI Orlando, FL Edmonton, Canada
Houston, TX
</TABLE>
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<PAGE>
The Company also produces motor sports events such as monster truck
events, tractor pulls, mud races, demolition derbies and motorcross races, and
designs tracks and other elements for those events. Competition among producers
in the specialized motor sports industry is between three large companies and a
number of smaller regional companies. The Company believes that it is the
largest participant in the industry, on a pro forma basis having produced over
190 events in 1997. The Company also competes with several regional specialized
motor sports companies, which each present only a small number of events, as
well as a number of local promoters that present only one or two events per
year. See "Risk Factors--Company-Specific Risks--Re-Purchase Rights for Certain
Subsidiaries."
In addition, the Company produces a variety of other forms of live
entertainment, including music festivals, radio programs, air shows, figure
skating shows, gymnastics tours, comedy tours, motivational speaking tours and
television programming based on certain of its events and other events.
VENUE OPERATIONS
The Company's revenues from its venue operations are derived primarily
from corporate sponsorships and advertising, concessions, merchandise, parking
and other related items. A venue operator will typically receive for each event
it hosts a fixed fee or percentage of ticket sales for use of the venue, as
well as a fee representing between 40-50% of total concession sales from the
vendors and 10-25% of total merchandise sales from the performer. As a venue
owner, the Company typically receives 100% of sponsorship and advertising
revenues. Since few artists will play in every available market during a tour,
the Company competes with venues in other markets for dates of popular national
tours. The favorable cost structure of amphitheaters and their ability to draw
fans is often an important factor in the decision of a performer to choose to
perform in an amphitheater market. In certain cities, the Company also competes
with other venues to promote an artist in that city. The Company believes that
it controls the largest network of venues used principally for music concerts
and other live entertainment events in the United States. Upon closing of the
Pending Acquisitions, the Company will own (partially or entirely) and/or
operate 69 venues in 28 of the top 50 markets, including 14 amphitheaters in 9
of the top 10 markets. The following chart sets forth certain information with
respect to the venues that are owned (partially or entirely) and/or operated by
the Company:
<TABLE>
<CAPTION>
MARKET
RANK THE COMPANY'S
MARKET AND VENUE (1) TYPE OF VENUE INTEREST
- ----------------------------- -------- --------------- ----------------------------
<S> <C> <C> <C>
New York--Northern New
Jersey--Long Island: 1
PNC Bank Arts Center
(formerly Garden State
Arts Center) ............... amphitheater 22-year lease (expires
October 31, 2017)
Jones Beach Marine
Amphitheater ............... amphitheater 10-year license
agreement (expires
December 31, 1999)
Roseland Theater ............ theater exclusive booking
agent
Westbury Music Fair ......... theater 43-year lease (expires
December 31, 2034)
Irving Plaza ................ theater 10-year lease (expires
July 30, 2007)
Beacon Theater .............. theater 49% partnership
interest in 15-year lease
(expires December 31,
2006)
Los Angeles--Riverside--
Orange County: 2
Glen Helen Blockbuster
Pavilion ................... amphitheater 25-year lease (expires
July 1, 2018)
Irvine Meadows
Amphitheater ............... amphitheater facility owned; land
leased
<CAPTION>
TOTAL
TOTAL AVG. NO. OF SEATS
SEATING ATTENDANCE EVENTS SOLD
MARKET AND VENUE CAPACITY IN 1997 IN 1997 IN 1997
- ----------------------------- --------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
New York--Northern New
Jersey--Long Island:
PNC Bank Arts Center
(formerly Garden State
Arts Center) ............... 17,500 6,456 57 368,004
Jones Beach Marine
Amphitheater ............... 14,400 7,992 45 359,653
Roseland Theater ............ 3,600 2,614 41 107,174
Westbury Music Fair ......... 2,870 2,198 148 325,348
Irving Plaza ................ 1,121 963 208 200,250
Beacon Theater .............. 2,849 2,000(2) 40(2) 80,000(2)
Los Angeles--Riverside--
Orange County:
Glen Helen Blockbuster
Pavilion ................... 25,000(3) 10,162 15 152,432
Irvine Meadows
Amphitheater ............... 15,500 11,537 19 219,211
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TOTAL
MARKET TOTAL AVG. NO. OF SEATS
RANK THE COMPANY'S SEATING ATTENDANCE EVENTS SOLD
MARKET AND VENUE (1) TYPE OF VENUE INTEREST CAPACITY IN 1997 IN 1997 IN 1997
- ----------------------------- -------- --------------- ---------------------------- ---------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Thousand Oaks Civic Arts
Plaza ...................... theater 5-year exclusive 1,800 1,164 24 27,929
booking agent for
contemporary music
events (expires
May 2003)
Chicago--Gary--Kenosha: 3
The Palace Theater(4) ....... theater 50% partnership 2,350 N/A N/A N/A
interest in 49-year lease
(expires May, 2048)
Washington--Baltimore: 4
Nissan Pavilion at Stone
Ridge(5) ................... amphitheater 20-year lease 25,000 11,116 31 344,600
(expires June 9, 2014)
San Francisco--Oakland--
San Jose: 5
Shoreline Amphitheater ...... amphitheater facility owned; land 22,000 12,600 40 504,013
leased for 35 years
(expires November 30,
2021)
Concord Pavilion ............ amphitheater 10-year exclusive 12,500 6,226 42 261,479
outside booking agent
(expires December 31,
2005)
Greek Theater ............... theater 4-year promotion 8,500 6,191 9 55,718
agreement (expires
October 31, 2002)
Warfield Theatre ............ theater 10-year lease (expires 2,250 1,677 77 129,129
May 31, 2008)
Filmore Auditorium .......... theater 10-year lease (expires 1,249 1,051 180 189,103
August 31, 2007)
Punchline Comedy
Club ....................... club 5-year lease (expires 175 97 422 41,138
September 15, 2001)
Philadelphia--Wilmington--
Atlantic City: 6
Blockbuster/SONY Music
Entertainment Centre
on the Waterfront .......... amphitheater 31-year lease (expires 25,000 8,973 54 484,528
September 29, 2025)
Boston--Worcester--
Lawrence: 7
Great Woods Center for
the Performing Arts ........ amphitheater owned 19,500 11,943 54 644,875
Harborlights Pavilion(11) ... amphitheater leased 4,800 3,180 45 143,100
Orpheum Theatre ............. theater long-term management 2,700 2,475 184 622,586
contract
Avalon Ballroom ............. club 5-year exclusive 1,350 1,116 54 60,213
booking agent (expires
June 30, 2003) and
beneficial owner of a
minority interest
Charles Playhouse
(main stage) ............... theater owned 525 439 416 182,448
Charles Playhouse
(basement) ................. theater owned 200 104 416 43,480
Wilbur Theater .............. theater 5-year lease (expires 1,223 959 129 123,732
August 25, 2001)
Colonial Theater ............ theater 8-year lease (expires 1,704 1,330 208 276,754
August 31, 2001)
Detroit--Ann 8
Arbor--Flint:
Pine Knob Music amphitheater exclusive booking 16,646 11,277 45 507,469
Theatre(5) .................
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
MARKET
RANK THE COMPANY'S
MARKET AND VENUE (1) TYPE OF VENUE INTEREST
- ------------------------------ -------- --------------- ----------------------------
<S> <C> <C> <C>
The Palace at Auburn
Hills(5) .................... arena exclusive booking
Detroit State Theatre(5) ..... theater exclusive booking
Meadowbrook
Amphitheater(5) ............. amphitheater exclusive booking
Dallas--Fort Worth: 9
Starplex Amphitheater ........ amphitheater 32.5% partnership
interest in 31 year lease
(expires December 31,
2028)
Houston--Galveston--
Brazoria: 10
Cynthia Woods Mitchell
Pavilion .................... amphitheater 15-year management
contract (expires
December 31, 2009)
Aerial Theater at Bayou
Place theater 50% partnership
interest in 10-year lease
(expires December 31,
2007)
Miami--Fort Lauderdale: 11
Sunrise Musical Theatre
(5) ......................... theater owned
Parker Playhouse ............. theater 4-year license
agreement (expires
October 17, 2000)
Atlanta: 12
Lakewood
Amphitheater ................ amphitheater 32.5% partnership
interest in 35-year lease
(expires January 1,
2019) (8)
Chastain Park
Amphitheater ................ amphitheater 10-year lease (expires
December 31, 2000)
Roxy Theater ................. club 7-year lease (expires
March 31, 2004)
Cotton Club .................. club 5-year lease (expires
August 31, 2000)
Seattle--Tacoma--Bremerton: 13
White River
Amphitheatre(9) ............. amphitheater long-term management
agreement
St. Louis: 17
Riverport Amphitheater ....... amphitheater owned
American Theater ............. theater 10-year lease (expires
July 31, 2004)
Westport Playhouse ........... theater year-to-year lease
(renewal under
negotiation)
Phoenix--Mesa: 18
Desert Sky Blockbuster
Pavilion .................... amphitheater 60-year lease (expires
June 30, 2049)
Pittsburgh: 19
Star Lake Amphitheater ....... amphitheater 45-year lease (expires
December 31, 2034)
I.C. Light Amphitheater ...... amphitheater year to year license
agreement (expires
December 31, 1998)
<CAPTION>
TOTAL
TOTAL AVG. NO. OF SEATS
SEATING ATTENDANCE EVENTS SOLD
MARKET AND VENUE CAPACITY IN 1997 IN 1997 IN 1997
- ------------------------------ --------------- ------------- --------- ---------------
<S> <C> <C> <C> <C>
The Palace at Auburn
Hills(5) .................... 15,000(6) 15,893 23 365,549
Detroit State Theatre(5) ..... 3,000 2,388 36 85,979
Meadowbrook
Amphitheater(5) ............. 7,619 4,235 5 21,174
Dallas--Fort Worth:
Starplex Amphitheater ........ 20,500 8,799 35 307,981
Houston--Galveston--
Brazoria:
Cynthia Woods Mitchell
Pavilion .................... 13,000 8,381 35 293,350
Aerial Theater at Bayou
Place 2,800 3,223 18 58,019 (7)
Miami--Fort Lauderdale:
Sunrise Musical Theatre
(5) ......................... 3,968 3,366 34 114,444
Parker Playhouse ............. 1,185 749 112 83,904
Atlanta:
Lakewood
Amphitheater ................ 19,000 9,257 32 296,225
Chastain Park
Amphitheater ................ 7,000 5,777 28 161,755
Roxy Theater ................. 1,500 848 102 86,498
Cotton Club .................. 650 403 151 60,829
Seattle--Tacoma--Bremerton:
White River
Amphitheatre(9) ............. 20,000 N/A N/A N/A
St. Louis:
Riverport Amphitheater ....... 21,000 10,531 42 442,302
American Theater ............. 2,000 1,510 24 36,236
Westport Playhouse ........... 1,100 880 15 13,196
Phoenix--Mesa:
Desert Sky Blockbuster
Pavilion .................... 19,900 9,179 23 211,114
Pittsburgh:
Star Lake Amphitheater ....... 22,500 12,361 42 519,182
I.C. Light Amphitheater ...... 4,235 2,257 82 185,029
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
TOTAL
MARKET TOTAL AVG. NO. OF SEATS
RANK THE COMPANY'S SEATING ATTENDANCE EVENTS SOLD
MARKET AND VENUE (1) TYPE OF VENUE INTEREST CAPACITY IN 1997 IN 1997 IN 1997
- ----------------------------- -------- --------------- -------------------------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Kansas City: 24
Sandstone
Amphitheater ............... amphitheater 10-year lease (expires 18,000 8,109 32 259,488
December 31, 2002)
Starlight Theater ........... theater box office and concert 9,000 3,772 9 33,948
promotions contract
(expires September 30,
2000)
Memorial Hall ............... theater exclusive booking 3,000 1,910 11 21,014
Milwaukee--Racine: 25
Marcus Amphitheater (5) ..... amphitheater 50% partnership in 22,828 8,334 11 91,670
lease (expires in 2000)
Modjeska Theater(5) ......... theater exclusive booking 1,800 965 21 20,262
Sacramento--Yolo: 26
Punchline Comedy
Club ....................... club 9-year lease (expires 245 90 355 31,834
December 17, 1999)
Norfolk--Virginia
Beach--Newport News: 27
GTE Virginia Beach
Amphitheater(5) ............ amphitheater 30-year lease (expires 20,000 10,428 32 333,688
in 2026)
The Boathouse(5) ............ concert hall lease (expires 2013) 2,460 1,494 42 62,762
The Abyss(5) ................ club exclusive booking 900 329 16 5,269
Indianapolis: 28
Deer Creek Music
Center ..................... amphitheater owned 21,000 11,348 42 476,617
Murat Centre ................ theater and 50-year lease (expires 2,700 1,412 144 211,920
ballroom August 31, 2045)
Columbus: 30
Polaris Amphitheater ........ amphitheater owned 20,000 7,732 39 301,555
Charlotte--Gastonia--Rock
Hill: 33
Charlotte Blockbuster
Pavilion ................... amphitheater owned(8) 18,000 8,592 34 292,135
Hartford: 36
Meadows Music
Theater .................... amphitheater facility owned; land 25,000 9,807 26 254,982
leased for 40 years
(expires September 13,
2034)
Oakdale Theater ............. theater facility owned; land 4,800 2,944 142 418,000
leased for 15 years and
the Company will
purchase land upon
expiration
Rochester: 39
Finger Lakes
Amphitheater ............... amphitheater co-promotion 12,700 6,123 15 91,845
agreement
Nashville: 41
Starwood Amphitheater ....... amphitheater 50% ownership 17,000 8,208 25 205,204
Raleigh--Durham--Chapel
Hill: 47
Walnut Creek
Amphitheater ............... amphitheater 40-year lease (expires 20,000 10,498 40 419,919
October 31, 2030) (10)
West Palm Beach--Boca
Raton: 50
SONY Music/Blockbuster
Coral Sky Amphitheater amphitheater lease (expires 20,000 11,244 26 292,340
January 4, 2005) (10)
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
TOTAL
MARKET TOTAL AVG. NO. OF SEATS
RANK THE COMPANY'S SEATING ATTENDANCE EVENTS SOLD
MARKET AND VENUE (1) TYPE OF VENUE INTEREST CAPACITY IN 1997 IN 1997 IN 1997
- ------------------------------- -------- --------------- ------------------------ ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Royal Poinciana
Playhouse .................... theater 6-year license 878 601 84 50,509
agreement (expires
October 31, 2004)
Richmond--Petersburg: 51
Classic Amphitheatre(5) ....... amphitheater year to year 11,000 6,208 14 86,917
management contract
Springfield: 70
Tanglewood .................... amphitheater exclusive 13,802 5,786 8 46,289
booking
agent
Reno: 130
Reno Hilton
Amphitheater ................. amphitheater 4-year exclusive 8,500 3,420 19 64,983
booking agreement
(expires December 31,
2001)
</TABLE>
- ----------
(1) Based on the July 1994 population of metropolitan statistical areas as
set forth in the 1997 Statistical Abstracts of the United States. Does
not include venues where the Company sells subscriptions for Touring
Broadway Shows.
(2) Approximate numbers.
(3) Additional seating of approximately 40,000 is available for certain
events.
(4) Venue is closed for renovation and is scheduled to re-open in May 1999.
(5) Includes venues to be acquired in the Cellar Door Acquisition.
(6) Additional seating of approximately 5,000 for certain events.
(7) Includes New Year's Eve Festival with attendance of approximately 15,000.
(8) Upon closing of the Cellar Door Acquisition. The Company currently holds
a 66 2/3 partnership interest in the Walnut Creek Amphitheater lease and
a 75% partnership interest in the SONY Music/Blockbuster Coral Sky
Amphitheater lease.
(9) Venue is currently under development.
(10) Upon closing of the Cellar Door Acquisition, the Company will own a 100%
interest in each of these leases. The Company currently holds a 66 2/3%
partnership interest in the Walnut Creek Amphitheater lease and a 75%
partnership interest in the SONY Music/Blockbuster Coral Sky Amphitheater
lease.
(11) The Company's license to use this facility will terminate on November 30,
1998. The Company is currently negotiating an arrangement for a
replacement site in the same market. However, there can be no assurance
that an alternative site will be obtained on terms acceptable to the
Company, or at all.
Because the Company operates a number of its venues under leasing or
booking agreements, the Company's long-term success will depend on its ability
to renew these agreements when they expire or terminate. There can be no
assurance that the Company will be able to renew these agreements on acceptable
terms or at all, or that it will be able to obtain attractive agreements with
substitute venues. See "Risk Factors--Company-Specific Risks--Control of
Venues."
REPRESENTATION OF PROFESSIONAL ATHLETES
Upon consummation of the FAME Acquisition in June 1998, the Company became
a leading full-service provider of marketing and management services,
specializing in the representation of team sports athletes (primarily in
professional basketball). The Company generates revenues through the
negotiation of professional sports contracts (primarily basketball) and
endorsement contracts for its clients. FAME's clients have endorsed products
for companies such as Nike, McDonald's, Coca-Cola and Chevrolet. In addition,
FAME generates a small portion of its revenues by providing certain financial
management and planning services to its clients, through its investment
affiliate (which was also acquired in the FAME Acquisition), which is a
registered investment advisor. The Company believes that it will be able to
capitalize on the synergies which exist between the representation of athletes
in corporate marketing opportunities and the sale of corporate sponsorships and
other marketing rights at its existing venues.
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<PAGE>
A significant portion of FAME's revenues to date has been derived from a
small number of its clients (primarily in professional basketball). The Company
estimates that five of FAME's basketball clients accounted for approximately
78% of FAME's revenue for the nine months ended September 30, 1998, and on a
pro forma basis, FAME's EBITDA would have comprised approximately 3% of the
Company's EBITDA for the same period. The amount of endorsement and other
revenues that these clients generate is a function of, among other things, such
clients' professional performance and public appeal. Factors beyond the
Company's control, such as injuries to these clients, declining skill or labor
unrest, among others, could have a material adverse affect on the Company's
operations. Representation agreements with its clients are generally for a term
equal to the term of the player's professional sports contract but are
terminable on 15 days' notice (although FAME would continue to be entitled to
the revenue streams generated during the remaining term of any contracts which
it negotiated). The termination or expiration of FAME's contracts with certain
clients could have a material adverse affect on the Company's operations.
The owners of the teams in the NBA have instituted a "lock-out" of the
basketball players on their respective teams, causing cancellation of some of
the games for the upcoming basketball season. If such NBA lock-out continues
for an extended period of time, it will have a significant negative impact on
FAME's revenues and EBITDA.
SPONSORSHIPS AND ADVERTISING; MARKETING AND OTHER SERVICES
In order to maximize revenues, the Company actively pursues the sale of
local, regional and national corporate sponsorships, including the naming of
venues (e.g., the PNC Bank Arts Center) and the designation of "official" event
or tour sponsors, concessions providers (e.g., beer and soda), credit card
companies, phone companies, film manufacturers and radio stations, among
others. Sponsorship arrangements can provide significant additional revenues at
negligible incremental cost, and many of the Company's venues currently have no
sponsorship arrangements in many of the available categories (including naming
rights). The Company believes that the national venue network assembled through
the 1998 Acquisitions will likely (1) attract a larger number of major
corporate sponsors and (2) enable the Company to sell national sponsorship
rights at a premium over local or regional sponsorship rights. The Company also
pursues the sale of corporate advertising at its venues, and believes that it
has substantial advertising space available (e.g., billboard space) that it has
not yet begun to utilize. The Company also believes that (1) its relationships
with advertisers will enable it to better utilize available advertising space
and (2) the aggregation of its audiences nationwide will create the opportunity
for advertisers to access a nationwide market.
The Company provides a variety of marketing and consulting services
derived from or complementary to its live entertainment operations, including
(1) local, regional and national live marketing programs and (2) subscription
or fee based radio and music industry data compilation and distribution. Live
marketing programs are generally specialized advertising campaigns designed to
promote a client's product or service by providing samples or demonstrations in
a live format, typically at malls and college campuses. For example,
Contemporary (one of the 1998 Acquisitions) presents live marketing events on
behalf of AT&T for the purposes of demonstrating the advantages of AT&T's long
distance service over that of its competitors. This program is in its third
year, and Contemporary is now the primary vendor for this service.
Additionally, the Company believes that Contemporary is one of the leading
producers of national mall touring events, producing over 65 events every year
in the country's shopping malls. These events, either in stores or mall
congregation areas, are designed to promote brand awareness and drive follow-up
sales. Contemporary recently had mall tour campaigns for Newsweek magazine (the
Newsweek Technology Tour) and for Radio Shack (The Rock and Roll Hall of
Fame/Radio Shack Tour). The Company believes that, along with mall events,
Contemporary is one of the industry leaders in events produced on college
campuses. Currently in its seventh year, the CBS College Tour will appear at 40
colleges in the United States. In addition to promoting the image of the CBS
Television Network, these tours also create value-added tie-in promotions and
marketing programs for the network's top advertisers. During each year,
Contemporary uses over 100 vehicles (including semi-trailer trucks, vans and
other vehicles) traveling nationwide in support of these programs, and draws on
over 1,000 independent marketing associates across the country with respect to
its marketing campaigns.
83
<PAGE>
The Company is engaged in music marketing, research and artist development
activities, and is a publisher of trade magazines for radio broadcasters, music
retailers, performers and record industry executives. Each of the Company's
magazines focuses on research and insight common to a specific contemporary
radio format. The Company also provides radio airplay and music retail research
services to record labels, artist managers, retailers and radio broadcasters.
The Company, through Network, creates and distributes network radio
special events and live concert programming for over 400 music radio stations
in the top 200 United States radio markets. Additionally, the Company produces
eight daily radio "show prep" services that stations use to supplement in-house
content production. Network also provides consulting and entertainment
marketing services to corporate clients with music business interests.
OPERATING STRATEGY
The Company's principal objectives are to maximize revenue and cash flow
growth opportunities by (1) being a leading promoter and producer of live
entertainment events and a leading provider of talent representation services
and (2) owning and/or operating leading live entertainment venues in the United
States. The Company's specific strategies include the following:
OWN AND/OR OPERATE LEADING LIVE ENTERTAINMENT VENUES IN NATION'S TOP 50
MARKETS
A key component of the Company's strategy is to own and/or operate a
network of leading live entertainment venues in the nation's top 50 markets.
The Company believes that this strategy will allow it to:
o utilize its nationwide venue footprint, significant industry expertise and
access to a large aggregate audience to secure more events and distribute
content on a national scale;
o sell additional products and maximize numerous other related revenue
sources, including sponsorships and other marketing opportunities;
o position itself to produce national tours by leading performers in order to
capture a greater percentage of revenues from those tours;
o encourage wider use by performers of the Company's venues by providing
centralized access to a nationwide network of venues; and
o take advantage of economies of scale to increase, for example, concession
and related revenues.
The Company believes that it controls the largest network of venues used
principally for music concerts and other live entertainment events in the
United States. Upon closing of the Pending Acquisitions, the Company will own
(partially or entirely) and/or operate under lease or exclusive booking
arrangements 69 venues in 28 of the top 50 markets, including 14 amphitheaters
in 9 of the top 10 markets.
MAXIMIZE ANCILLARY REVENUE OPPORTUNITIES
The Company intends to enhance revenues and cash flows by maximizing
revenue sources arising from and related to its leadership position in the live
entertainment business. Management believes that these related revenue sources
generally have higher margins than promotion and production revenues and
include, among others, (1) the sale of corporate sponsorship, naming and other
rights, concessions, merchandise, parking and other products and services and
(2) the sale of rights to advertise to the Company's large aggregate national
audience. Categories available for sponsorship arrangements include the naming
of the venue itself (e.g., the PNC Bank Arts Center) and the designation of
"official" event or tour sponsors, concessions providers (e.g., beer and soda),
credit card companies, phone companies, film manufacturers and radio stations,
among others. Sponsorship arrangements can provide significant additional
revenues at negligible incremental cost, and many of the Company's venues
currently have no sponsorship arrangements in many of the available categories
(including naming rights). The Company also intends to maximize related
revenues by developing and exploiting intellectual property rights associated
with (1) its production of musical concert tours and themed events (such as
regional music festivals) and (2) branded characters created as an integral
part of the content, marketing and merchandising of certain motor sports
events.
84
<PAGE>
EXPLOIT SYNERGIES OF THE ACQUIRED BUSINESSES
The Company plans to maximize revenues by exploiting synergies among, and
incorporating the best business practices of, its various existing businesses,
including the businesses to be acquired. For example, the Company believes that
the radio industry trade publications of Network (another of the 1998
Acquisitions) will enable the Company to introduce new acts and new musical
releases to radio programming directors nationwide. This exposure can enhance
recorded music sales and, in turn, music concert attendance, particularly for
artists having relationships with the Company. In addition, the Company
believes that it will be able to capitalize on the cross-marketing
opportunities that may arise by virtue of representing prominent team athletes
while selling corporate sponsorships and other marketing rights at its existing
venues.
INCREASE USE OF VENUES; DIVERSIFICATION OF ACTS AND VENUES
Typically, a venue is not utilized for many of the dates available for
live entertainment events in any given season. The Company believes that it
will be able to increase the utilization of its venues through its ability to
affect scheduling on a nationwide basis, its local knowledge, relationships and
expertise and its presentation of a variety of additional events, including
comedy acts, magic acts, motivational speeches, national figure skating and
gymnastics competitions and exhibitions and bull riding competitions, among
others. The Company believes that a diversified portfolio of performers, events
and venues reduces reliance on the commercial success of any one performer,
event or venue.
INNOVATIVE EVENT MARKETING
The Company plans to use innovative event marketing to increase
admissions, sponsorship and advertising revenues, and, to a limited extent,
average ticket prices at its venues. In particular, the Company believes that
it can increase the profitability of its venues by offering premium ticket
packages, including:
o season ticket packages that include amenities such as preferred seating,
VIP parking, waiter service, private club and/or "upscale" concession
menus;
o subscription series packages allowing customers to purchase tickets for a
set of performances; and
o preferred seating, such as box seating and VIP seating areas, which
typically generate higher revenues per seat.
The Company acquired market research and audience demographics databases
through certain of the 1998 Acquisitions. These databases, when combined with
the Company's existing audience data collection efforts, will permit
highly-effective targeted marketing, such as direct-mail and subscription
series campaigns, which the Company believes will increase ticket pre-sales and
overall sales in a cost-efficient manner.
STRICT COST CONTROLS; NATIONALLY COORDINATED BOOKING, MARKETING & ACCOUNTING
The Company's senior management imposes strict financial reporting
requirements and expense budget limitations on all of its businesses, enabling
senior management to monitor the performance and operations of all of its
businesses, to eliminate duplicative administrative costs and to realize
expense savings. Moreover, the Company believes that its size will enable it to
achieve substantial economies of scale by:
o implementing a nationally coordinated booking system (for contracting for
and scheduling acts), while continuing to utilize the substantial local
expertise of the acquired businesses;
o establishing a centralized marketing team to exploit ancillary revenue
streams on local, regional and national levels, including from sponsorship,
advertising and merchandising opportunities; and
o implementing a centralized accounting system.
PURSUE COMPLEMENTARY ACQUISITION OPPORTUNITIES
The live entertainment business is characterized by numerous participants,
including booking agents, promoters, producers, venue owners and venue
operators, many of which are entrepreneurial, capital-
85
<PAGE>
constrained local or regional businesses that do not achieve significant
economies of scale from their operations. The Company believes that the
fragmented nature of the industry presents attractive acquisition
opportunities, and that its larger size will provide it with improved access to
the capital markets that will give it a competitive advantage in implementing
its acquisition strategy. Through consolidation, the Company believes that it
will be better able to coordinate negotiations with performers and talent
agents, addressing what the Company believes is a growing desire among
performers and talent agents to deal with fewer, more sophisticated promoters.
The Company intends to pursue additional strategic acquisitions of:
o amphitheater and other live entertainment venues;
o local and regional promoters and producers of music concert, theatrical,
specialized motor sports and other live entertainment events; and
o companies in the sports marketing and talent representation industry.
The Company is currently in the process of negotiating certain additional
acquisitions of live entertainment and related businesses; however, it has not
entered into definitive agreements with respect to any of such acquisitions and
there can be no assurance that it will do so. See "Risk
Factors--Company-Specific Risks--Expansion Strategy; Need for Additional
Funds."
REGULATORY MATTERS
The Company's business is subject to extensive local, state and federal
regulatory, licensing, approval and permit requirements, including those
relating to zoning, operation of public facilities and consumer protection.
Certain large acquisitions must also comply with the HSR Act. The Company may
be unable to obtain the licenses, approvals and permits it requires (including
under the HSR Act) from time to time in order to acquire and operate live
entertainment businesses in accordance with its expansion strategy.
In connection with the HSR Act filing for the Marquee Acquisition, the
Company received notice of a preliminary inquiry from the Antitrust Division of
the U.S. Department of Justice relating to the Pending Acquisitions and seeking
information on the overall scope of the Company's operations. In order to allow
the Department of Justice to evaluate the information provided by the Company,
the Company re-submitted its HSR filing for the Marquee Acquisition. In
connection with such re-submission, the applicable waiting period under the HSR
Act relating to the Marquee Acquisition has expired. The Company intends to
cooperate with the Department of Justice inquiry. The Company believes that the
Cellar Door Acquisition, along with the Company's overall business and plan of
acquisitions, is in compliance with applicable antitrust laws.
PROPERTIES
The Company's executive offices are located at 650 Madison Avenue, 16th
Floor, New York, New York 10022. The Company owns (partially or entirely)
and/or operates 69 venues as more fully described under "--Services
Provided--Venue Operations." In addition, the Company owns or leases office
space throughout the United States and abroad in connection with its
operations.
LITIGATION
In a complaint filed October 8, 1998 in the Superior Court of the State of
California, Los Angeles County, Universal brought suit against PACE
Amphitheaters, Inc., PACE Entertainment Group, Inc., SFX Entertainment, Inc.,
Brian Becker and Allen Becker alleging, among other things, that the Company's
acquisitions of PACE and Concert/Southern caused breaches of PACE's various
agreements with Universal. The complaint alleges that PACE is in breach of a
co-promotion agreement, that Brian and Allen Becker are in breach of
non-competition agreements and that the Company has intentionally interfered
with contracts between the plaintiff and certain of the defendants. The
defendants have not answered the complaint and there has been no discovery as
yet. Although the lawsuit seeks damages in an unspecified amount, in the
Company management's view, the realistic amount in controversy is not material
to the business or prospects of the Company. The defendants intend to defend
the case vigorously.
86
<PAGE>
On November 20, 1998, a complaint was filed against 11 talent agencies and
29 promoters, including the Company, several of its subsidiaries and other
entities to be acquired in the Pending Acquisitions. According to the
complaint, the plaintiffs are five corporations owned by African-Americans. The
complaint alleges action by the defendants to exclude African-Americans from
promoting concerts and seeks injunctive relief and damages for civil rights and
antitrust violations. The focus of the action appears to be industry-wide,
rather than specifically directed at the Company. The Company intends to defend
the action vigorously.
On May 5, 1998, a class action complaint was filed in Chancery Court in
the State of Delaware, New Castle County, CA #16355NC against the Company,
certain of its directors and Marquee. The complaint alleged that the Company
proposed an acquisition of Marquee and that the proposed acquisition would be
unfair to Marquee's public stockholders. The complaint sought an order
enjoining the proposed transaction, or, in the alternative, awarding rescissory
and compensatory damages.
On July 22, 1998, the parties entered into a Memorandum of Understanding,
pursuant to which the parties have reached an agreement providing for a
settlement of the action (the "Settlement"). Pursuant to the Settlement, the
Company acknowledged that the legal action was a significant factor in
improving the terms of its offer to acquire Marquee. The Settlement also
provides for the defendants to pay plaintiffs' counsel an aggregate of
$310,000, including all fees and expenses as approved by the court. The
Settlement is conditioned on the (1) closing of the merger, (2) completion of
confirmatory discovery and (3) approval of the court. Pursuant to the
Settlement, the defendants have denied, and continue to deny, that they have
acted improperly in any way or breached any fiduciary duty.
On October 16, 1998, the Company and Marquee entered into Amendment No. 3
to the Marquee Merger Agreement. In entering into this amendment, the Company
and Marquee took into consideration the concerns and interests of the
plaintiffs in the litigation, and it is therefore their intention to attempt to
finalize a revised Memorandum of Understanding with plaintiff's counsel. There
can be no assurance, however, that the parties will enter into a revised
Memorandum of Understanding or that the court will approve any settlement on
the terms and conditions provided for therein, or at all.
Although the Company is involved in several other suits and claims in the
ordinary course of business, it is not currently a party to any legal
proceeding that it believes would have a material adverse effect on its
business, financial condition or results of operations.
EMPLOYEES
As of October 31, 1998, the Company had approximately 1,300 full-time
employees. Upon closing of the Pending Acquisitions, the Company expects to
have approximately 1,550 full-time employees. The Company will also, from time
to time, hire or contract for part-time or seasonal employees or independent
contractors, although its staffing needs will vary. Management believes that
its relations with its employees are good. A number of the employees to be
retained by the Company are covered by collective bargaining agreements. See
"Management."
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<PAGE>
AGREEMENTS RELATED TO THE PENDING ACQUISITIONS
The following is a summary of the material terms of the agreements related
to the Pending Acquisitions. This summary is not intended to be complete and is
subject to, and qualified in its entirety by reference to, the agreements,
copies of which have been filed with the SEC and are incorporated herein by
reference. The Company will provide without charge to each person to whom this
Offering Memorandum is delivered, upon written or oral request of any such
person, a copy of any or all documents incorporated herein by reference (other
than exhibits to such documents which are not specifically incorporated by
reference into such documents). Requests for such documents should be directed
to SFX Entertainment, Inc., 650 Madison Avenue, 16th Floor, New York, New York
10022, Attention: Investor Relations, telephone (212) 838-3100.
MARQUEE
The Company entered into an agreement and plan of merger, dated July 23,
1998, as amended, with SFX Acquisition Corp., a wholly-owned subsidiary of the
Company ("Sub"), and Marquee. Pursuant to this agreement, Sub will merge with
and into Marquee, and Marquee will continue as the surviving corporation of the
merger. If the merger is completed, Marquee stockholders will receive shares of
the Company's Class A common stock. The "Exchange Ratio" is the number of
shares of the Company's Class A common stock to be issued for each share of
Marquee stock in the merger. It will be based on the average of the last
reported sale price of the Company's Class A common stock for the fifteen
trading days ending five days before the merger (the "SFX Stock Price"). The
Exchange Ratio will be calculated as follows:
o If the SFX Stock Price is $42.75 or less, then the Exchange Ratio will
equal 0.1111; and
o If the SFX Stock Price is greater than $42.75, then the Exchange Ratio will
equal the quotient obtained by dividing $4.75 by the SFX Stock Price.
On November 20, 1998, the closing sale price for the Company's Class A
common stock was $46.50.
The consummation of the merger is subject to the satisfaction of a number
of conditions set forth in the merger agreement, including, but not limited to,
the approval by the Marquee stockholders of the transactions contemplated
thereby, the Company's Class A common stock to be issued in the merger being
approved for listing on the Nasdaq National Market, the absence of legal
restraints or prohibitions that prevent the completion of the merger, and the
receipt of all applicable consents to the merger from third parties and
regulatory agencies. See "Business--Regulatory Matters."
The board of directors of the Company and Marquee may jointly agree in
writing to terminate the merger agreement without completing the merger. The
merger agreement may also be terminated in certain other circumstances,
including, but not limited to, the following:
(1) Either the Company or Marquee may terminate the merger agreement if:
(a) the merger is not completed by April 30, 1999 (subject to certain
exceptions);
(b) a law or court order permanently prohibits the merger; or
(c) Marquee stockholders do not approve and adopt the merger agreement and
the transactions it contemplates.
(2) The Company may terminate the merger agreement if, among other things:
(a) the Marquee board of directors or the special committee of the Marquee
board of directors withdraws or modifies its recommendation in favor of
the merger in a manner adverse to the Company;
(b) the Marquee board of directors or the special committee of the Marquee
board of directors recommends to the Marquee stockholders a competing
takeover proposal or fails to recommend against accepting a competing
takeover proposal;
(c) any person (other than the Company, Sub or any of their affiliates)
acquires beneficial ownership or the right to acquire beneficial
ownership of, or any group beneficially owns, more than 25% of the
outstanding shares of Marquee common stock; or
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(d) Marquee breaches any representation, warranty, covenant or agreement,
or any representation or warranty of Marquee becomes untrue (subject to
certain limitations); or
(3) Marquee may terminate the merger agreement if, among other things:
(a) the Company breaches any representation, warranty, covenant or
agreement, or any representation or warranty of the Company becomes
untrue (subject to certain limitations); or
(b) Marquee accepts a competing takeover proposal.
The merger agreement requires Marquee to pay a termination fee of
$1,900,000 to the Company, and expenses of up to $500,000, if: (i) the merger
agreement is terminated under clauses (2)(a), (2)(b), (2)(c) or (3)(b) above
(except for certain terminations under clause (2)(a)); or (ii) the merger
agreement is terminated under clause (1)(a) or (1)(c) above, and in either
event a takeover proposal was made prior to termination and definitive
documentation for the takeover proposal is entered into within 12 months of
such termination. If the merger agreement is terminated under clause (1)(c)
above, but the $1,900,000 fee and expenses are not due, then Marquee will be
required to pay the Company a termination fee of $500,000. See "Risk
Factors--Company-Specific Risks--Potential Conflicts of Interest.
CELLAR DOOR
On August 12, 1998, the Company entered into a letter agreement with John
J. Boyle, the sole stockholder of the Cellar Door group of companies, which own
interests in three live entertainment venues. The letter agreement is binding,
and (as subsequently amended) contemplates that the parties will enter into a
more definitive acquisition agreement by November 27, 1998.
The Company anticipates that the definitive agreement will provide that
the Company will buy all of the stock in Cellar Door for a purchase price of:
o $70.0 million in cash, minus an amount equal to Cellar Door's secured
indebtedness and capitalized leases;
o $8.5 million in cash, to be paid in five equal annual installments;
o $20.0 million in shares of the Company's Class A common stock, valued based
on a twenty-day trading average (provided that the Company will have the
option to substitute up to $15.0 million of such amount in cash); and
o options to purchase an aggregate of 100,000 shares of the Company's Class A
common stock, granted over a five-year period.
Mr. Boyle will be entitled to retain all net income of Cellar Door for 1998,
subject to certain limitations. In addition, Mr. Boyle will become an employee
of the Company and the Chairman of the Company's Music Group at closing, with
an annual base salary of $300,000. He will also be appointed as a non-voting
observer to the Company's board of directors.
The agreement is expected to provide that 50% of the shares issuable at
closing will be subject to:
o a right of Mr. Boyle to "put" any of those shares to the Company at a price
equal to 90% of the value originally ascribed to them, exercisable for 30
days after the second anniversary of the closing of the Cellar Door
Acquisition;
o a right of the Company to "call" any of those shares at a price equal to
120% of the value originally ascribed to them, exercisable during the same
period as the "put" right; and
o a restriction on transfer for 2 years and 30 days after issuance.
The remaining 50% of the shares issuable at closing will be subject to a
restriction on transfer for 1 year after issuance.
The closing date for the Cellar Door Acquisition is expected to be on
January 5, 1999. The agreement is expected to provide that Mr. Boyle will
indemnify the Company for certain claims arising after the closing, if the
claims exceed $500,000 in the aggregate.
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The Company has received notice of a preliminary inquiry from the
Antitrust Division of the U.S. Department of Justice relating to the Cellar
Door Acquisition. The Company intends to cooperate fully with the Department of
Justice inquiry. See "Business--Regulatory Matters."
The Company will be required to pay Mr. Boyle $10.0 million in liquidated
damages if:
o Cellar Door terminates the stock purchase agreement because the closing
of the Cellar Door Acquisition does not occur on or before January 5,
1999, and Cellar Door is not in material breach of any of its
representations, warranties or covenants under the agreement, or
o the Company does not complete the acquisition of Cellar Door for
reasons other than (1) a material misrepresentation or material breach of
warranty by Cellar Door under the stock purchase agreement, (2) a
material breach by Cellar Door of its obligations under the agreement, or
(3) failure of certain conditions precedent.
There can be no assurance that the Pending Acquisitions will be
consummated on the terms described herein, or at all. See "Risk
Factors--Company-Specific Risks--Pending Acquisitions."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to the Certificate of Incorporation and Bylaws, the Board manages
the business of the Company. The Board conducts its business through meetings
of the Board and its committees. The standing committees of the Board are
described below.
The Bylaws authorize the Board to fix the number of directors from time to
time. The number of directors of the Company is currently eleven. All directors
hold office until the next annual meeting of stockholders following their
election or until their successors are elected and qualified. Officers of the
Company are to be elected annually by the Board and serve at the Board's
discretion. In the election of directors, the holders of the Company's Class A
common stock are entitled by class vote, exclusive of all other stockholders,
to elect two-sevenths (rounded up) of the directors to serve on the Board, with
each share of the Class A common stock entitled to one vote.
Currently, the Board consists of the individuals who previously served as
directors of Broadcasting, Brian Becker, who was appointed to the Board upon
the consummation of the PACE Acquisition, and David Falk, the Chairman and a
founder of FAME, who was appointed as a Director and a Member of the Office of
the Chairman of the Company upon the consummation of the FAME Acquisition. All
of the individuals who previously served as directors of Broadcasting ceased to
be directors of Broadcasting at the time of the Broadcasting Merger.
All of the executive officers of Broadcasting entered into five-year
employment agreements with the Company (except Mr. Armstrong, who resigned as
an executive officer of the Company). See "--Employment Agreements and
Arrangements with Certain Officers and Directors."
The following table sets forth information as to the directors and the
executive officers of the Company:
<TABLE>
<CAPTION>
POSITION(S) HELD WITH SFX AGE AS OF
NAME ENTERTAINMENT OCTOBER 30, 1998
- -------------------------------- ------------------------------------------ -----------------
<S> <C> <C>
Robert F.X. Sillerman .......... Director, Executive Chairman and 50
Member of the Office of the
Chairman
Michael G. Ferrel .............. Director, President, Chief Executive 49
Officer and Member of the Office of the
Chairman
Brian Becker ................... Director, Executive Vice President and 41
Member of the Office of the Chairman
David Falk ..................... Director and Member of the Office of the 48
Chairman
Howard J. Tytel ................ Director, Executive Vice President, 52
General Counsel and Secretary
Thomas P. Benson. .............. Director, Vice President and Chief 36
Financial Officer
Richard A. Liese ............... Director, Senior Vice President and 48
Associate General Counsel
D. Geoffrey Armstrong .......... Director 41
James F. O'Grady, Jr. .......... Director 70
Paul Kramer .................... Director 66
Edward F. Dugan ................ Director 64
Robert M. Gutkowski(1) ......... Non-voting observer to Board of 50
Directors
John J. Boyle(2) ............... Non-voting observer to Board of 64
Directors
</TABLE>
- ----------
(1) Upon closing of the Marquee Acquisition, the Company will appoint Mr.
Gutkowski as a non-voting observer to its Board.
(2) Upon closing of the Cellar Door Acquisition, the Company will appoint Mr.
Boyle as a non-voting observer to its Board.
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ROBERT F.X. SILLERMAN has served as the Executive Chairman, a Member of
the Office of the Chairman and a Director of the Company since its formation in
December 1997. Mr. Sillerman also served as the Executive Chairman of
Broadcasting from July 1, 1995 until the consummation of the Broadcasting
Merger. From 1992 through June 30, 1995, Mr. Sillerman served as Chairman of
the Board of Directors and Chief Executive Officer of Broadcasting. Mr.
Sillerman is Chairman of the Board of Directors and Chief Executive Officer of
SCMC, a private company that makes investments in and provides financial
consulting services to companies engaged in the media business, and of TSC, a
private company that makes investments in and provides financial advisory
services to media-related companies. Through privately held entities, Mr.
Sillerman controls the general partner of Sillerman Communications Partners,
L.P., an investment partnership. Mr. Sillerman is also the Chairman of the
Board and a founding stockholder of Marquee, a publicly-traded company
organized in 1995, which is engaged in various aspects of the sports, news and
other entertainment industries. Mr. Sillerman is also a founder and a
significant stockholder of Triathlon, a publicly-traded company that owns and
operates radio stations in medium and small-sized markets in the mid-western
and western United States. For the last twenty years, Mr. Sillerman has been a
senior executive of and principal investor in numerous entities operating in
the broadcasting business. In 1993, Mr. Sillerman became the Chancellor of the
Southampton campus of Long Island University.
MICHAEL G. FERREL has served as the President, Chief Executive Officer, a
Member of the Office of the Chairman and a Director of the Company since its
formation in December 1997. Mr. Ferrel also served as the President, Chief
Executive Officer and a Director of Broadcasting from November 22, 1996 until
the consummation of the Broadcasting Merger. Mr. Ferrel served as President and
Chief Operating Officer of Multi-Market Radio, Inc., a wholly-owned subsidiary
of Broadcasting ("MMR"), and a member of MMR's board of directors since MMR's
inception in August 1992 and as Co-Chief Executive Officer of MMR from January
1994 to January 1996, when he became the Chief Executive Officer. From 1990 to
1993, Mr. Ferrel served as Vice President of Goldenberg Broadcasting, Inc., the
former owner of radio station WPKX-FM, Springfield, Massachusetts, which was
acquired by MMR in July 1993.
BRIAN E. BECKER has served as an Executive Vice President, a Member of the
Office of the Chairman and a Director of the Company since the consummation of
the PACE acquisition in February 1998. Mr. Becker has served as Chief Executive
Officer of PACE since 1994 and was appointed as President of PACE in 1996. He
first joined PACE as the Vice President and General Manager of PACE's
theatrical division at the time of that division's formation in 1982, and
subsequently directed PACE's amphitheater development efforts. He served as
Vice Chairman of PACE from 1992 until he was named its Chief Executive Officer
in 1994.
DAVID FALK serves as a Member of the Office of the Chairman and a Director
of the Company. Mr. Falk will also serve as a Director and as Chairman of the
Company's sports group and several subsidiaries within the Company's sports
group (which includes FAME). Mr. Falk, who has represented professional
athletes for over twenty years, is presently a director, Chairman and Chief
Executive Officer of FAME, positions he has held since he founded FAME in 1992.
Mr. Falk also serves as Chairman of the HTS Sports-a-Thon to benefit the
Leukemia Society of America, is a member of the Executive Committee of the
College Fund and is on the Board of Directors of the Juvenile Diabetes
Foundation and Share the Care for Children.
HOWARD J. TYTEL has served as an Executive Vice President, General
Counsel, Secretary and a Director of the Company since its formation in
December 1997. Mr. Tytel also served as a Director, General Counsel, Executive
Vice President and Secretary of Broadcasting from 1992 until the consummation
of the Broadcasting Merger. Mr. Tytel is Executive Vice President, General
Counsel and a Director of SCMC and TSC and holds an economic interest in those
companies. Mr. Tytel is a Director and a founder of Marquee and a founder of
Triathlon. Mr. Tytel was a Director of Country Music Television from 1988 to
1991. From March 1995 until March 1997, Mr. Tytel was a Director of Interactive
Flight Technologies, Inc., a publicly-traded company providing computer-based
in-flight entertainment. For the last twenty years, Mr. Tytel has been
associated with Mr. Sillerman in various capacities with entities operating in
the broadcasting business. From 1993 to 1998, Mr. Tytel was Of Counsel to the
law firm of Baker & McKenzie, which represented Broadcasting and currently
represents the Company and other entities with which Messrs. Sillerman and
Tytel are affiliated on various matters.
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THOMAS P. BENSON has served as the Vice President, Chief Financial Officer
and a Director of the Company since its formation in December 1997. Mr. Benson
also served as the Chief Financial Officer and a Director of Broadcasting,
having served in such capacity from November 22, 1996 until the consummation of
the Broadcasting Merger. Mr. Benson became the Vice President of Financial
Affairs of Broadcasting in June 1996. He was the Vice President--External and
International Reporting for American Express Travel Related Services Company
from September 1995 to June 1996. From 1984 through September 1995, Mr. Benson
worked at Ernst & Young LLP as a staff accountant, senior accountant, manager
and senior manager.
RICHARD A. LIESE has served as a Senior Vice President since September,
1998, and as a Vice President, Associate General Counsel and a Director of the
Company since its formation in December 1997. Mr. Liese also served as a
Director, Vice President and Associate General Counsel of Broadcasting, having
served in such capacity from 1995 until the consummation of the Broadcasting
Merger. Mr. Liese has also been the Assistant General Counsel and Assistant
Secretary of SCMC since 1988. In addition, from 1993 until April 1995, he
served as Secretary of MMR.
D. GEOFFREY ARMSTRONG has served as a Director of the Company since its
formation in December 1997. He served as an Executive Vice President of the
Company from its formation until September 1, 1998. Mr. Armstrong currently
serves as a Director of Capstar Broadcasting Corporation, a publicly-traded
radio broadcasting company. Mr. Armstrong also served as the Chief Operating
Officer and an Executive Vice President of Broadcasting, having served in such
capacity from November 22, 1996 until the consummation of the Broadcasting
Merger. Mr. Armstrong has served as a Director of Broadcasting since 1993. Mr.
Armstrong became the Chief Operating Officer of Broadcasting in June 1996 and
the Chief Financial Officer, Executive Vice President and Treasurer of
Broadcasting in April 1995. Mr. Armstrong was Vice President, Chief Financial
Officer and Treasurer of Broadcasting from 1992 until March 1995. He had been
Executive Vice President and Chief Financial Officer of Capstar, a predecessor
of Broadcasting, since 1989. From 1988 to 1989, Mr. Armstrong was the Chief
Executive Officer of Sterling Communications Corporation.
JAMES F. O'GRADY, JR. has served as a Director of the Company since its
formation in December 1997. Mr. O'Grady also served as a Director of
Broadcasting prior to the consummation of the Broadcasting Merger. Mr. O'Grady
has been President of O'Grady and Associates, a media brokerage and consulting
company, since 1979. Mr. O'Grady has been a Director of Orange and Rockland
Utilities, Inc. and of Video for Broadcast, Inc. since 1980 and 1991,
respectively. Mr. O'Grady has been the co-owner of Allcom Marketing Corp., a
corporation that provides marketing and public relations services for a variety
of clients, since 1985, and has been Of Counsel to Cahill and Cahill, Brooklyn,
New York, since 1986. He also served on the Board of Trustees of St. John's
University from 1984 to 1996, and has served as a Director of The Insurance
Broadcast System, Inc. since 1994.
PAUL KRAMER has served as a Director of the Company since its formation in
December 1997, served as a Director of Broadcasting prior to the Broadcasting
Merger and currently serves as a director of Nations Flooring, Inc. Mr. Kramer
has been a partner in Kramer & Love, financial consultants specializing in
acquisitions, reorganizations and dispute resolution, since 1994. From 1992 to
1994, Mr. Kramer was an independent financial consultant. Mr. Kramer was a
partner in the New York office of Ernst & Young LLP from 1968 to 1992.
EDWARD F. DUGAN has served as a Director of the Company since its
formation in December 1997. Mr. Dugan also served as a Director of Broadcasting
prior to the Broadcasting Merger. Mr. Dugan is President of Dugan Associates
Inc., a financial advisory firm to media and entertainment companies, which he
founded in 1991. Mr. Dugan was an investment banker with Paine Webber Inc., as
a Managing Director, from 1978 to 1990, with Warburg Paribas Becker Inc., as
President, from 1975 to 1978 and with Smith Barney Harris Upham & Co., as a
Managing Director, from 1961 to 1975.
ROBERT M. GUTKOWSKI will become a non-voting observer to the Board of
Directors of the Company upon closing of the Marquee Acquisition. Mr. Gutkowski
has served as President, Chief Executive Officer and a Director of Marquee
since December 1995. Since March 1997, Mr. Gutkowski has been a member of the
Board of Directors of the Professional Bowlers Association. Mr. Gutkowski has
more than 20 years
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of experience in the television, sports and entertainment industries. From
September 1994 until December 1995, Mr. Gutkowski was a consultant to
sports-related businesses. From November 1991 to September 1994, he served as
President and Chief Executive Officer of Madison Square Garden Corporation,
where he oversaw the operations of the New York Knicks, the New York Rangers,
the MSG Entertainment Group, the MSG Cable Network, Madison Square Garden and
the Paramount Theater. From July 1990 to November 1991, Mr. Gutkowski served as
President of MSG Entertainment Group, having served as Executive Vice President
thereof from September 1987 to July 1990. From October 1985 to September 1987,
he served as President of Madison Square Garden Network. Prior to his tenure at
Madison Square Garden, Mr. Gutkowski was Vice President-Sales for Paramount
Television Domestic Distribution. From February 1981 to September 1983, Mr.
Gutkowski was Vice President-Programming for ESPN. Mr. Gutkowski earned a B.A.
from Hofstra University.
JOHN J. BOYLE will become a non-voting observer to the Board of Directors
of the Company and the Chairman of the Company's Music Group upon closing of
the Cellar Door Acquisition. Mr. Boyle currently serves as the Chief Executive
Officer and Chairman of the Board of Directors of Cellar Door. Mr. Boyle
purchased Cellar Door in 1963, and has been in the concert promotion business
for over thirty years. See "Agreements Related to the Pending Acquisitions."
AUDIT COMMITTEE
The Audit Committee will review and report to the Board on various
auditing and accounting matters, including the selection, quality and
performance of the Company's internal and external accountants and auditors,
the adequacy of its financial controls and the reliability of financial
information reported to the public. The Audit Committee will also review
certain related-party transactions and potential conflict-of-interest
situations involving officers, directors or stockholders of the Company. The
members of the Audit Committee are Messrs. Kramer, O'Grady and Dugan.
COMPENSATION COMMITTEE
The Compensation Committee reviews and makes recommendations with respect
to certain of the Company's compensation programs and compensation arrangements
with respect to certain officers, including Messrs. Sillerman, Ferrel, Tytel,
Benson and Liese. The members of the Compensation Committee are Messrs. Kramer,
O'Grady and Dugan, none of whom is a current or former employee or officer of
Broadcasting or the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board approved the issuance of shares of the Company's Class A common
stock to holders as of the Spin-Off record date of stock options or SARs of
Broadcasting, whether or not vested. These holders included the members of the
Compensation Committee. The issuance was approved to allow the holders of these
options and SARs to participate in the Spin-Off in a similar manner to holders
of Broadcasting's Class A common stock and as consideration for past services
to the Company. In connection with this issuance, Messrs. Kramer, O'Grady and
Dugan received 13,000, 13,000 and 3,000 shares of the Company's Class A common
stock, respectively.
STOCK OPTION COMMITTEE
The Stock Option Committee grants options, determines which employees and
other individuals performing substantial services to the Company may be granted
options and determines the rights and limitations of options granted under the
Company's plans. The members of the Stock Option Committee are Messrs. Kramer,
O'Grady and Dugan.
STOCK OPTION AND RESTRICTED STOCK PLAN
The Company's 1998 Stock Option and Restricted Stock Plan provides for the
issuance of options to purchase up to 2,000,000 shares of the Company's Class A
common stock. The purpose of the plan is to provide additional incentive to
officers and employees of the Company. Each option granted under the plan will
be designated at the time of grant as either an "incentive stock option" or a
"non-qualified stock
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option." The plan is administered by the Stock Option Committee. The Board has
approved the issuance of stock options exercisable for an aggregate of
1,982,166 shares under the plan. See "--Employment Agreements and Arrangements
with Certain Officers and Directors" and "--Option Grants."
COMPENSATION OF DIRECTORS
Directors employed by the Company receive no compensation for meetings
they attend. Each director not employed by the Company receives a fee of $1,500
for each Board meeting he attends, in addition to reimbursement of travel
expenses. Each non-employee director who is a member of a committee also
receives $1,500 for each committee meeting he attends that is not held in
conjunction with a Board meeting. If the committee meeting occurs in
conjunction with a Board meeting, each committee member receives an additional
$500 for each committee meeting he attends.
In addition, the Company adopted a deferred compensation plan for the
non-employee directors effective as of January 1, 1998. Pursuant to the plan,
the Company pays each non-employee director a quarterly retainer of $7,500, at
least one-half of which must be paid in shares of Class A common stock which
are credited to a book-entry account maintained by the Company for each
participant. Each non-employee director's account was initially credited with
5,455 shares of Class A common stock representing one year's annual retainer
fee (based upon $5.50 per share).
PROPOSED STOCK OPTION PLAN
Following a recommendation of the Company's compensation committee, the
Company has, subject to stockholder approval, adopted a new incentive stock
option plan covering options to acquire up to 3,000,000 shares of the Company's
Class A common stock. The plan will be designed to broaden the equity ownership
of the Company's employees at all levels. The Company anticipates that the
proposed stock option plan will be submitted to a vote of the stockholders at
the Company's first annual meeting scheduled to be held in the spring of 1999.
EXECUTIVE COMPENSATION
The Company did not pay any compensation to its current executive officers
in 1997. The Company anticipates that, during 1998, its most highly compensated
executive officers will be Messrs. Sillerman, Ferrel, Becker and Tytel. See
"--Employment Agreements and Arrangements with Certain Officers and Directors."
The Company has issued shares of the Company's Class A common stock to
holders as of the Spin-Off record date of stock options or SARs of
Broadcasting, whether or not vested. See "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of Broadcasting's Options and SARs."
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS WITH CERTAIN OFFICERS AND DIRECTORS
The Company has entered into employment agreements with each of its
executive officers. The employment agreements became effective upon the
Broadcasting Merger or shortly thereafter (except for Mr. Becker's employment
agreement which is described below). The employment agreements provide for
annual base salaries of $500,000 for Mr. Sillerman, $350,000 for Mr. Ferrel,
$300,000 for Mr. Tytel and $235,000 for Mr. Benson, increased annually by the
greater of five percent or the rate of inflation. Each executive officer will
receive a bonus to be determined annually in the discretion of the Board, on
the recommendation of its Compensation Committee. Each employment agreement is
for a term of five years, and unless terminated or not renewed by the Company
or the employee, the term will continue thereafter on a year-to-year basis on
the same terms existing at the time of renewal.
If an executive officer is terminated by the Company without Cause or if
there is a Constructive Termination Without Cause (as such terms are defined in
the respective employment agreements), then the executive officer will be
entitled to receive the following payments:
o his base salary for a period of three years following his termination or
until the end of the term of the employment agreement, whichever is
longer;
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o a bonus for the unexpired term of the agreement, based on the bonus
received for the year prior to termination, multiplied by the unexpired
term; and
o options to purchase shares of the Company's Class A common stock.
If the executive officer is terminated for any reason other than Cause, or
if there is a Constructive Termination Without Cause (as such terms are defined
in the respective employment agreements), following a change in control of the
Company, then he will be entitled to receive, in addition to the foregoing,
additional options to purchase shares of the Company's Class A common stock.
The Company has also agreed to indemnify the executive officers for taxes that
they incur if any of the change of control payments are deemed "parachute
payments" under the Code. Mr. Tytel's agreement permits him or the Company to
terminate his employment after one year, in which case all of his options would
immediately vest, he would receive two years' salary paid in a lump sum and he
would be granted options to purchase between 25,000 and 50,000 shares of the
Company's Class A common stock at the lowest exercise price of any options
granted by the Company during that year.
In connection with entering into the employment agreements, the Company
sold the following shares of restricted stock:
o 500,000 shares of Class B common stock to Mr. Sillerman;
o 150,000 shares of Class B common stock to Mr. Ferrel;
o 80,000 shares of Class A common stock to Mr. Tytel; and
o 10,000 shares of Class A common stock to Mr. Benson.
The shares of restricted stock were sold to the officers at a purchase price of
$2.00 per share. In addition, the Board (on the review and recommendation of
the Compensation Committee) also approved the issuance of the following stock
options exercisable for shares of the Company's Class A common stock:
o options to purchase 120,000 shares to Mr. Sillerman;
o options to purchase 50,000 shares to Mr. Ferrel;
o options to purchase 40,000 shares to Mr. Armstrong;
o options to purchase 25,000 shares to Mr. Tytel; and
o options to purchase 10,000 shares to Mr. Benson.
The Board (other than Messrs. Kramer, O'Grady and Dugan) also approved the
issuance of stock options to purchase 2,500 shares of Class A common stock to
each of Messrs. Kramer, O'Grady and Dugan.
The options will vest over three years and will have an exercise price of
$5.50 per share. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Upon the Broadcasting Merger, the Company assumed Broadcasting's
obligations arising under the employment agreements or arrangements between
Broadcasting and the Company's executive officers, with certain exceptions. The
Company also assumed the obligation to make change of control payments under
Messrs. Sillerman's, Ferrel's and Benson's existing employment agreements with
Broadcasting of approximately $3.3 million, $1.5 million and $200,000,
respectively.
OPTION GRANTS
On April 27, 1998, the Company granted the following options to purchase
shares of the Company's Class A common stock at $29.125 per share:
o options to purchase 250,000 shares to Mr. Sillerman;
o options to purchase 75,000 shares to Mr. Ferrel;
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o options to purchase 25,000 shares to Mr. Becker;
o options to purchase 30,000 shares to Mr. Tytel;
o options to purchase 35,000 shares to Mr. Armstrong; and
o options to purchase 15,000 shares to Mr. Benson.
On May 27, 1998, the Company granted the following options to purchase
shares of the Company's Class A common stock at $43.25 per share:
o options to purchase 250,000 shares to Mr. Sillerman;
o options to purchase 100,000 shares to Mr. Ferrel;
o options to purchase 50,000 shares to Mr. Becker;
o options to purchase 50,000 shares to Mr. Tytel;
o options to purchase 50,000 shares to Mr. Armstrong; and
o options to purchase 25,000 shares to Mr. Benson.
These options vest over five years, starting one year from their date of
grant.
BECKER EMPLOYMENT AGREEMENT
As a condition to the execution of the PACE Agreement, the Company entered
into an employment agreement with the Chief Executive Officer and President of
PACE, Brian Becker. The agreement has a term of five years that commenced on
February 25, 1998. Mr. Becker will continue as President and Chief Executive
Officer of PACE. In addition, for the term of his employment, Mr. Becker will
serve as (1) a member of the Company's Office of the Chairman, (2) an Executive
Vice President of the Company and (3) a director of each of PACE and the
Company (subject to shareholder approval). During the term of his employment,
Mr. Becker will receive (1) a base salary of $294,000 for the first year,
$313,760 for each of the second and third years and $334,310 for each of the
fourth and fifth years and (2) an annual bonus in the discretion of the Board.
The Company has agreed that it will not sell either the theatrical or
motor sports line of business of PACE prior to February 25, 1999. If the
Company sells either line of business after the first anniversary, it has
agreed not to sell the other line of business prior to March 11, 2000. Mr.
Becker's employment agreement provides Mr. Becker with a right of first refusal
(the "Becker Right of First Refusal") if, between February 25, 1999 and
February 25, 2000, the Company receives a bona fide offer from a third party to
purchase all or substantially all of either the theatrical or motor sports
lines of business at a price equal to 95% of the proposed purchase price. The
Fifth Year Put Option (as defined in the PACE acquisition agreement and
described in footnote 3 to the Summary Consolidated Financial Data contained
herein) will also be immediately exercisable as of such closing. If Mr. Becker
does not exercise his right of first refusal and either of the theatrical or
motor sports line of business is sold, then he will have an identical right of
first refusal for the sale of the remaining line of business beginning on
February 25, 2000 and ending August 25, 2000. Mr. Becker will be paid an
administrative fee of $100,000 if he does not exercise his right of first
refusal and if the Company does not consummate the proposed sale. Mr. Becker
would thereafter retain all rights to the Becker Right of First Refusal.
Beginning on December 12, 1999, Mr. Becker will have the option (the
"Becker Second Year Option"), exercisable within 15 days thereafter, to elect
one or more of the following:
o to sell to the Company any stock or portion thereof (including any vested
and unvested options to purchase stock) and/or any compensation to be paid
to Mr. Becker by the Company;
o to become a consultant to the Company for no more than an average of 20
hours per week for the remainder of the term and with the same level of
compensation set forth in his employment agreement; or
o to acquire PACE's motor sports line of business (or, if that line of
business was previously sold, PACE's theatrical line of business) at its
fair market value (as determined in his employment agreement).
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Exercise of the Becker Second Year Option would result in the termination
of Mr. Becker's employment agreement.
Mr. Becker's employment agreement may be terminated by the Company for
Cause (as defined in the agreement), by the Company for Mr. Becker's death or
permanent disability or by Mr. Becker at any time for any reason or upon
exercise of the Becker Second Year Option.
In addition, Mr. Becker's employment may be terminated by the Company at
any time in the Company's sole discretion or by Mr. Becker at any time
following, among other things,
o failure to elect or re-elect Mr. Becker as a director of the Company;
o a reduction in Mr. Becker's base salary or in the formula to calculate his
bonus;
o discontinuation of Mr. Becker's participation in any stock option, bonus or
other employee benefit plan;
o prior to March 7, 2000, the sale of either the motor sports or theatrical
line of business to any person other than Mr. Becker (unless Mr. Becker
elected not to exercise the Becker Right of First Refusal);
o the sale of all or substantially all of the assets of PACE;
o a change of control of the Company; or
o the failure by the Company to contribute any acquired business (which
derives a majority of its revenues from either a theatrical or motor
sports line of business) to PACE.
If Mr. Becker's employment is terminated, then, among other things,
o from the date of termination until February 25, 2003, the Company must pay
Mr. Becker the base salary and any bonus to which he would otherwise be
entitled and Mr. Becker will be entitled to participate in all of the
profit-sharing, retirement income, stock purchase, savings and executive
compensation plans to the same extent he would otherwise have been
entitled to participate;
o for one year after the date of termination, the Company will maintain Mr.
Becker's life, accident, medical, health care and disability programs or
arrangements and provide Mr. Becker with use of the same office and
related facilities; and
o if the termination occurs before March 11, 2000, Mr. Becker will retain the
Becker Second Year Option and the Becker Right of First Refusal.
Throughout the term of his employment and for a period of 18 months
thereafter, Mr. Becker has agreed not to, directly or indirectly, engage in any
activity or business that is directly competitive with the Company (or its
affiliates) or solicit any of its employees to leave the Company (or its
affiliates). However, these restrictions will not apply if Mr. Becker exercises
his rights, or the Company breaches its obligations, with respect to the Becker
Right of First Refusal or the Becker Second Year Option.
FALK EMPLOYMENT AGREEMENT
On April 29, 1998, the Company entered into an employment agreement with
David Falk. The agreement has a term of five years commencing June 4, 1998. The
Company employs Mr. Falk as the Chairman of FAME and the Company's Sports Group
and as a Member of the Office of Chairman of the Company and appointed him a
Director of the Company. Pursuant to the agreement, Mr. Falk directs the day to
day operations of FAME and the Company's Sports Group and any other sports
businesses acquired by the Company. The agreement provides for an annual base
salary of $315,000, reviewed annually and increased (but in no event decreased)
by a minimum of 4.0% per year. In addition, Mr. Falk will be considered for an
annual bonus consistent with the bonuses given to other senior executives of
the Company. Mr. Falk received an option to purchase 100,000 shares of the
Company's Class A common stock at an exercise price of $41.62 per share. The
option will fully vest on June 4, 1999. In addition, the Company has agreed to
make annual stock option grants to Mr. Falk to purchase at least 30,000 shares
of the Company's Class A common stock in the first four years of his employment
agreement.
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The Company may terminate Mr. Falk's employment at any time with or
without cause (as defined in his employment agreement). If the agreement is
terminated for any reason other than a voluntary termination or termination for
cause, then
o all stock options granted pursuant to the agreement will immediately vest
and become exercisable;
o any remaining stock options to be granted pursuant to the agreement will
immediately be granted and will vest and become exercisable; and
o the Company will be obligated to pay Mr. Falk his (1) base salary and (2)
annual bonuses at a rate equal to 50% of his base salary through the
original term of the agreement, as well as certain additional benefits.
In addition, if a Change of Control (as defined in the agreement) occurs,
the Company may be required to pay a portion of certain taxes incurred by Mr.
Falk as a result of the Change of Control.
For one year following the termination of the employment agreement for
cause (as defined in the agreement) or by Mr. Falk, except in the event of a
constructive termination event (as defined in the agreement), Mr. Falk has
agreed that (1) he will not become employed in any capacity by, or become an
officer, director, shareholder or general partner of any entity that competes
with any material business of FAME as conducted as of the closing date of the
FAME Acquisition and (2) he will not solicit any employee of the Company or any
entities that are directly or indirectly controlled by the Company to leave
such employment.
The Company and Broadcasting have also entered into certain agreements and
arrangements with their officers and directors from time to time in the past.
See "Certain Relationships and Related Transactions."
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding ownership of the
Company's common stock as of November 15, 1998, by (1) each executive officer
of the Company, (2) each director of the Company, (3) the directors and
executive officers of the Company as a group and (4) each person known by the
Company to own beneficially more than 5% of any class of the Company's common
stock.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK
CLASS A AFTER THE PENDING
COMMON STOCK ACQUISITIONS(1)
------------------------------- -------------------------------
NAME AND ADDRESS OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF
BENEFICIAL OWNER(2) SHARES CLASS SHARES CLASS
- --------------------------------------- ------------------ ------------ ------------------ ------------
<S> <C> <C> <C> <C>
Directors and Executive Officers:
Robert F.X. Sillerman ................. 2,644,672(3) 9.2% 2,774,859(4) 9.1%
Michael G. Ferrel ..................... 145,303(5) * 145,303(5) *
Brian Becker .......................... 29,402(6) * 29,402(6) *
David Falk ............................ 650,000(7) 2.3 650,000(7) 2.1
Howard J. Tytel ....................... 454,604(8) 1.6 473,825(9) 1.6
Thomas P. Benson ...................... 22,333(10) * 22,333(10) *
Richard A. Liese ...................... 2,800(11) * 2,800(11) *
D. Geoffrey Armstrong ................. 175,133(12) * 175,133(12) *
James F. O'Grady, Jr. ................. 15,605(13) * 15,605(13) *
Paul Kramer ........................... 16,755(13) * 16,755(13) *
Edward F. Dugan ....................... 6,755(13) * 6,755(13) *
All directors and executive officers
as a group (11 persons) .............. 3,708,758 12.9% 3,838,945 12.4%
5% Stockholders:
Zweig-DiMenna International Limited
and affiliated companies(14) ......... 1,450,400 5.0% 1,450,400 4.8%
P.O. Box N-9932
Maritime House, Frederick Street
Nassau, Bahamas
<CAPTION>
CLASS B
COMMON STOCK
-------------------------------
PERCENT OF PERCENT OF TOTAL
TOTAL VOTING VOTING POWER
POWER BEFORE AFTER THE
NAME AND ADDRESS OF NUMBER OF PERCENT OF THE PENDING PENDING
BENEFICIAL OWNER(2) SHARES CLASS ACQUISITIONS ACQUISITIONS(1)
- --------------------------------------- ------------------ ------------ -------------- -----------------
<S> <C> <C> <C> <C>
Directors and Executive Officers:
Robert F.X. Sillerman ................. 1,524,168(4) 89.8% 39.1% 37.6%
Michael G. Ferrel ..................... 172,869(5) 10.2 4.1 3.9
Brian Becker .......................... -- -- * *
David Falk ............................ -- -- 1.4 1.4
Howard J. Tytel ....................... -- -- 1.0 1.0
Thomas P. Benson ...................... -- -- * *
Richard A. Liese ...................... -- -- * *
D. Geoffrey Armstrong ................. -- -- * *
James F. O'Grady, Jr. ................. -- -- * *
Paul Kramer ........................... -- -- * *
Edward F. Dugan ....................... -- -- * *
All directors and executive officers
as a group (11 persons) .............. 1,697,037 100.0% 45.1% 43.2%
5% Stockholders:
Zweig-DiMenna International Limited
and affiliated companies(14) ......... -- -- 3.2% 3.0%
P.O. Box N-9932
Maritime House, Frederick Street
Nassau, Bahamas
</TABLE>
- ----------
* Less than 1%
(1) Assumes for the Marquee Acquisition that the Exchange Ratio is 0.1022
(assuming an SFX Stock Price of $46.50, the closing price of the
Company's Class A common stock on November 20, 1998) and the issuance of
430,108 shares of Class A common stock in connection with the Cellar Door
Acquisition.
(2) Unless otherwise set forth above, the address of each stockholder is the
address of the Company, which is 650 Madison Avenue, 16th Floor, New
York, New York 10022. Pursuant to Rule 13d-3 of the Exchange Act, as used
in this table, (a) "beneficial ownership" means the sole or shared power
to vote, or to direct the disposition of, a security and (b) a person is
deemed to have "beneficial ownership" of any security that the person has
the right to acquire within 60 days of November 15, 1998. Unless noted
otherwise, (a) information as to beneficial ownership is based on
statements furnished to the Company by the beneficial owners and (b)
stockholders possess sole voting and dispositive power with respect to
shares listed on this table. As of November 15, 1998, there were issued
and outstanding 28,753,194 shares of Class A common stock and 1,697,037
shares of Class B common stock.
(3) Includes 39,343 shares of Class A common stock held by SCMC and options
to purchase an aggregate of 40,000 shares of Class A common stock held by
Mr. Sillerman which are exercisable within 60 days of November 15, 1998.
Also includes 454,604 shares of Class A common stock held by Mr. Tytel
that Mr. Sillerman has the right to vote. Does not include options to
purchase an aggregate of 580,000 shares of Class A common stock held by
Mr. Sillerman which are not exercisable within 60 days of November 15,
1998. If the 1,524,168 shares of Class B common stock held by Mr.
Sillerman were included in calculating his ownership of the Class A
common stock, then Mr. Sillerman would beneficially own 4,168,840 shares
of Class A common stock, representing approximately 14.5%. See
"Management--Employment Agreements and Arrangements with Certain Officers
and Directors."
(4) Includes 39,343 shares of Class A common stock held by SCMC and options
to purchase an aggregate of 40,000 shares of Class A common stock held by
Mr. Sillerman which are exercisable within 60 days of November 15, 1998.
Also includes 473,825 shares of Class A common stock held by Mr. Tytel
that Mr. Sillerman has the right to vote. Includes options to be received
in the Marquee Acquisition to purchase an aggregate of 19,418 shares of
Class A common stock and warrants to be received in the Marquee
Acquisition to purchase an aggregate of 6,682 shares of Class A common
stock which are exercisable within 60 days of November 15, 1998. Does not
include options to be received in the Marquee Acquisition to purchase
14,459 shares of Class A common stock and options previously issued to
purchase an aggregate of 580,000 shares of Class A common stock which are
not exercisable within 60 days of November 15, 1998. If the 1,524,168
shares of Class B common stock held by Mr. Sillerman were included in
calculating his ownership of the Class A common stock, then Mr. Sillerman
would beneficially own 4,299,027 shares of Class A common stock,
representing approximately 13.4% of the class upon closing of the Pending
Acquisitions. See "Management--Employment Agreements and Arrangements
with Certain Officers and Directors."
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(5) Includes options to purchase an aggregate of 16,666 shares of Class A
common stock held by Mr. Ferrel which are exercisable within 60 days of
November 15, 1998. Does not include options to purchase an aggregate of
208,334 shares of Class A common stock held by Mr. Ferrel which are not
exercisable within 60 days of November 15, 1998. If the 172,869 shares of
Class B common stock held by Mr. Ferrel were included in calculating his
ownership of Class A common stock, then Mr. Ferrel would beneficially own
318,172 shares of Class A common stock, representing approximately 1.1%
of the class upon closing of the Pending Acquisitions. See
"Management--Employment Agreements and Arrangements with Certain Officers
and Directors."
(6) Does not include options to purchase an aggregate of 75,000 shares of
Class A common stock held by Mr. Becker which are not exercisable within
60 days of November 15, 1998.
(7) Does not include options to purchase an aggregate of 100,000 shares of
Class A common stock held by Mr. Falk which are not exercisable within 60
days of November 15, 1998.
(8) Includes 454,604 shares of Class A common stock held by Mr. Tytel that
Mr. Sillerman has the right to vote. Mr. Tytel also has an economic
interest in SCMC, which beneficially owns 39,343 shares of Class A common
stock, although he does not have voting or dispositive power with respect
to the shares beneficially held by SCMC. Includes options to purchase an
aggregate of 8,333 shares of Class A common stock held by Mr. Tytel which
are exercisable within 60 days of November 15, 1998. Does not include
options to purchase an aggregate of 96,667 shares of Class A common stock
held by Mr. Tytel which are not exercisable within 60 days of November
15, 1998. See "Management--Employment Agreements and Arrangements with
Certain Officers and Directors."
(9) Includes 473,825 shares of Class A common stock held by Mr. Tytel that
Mr. Sillerman has the right to vote. Mr. Tytel also has an economic
interest in SCMC, which beneficially owns 39,343 shares of Class A common
stock, although he does not have voting or dispositive power with respect
to the shares beneficially held by SCMC. Includes options to purchase an
aggregate of 8,333 shares of Class A common stock held by Mr. Tytel which
are exercisable within 60 days of November 15, 1998. Also includes
options to be received in the Marquee Acquisition to purchase 3,066
shares of Class A common stock and warrants to be received in the Marquee
Acquisition to purchase 1,179 shares of Class A common stock that are
exercisable within 60 days of November 15, 1998. Does not include options
to be received in the Marquee Acquisition to purchase 2,010 shares of
Class A common stock and 1,022 stock appreciation rights to be received
in the Marquee Acquisition not exercisable within 60 days of November 15,
1998. Also does not include options to purchase an aggregate of 96,667
shares of Class A common stock held by Mr. Tytel which are not
exercisable within 60 days of November 15, 1998. See "Principal
Stockholders."
(10) Includes options to purchase an aggregate of 3,333 shares of Class A
common stock held by Mr. Benson which are exercisable within 60 days of
November 15, 1996. Does not include options to purchase an aggregate of
46,667 shares of Class A common stock held by Mr. Benson which are not
exercisable within 60 days of November 15, 1998.
(11) Does not include options to purchase an aggregate of 10,000 shares of
Class A common stock held by Mr. Liese which are not exercisable within
60 days of November 15, 1998.
(12) Includes options to purchase an aggregate of 13,333 shares of Class A
common stock held by Mr. Armstrong which are exercisable within 60 days
of November 15, 1998. Does not include options to purchase an aggregate
of 111,667 shares of Class A common stock held by Mr. Armstrong which are
not exercisable within 60 days of November 15, 1998.
(13) Includes options to purchase an aggregate of 833 shares of Class A common
stock held by each of Messrs. Kramer, O'Grady and Dugan which are
exercisable within 60 days of November 15, 1998. Does not include options
to purchase an aggregate of 1,667 shares of Class A common stock held by
each of Messrs. Kramer, O'Grady and Dugan which are not exercisable
within 60 days of November 15, 1998. Also does not include 5,455 shares
credited to each of these individuals' accounts in the deferred
compensation plan for non-employee directors.
(14) Based on information contained in a Schedule 13G filed with the SEC on
June 8, 1998. The aggregate number of shares is beneficially owned as
follows: 714,300 shares by Zweig-DiMenna International Limited, a British
Virgin Islands corporation; 328,200 by Zweig-DiMenna Partners, L.P., a
New York limited partnership; 197,500 shares by Zweig-DiMenna Special
Opportunities, L.P., a Delaware limited partnership; 124,000 shares by
Zweig-DiMenna International Managers, Inc., a Delaware corporation, on
behalf of a discretionary account; 83,400 shares by Gotham Advisors,
Inc., a Delaware corporation, on behalf of a discretionary account and
3,000 shares by Zweig-DiMenna Investors L.P., a Delaware partnership. The
principal business office for each of these entities (other than
Zweig-DiMenna International Limited, whose address is set forth in the
above table) is 900 Third Avenue, New York, New York 10022.
POSSIBLE CHANGE IN CONTROL
Mr. Sillerman has pledged an aggregate of 793,401 of his shares of Class B
common stock as collateral for a line of credit, under which he currently has
no outstanding borrowings. He continues to be entitled to exercise voting and
consent rights with respect to the pledged shares, with certain restrictions.
However, if he defaults in the payment of any future loans extended to him
under the line of credit, the bank will be entitled to sell the pledged shares.
Although the Class B common stock has 10 votes per share in most matters, the
pledged shares will automatically convert into shares of Class A common stock
upon such a sale. Such a sale of the pledged shares would reduce Mr.
Sillerman's share of the voting power of the the Company's common stock, and
would therefore be likely to result in a change of control of the Company. See
"Risk Factors--Company-Specific Risks--Control by Management."
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
POTENTIAL CONFLICTS OF INTEREST
Until the closing of the Marquee Acquisition, Messrs. Sillerman and Tytel
may have conflicts of interest between Marquee and the Company. Mr. Sillerman
has an aggregate equity interest of approximately 5.9% in Marquee and is the
Chairman of its Board of Directors, and Mr. Tytel has an equity interest in
Marquee of approximately 1.0% and is one of its directors. However, Messrs.
Sillerman and Tytel did not represent the interests of Marquee in negotiations
with the Company relating to the Marquee Acquisition. The Company may directly
compete with Marquee prior to the consummation of the Marquee Acquisition in
obtaining representation agreements with particular athletes and endorsement
opportunities for its clients. In addition, the Company anticipates that, from
time to time, it will enter into transactions and arrangements (particularly
booking arrangements) with Marquee and Marquee's clients. In addition, TSC, an
entity controlled by Mr. Sillerman and in which Mr. Tytel also has an equity
interest, has provided financial consulting services to Marquee and will
continue to do so until the closing of the Marquee Acquisition. TSC's services
are provided by certain directors, officers and employees of the Company who
are not separately compensated for their services by TSC. In any transaction,
arrangement or competition with Marquee prior to the closing of the Marquee
Acquisition, Messrs. Sillerman and Tytel are likely to have conflicts of
interest between their duties as officers and directors of the Company, on the
one hand, and their duties as directors of Marquee and their interests in TSC
and Marquee, on the other hand. See "--Triathlon Fees."
Pursuant to the employment agreement entered into between Brian Becker and
the Company in connection with the acquisition of PACE, Mr. Becker has the
option, exercisable within 15 days after February 25, 2000, to purchase the
Company's motor sports line of business (or, if that line of business has been
sold, the Company's theatrical line of business) at its then fair market value.
Exercise of such option would result in the termination of Mr. Becker's
employment agreement. Mr. Becker's option may present a conflict of interest in
his role as a Director of the Company. See "Risk Factors--Company-Specific
Risks--Re-Purchase Rights for Certain Subsidiaries" and "Management."
EMPLOYMENT AGREEMENTS
In January 1998, in order to retain the services of certain officers and
directors of the Company, the Company reached an agreement in principle with
such individuals pursuant to which the individuals waived their right to
receive shares of the Company in connection with the Spin-Off in return for the
right to receive either a share of the Company's Class A common stock or $4.20
in cash for each share of Broadcasting common stock held by them directly or
indirectly in the event that either the Spin-Off or an Alternate Transaction
(as defined in the Broadcasting merger agreement) were to occur. The amount of
$4.20 was based on the value attributed to the Company's Class A common stock
in the fairness opinion obtained by Broadcasting in connection with the
Broadcasting Merger. The Company's obligation was deemed satisfied by the
receipt of shares of the Company's Class A common stock in the Spin-Off.
The Company has entered into employment agreements with each of its
current executive officers. The employment agreements provide for annual base
salaries of $500,000 for Mr. Sillerman, $350,000 for Mr. Ferrel, $315,000 for
Mr. Falk, $300,000 for Mr. Tytel and $235,000 for Mr. Benson. Mr. Becker's
employment agreement provides for an annual salary of $294,000 for the first
year, $313,760 for each of the second and third years and $334,310 for each of
the fourth and fifth years.
In connection with entering into the employment agreements, the Company
sold the following restricted shares of stock: 500,000 shares of its Class B
common stock to Mr. Sillerman, 150,000 shares of its Class B common stock to
Mr. Ferrel, 80,000 shares of its Class A common stock to Mr. Tytel and 10,000
shares of its Class A common stock to Mr. Benson. The shares were sold to the
officers at a purchase price of $2.00 per share. In addition, the Board, on the
recommendation of its Compensation Committee, also has approved the issuance of
stock options to its officers and directors exercisable for an aggregate of
252,500 shares of the Company's Class A common stock. The 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 over
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the three-year exercise period to the extent that the fair value of the
underlying Class A common stock exceeds the exercise price. See
"Management--Employment Agreements and Arrangements with Certain Officers and
Directors."
ASSUMPTION OF EMPLOYMENT AGREEMENTS; CERTAIN CHANGE OF CONTROL PAYMENTS
Pursuant to the terms of the Distribution Agreement, at the time of the
consummation of the Broadcasting Merger, the Company assumed all obligations
under any employment agreement or arrangement (whether written or oral) between
Broadcasting or any of its subsidiaries and any employee of the Company
(including Messrs. Sillerman and Ferrel), other than obligations relating to
Messrs. Sillerman's and Ferrel's change of control options and existing rights
to indemnification. These assumed obligations included the obligation to pay to
Messrs. Sillerman, Ferrel and Benson, after the termination of their employment
with Broadcasting following the Broadcasting Merger, cash payments aggregating
approximately $3.3 million, $1.5 million and $200,000, respectively, which the
Company has paid. In addition, the Company's assumed obligations include the
duty to indemnify Messrs. Sillerman and Ferrel (to the extent permitted by law)
for one-half of the cost of any excise tax that may be assessed against them
for any change-of-control payments made to them by Broadcasting in connection
with the Broadcasting Merger.
INDEMNIFICATION OF MR. SILLERMAN
On August 24, 1997, Mr. Sillerman entered into an agreement with
Broadcasting and the Broadcasting Buyer to waive his right to receive
indemnification (except to the extent covered by directors' and officers'
insurance) from Broadcasting, its subsidiaries, the Broadcasting Buyer and its
subsidiaries for claims and damages arising out of the Broadcasting Merger and
related transactions. Mr. Sillerman's employment agreement with the Company
provides that the Company will indemnify Mr. Sillerman for these claims and
damages to the fullest extent permitted by applicable law.
RELATIONSHIP BETWEEN HOWARD J. TYTEL AND BAKER & MCKENZIE
Howard J. Tytel, who is the Executive Vice President, General Counsel,
Secretary and a Director of the Company, was "Of Counsel" to the law firm of
Baker & McKenzie from 1993 to May 31, 1998. Mr. Tytel was also an executive
vice president, the general counsel and a director of Broadcasting. Baker &
McKenzie served as counsel to Broadcasting and currently serves as counsel to
the Company, Marquee and certain other affiliates of Mr. Sillerman. Baker &
McKenzie formerly compensated Mr. Tytel based, in part, on the fees it received
from providing legal services to Broadcasting, the Company, Marquee, other
affiliates of Mr. Sillerman and other clients introduced to the firm by Mr.
Tytel. Baker & McKenzie has agreed to a severance arrangement with Mr. Tytel,
which is not based on fees received by Baker & McKenzie.
ARRANGEMENT BETWEEN ROBERT F.X. SILLERMAN AND HOWARD J. TYTEL
Since 1978, Messrs. Sillerman and Tytel have been jointly involved in
numerous business ventures, including SCMC, TSC, MMR, Triathlon, Marquee,
Broadcasting and the Company. In consideration for certain services provided by
Mr. Tytel in connection with those ventures, Mr. Tytel has received from Mr.
Sillerman either a minority equity interest in the businesses (with Mr.
Sillerman retaining the right to control the voting and disposition of Mr.
Tytel's interest) or cash fees in an amount mutually agreed upon. Although Mr.
Tytel was not compensated directly by Broadcasting (except for ordinary fees
paid to him in his capacity as a director), he receives compensation from TSC
and SCMC, companies controlled by Mr. Sillerman, as well as from Mr. Sillerman
personally, with respect to the services he provides to various entities
affiliated with Mr. Sillerman, including Broadcasting. In 1997, these cash fees
aggregated approximately $5.0 million. In connection with the consummation of
the Broadcasting Merger and certain related transactions, Mr. Tytel received
308,374 shares of Class A common stock (with Mr. Sillerman retaining the right
to vote these shares) and cash fees from TSC, SCMC and Mr. Sillerman
personally. Mr Tytel has also granted Mr. Sillerman the right to vote all other
shares of Class A common stock
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beneficially owned by him. In addition, Mr. Tytel continues to have an economic
interest in SCMC, which beneficially owns 39,343 shares of Class A common
stock. See "--Assumption of Employment Agreements; Certain Change of Control
Payments" and "--Employment Agreements."
TRIATHLON FEES
SCMC, a corporation controlled by Mr. Sillerman and in which Mr. Tytel has
an equity interest, has an agreement to provide consulting and marketing
services to Triathlon, a publicly-traded company in which Mr. Sillerman is a
significant stockholder. Under the terms of the agreement, SCMC has agreed to
provide consulting and marketing services to Triathlon until June 1, 2005 for
an annual fee of $500,000, together with a refundable advance of $500,000 per
year against fees earned in respect of transactional investment banking
services. Fees paid by Triathlon for the years ended December 31, 1996 and
December 31, 1997 were $3,000,000 and $1,794,000, respectively. These fees vary
(above the minimum annual fee of $500,000) depending on the level of
acquisition and financing activities of Triathlon. SCMC previously assigned its
rights to receive fees payable under this agreement to Broadcasting. Pursuant
to the terms of the Distribution Agreement, Broadcasting assigned its rights to
receive these fees to the Company. Triathlon has announced that it has agreed
to be acquired by a third party. Triathlon will pay a fee to the Company in
connection with such acquisition. When Triathlon is acquired, it will cease
paying consulting fees for SCMC's services.
AGREEMENTS WITH BROADCASTING
The Company and Broadcasting have entered into various agreements with
respect to the Spin-Off and related matters. For the terms of these agreements,
see the Distribution Agreement, Tax Sharing Agreement and the Employment
Benefits Agreement, each of which have been filed with the SEC. See "Available
Information."
COMMON STOCK RECEIVED IN THE SPIN-OFF
In the Spin-Off, the holders of Broadcasting's Class A common stock,
Series D preferred stock and warrants (upon exercise) received shares of Class
A common stock, whereas Messrs. Sillerman and Ferrel, as the holders of
Broadcasting's Class B common stock (which is entitled to ten votes per share
on most matters), received shares of the Company's Class B common stock. The
Company's Class A common stock and the Company's Class B common stock have
similar rights and privileges, except that the Class B common stock has greater
voting rights. The issuance of the Company's Class B common stock in the
Spin-Off was intended to preserve Messrs. Sillerman's and Ferrel's relative
voting power after the Spin-Off. Assuming the completion of the Pending
Acquisitions, Mr. Sillerman may be deemed to beneficially own approximately
37.6% of the combined voting power of the Company, and Messrs. Sillerman and
Ferrel may be deemed to beneficially own approximately 41.5% of the combined
voting power of the Company. Accordingly, Mr. Sillerman, alone and together
with the Company's current directors and executive officers, will generally be
able to control the outcome of the votes of the stockholders of the Company on
most matters. See "Principal Stockholders."
In addition, in August 1997, the board of directors of Broadcasting
approved amendments to certain warrants that represented the right to purchase
an aggregate of 600,000 shares of Broadcasting's Class A common stock. The
warrants were held by SCMC, an entity controlled by Mr. Sillerman. The
amendments memorialize the original intent of the directors of Broadcasting
that SCMC receive the aggregate number of shares of the Company's Class A
common stock that it would have received if it had exercised the warrants
immediately prior to the Spin-Off.
ISSUANCE OF STOCK TO HOLDERS OF BROADCASTING'S OPTIONS AND SARS
On April 27, 1998, the Company issued 522,941 shares of its Class A common
stock to holders as of the Spin-Off record date of the stock options or SARs of
Broadcasting, whether or not vested, and 325,000 and 70,000 shares to Messrs.
Sillerman and Ferrel, respectively, with respect to the options to be issued
pursuant to their employment agreements with Broadcasting. In addition, the
Company issued 325,000
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and 30,000 shares of its Class A common stock to Messrs. Sillerman and Ferrel,
respectively, which corresponded to change of control options of Broadcasting
which they waived in connection with the Broadcasting Merger. The issuances
were made in consideration for past services to the Company and to allow
holders of such options and SARs to participate in the Spin-Off in a manner
similar to holders of Broadcasting's Class A common stock. Additionally, many
of the option and SAR holders are officers, directors or employees of the
Company. The members of the Board, other than Messrs. Becker and Falk, received
an aggregate of 850,479 shares pursuant to such issuance.
MEADOWS REPURCHASE
In connection with the acquisition of Meadows Music Theater, Broadcasting
obtained an option, as subsequently amended, to repurchase 247,177 shares of
its Class A common stock (the "Meadows Shares") for an aggregate purchase price
of $8.2 million (the "Meadows Repurchase"). However, Broadcasting was
restricted from exercising the Meadows Repurchase by certain loan covenants and
other restrictions. Pursuant to the terms of the Broadcasting Merger agreement,
since the Meadows Shares were outstanding at the effective time of the
Broadcasting Merger, Working Capital was decreased by approximately $10.3
million.
In January 1998, Mr. Sillerman committed to finance the $8.2 million
exercise price of the Meadows Repurchase in order to offset the $10.3 million
reduction to Working Capital. In consideration for his commitment, the board of
directors of Broadcasting agreed that Mr. Sillerman would receive approximately
the number of shares of the Company's Class A common stock to be issued in the
Spin-Off with respect to the Meadows Shares. At the time Broadcasting accepted
Mr. Sillerman's commitment, the board of directors of Broadcasting valued the
Company's 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
Broadcasting in connection with the Broadcasting Merger. The transaction was
approved by Broadcasting's board of directors, including the independent
directors.
In April 1998, Broadcasting assigned the option for the Meadows Shares to
an unaffiliated third party and, in connection therewith, agreed to pay such
party a fee of $75,000. Mr. Sillerman subsequently advanced such party the $8.2
million exercise price for the Meadows Repurchase, the repayment of which
became due upon the Broadcasting Merger. The third party has exercised the
option and transferred to Mr. Sillerman the Company's Class A common stock
issued in the Spin-Off with respect to the Meadows Shares. The Meadows Shares
were tendered in the Broadcasting Merger by the third party in exchange for the
per share Broadcasting Merger consideration of $75. The third party
subsequently repaid the advance from Mr. Sillerman and transferred $10.3
million, the remainder of such consideration net of the third party fee, to the
Company.
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DESCRIPTION OF OTHER INDEBTEDNESS
SENIOR CREDIT FACILITY
The following is a summary of the material terms of the credit agreement
for the Senior Credit Facility. This summary is not complete. It is subject to,
and qualified in its entirety by reference to, the credit agreement for the
Senior Credit Facility, which has been filed on Form 8-K (File No. 333-43287)
with the SEC and is incorporated herein by reference. The Company will provide
without charge to each person to whom this Offering Memorandum is delivered,
upon written or oral request of any such person, a copy of any or all documents
incorporated herein by reference (other than exhibits to such documents which
are not specifically incorporated by reference into such documents). Requests
for such documents should be directed to SFX Entertainment, Inc., 650 Madison
Ave., 16th Floor, New York, New York 10022, Attention: Investor Relations,
telephone (212) 838-3100.
In February 1998, the Company entered into the credit agreement for the
Senior Credit Facility, which established $300.0 million of senior secured
credit facilities. The Senior Credit Facility was then comprised of (a) the
$150.0 million eight-year Term Loan and (b) the $150.0 million seven-year
reducing Revolver. Borrowings under the Senior Credit Facility are secured by
substantially all the assets of the Company, including a pledge of the
outstanding stock of substantially all of its subsidiaries, and are guaranteed
by substantially all of the Company's subsidiaries. On February 27, 1998, the
Company borrowed $150.0 million pursuant to the Term Loan in connection with
certain of the 1998 Acquisitions. On September 10, 1998, the Company entered
into an agreement with The Bank of New York to increase its borrowing
availability under the Revolver portion of the Senior Credit Facility by an
additional $50.0 million, which increased the aggregate amount of borrowing
availability under the Senior Credit Facility to approximately $350.0 million.
As of October 30, 1998, the Company had approximately $346.0 million of
borrowings under the Senior Credit Facility.
The Company will be required to obtain the consent of the lenders under
the Senior Credit Facility in order to consummate this Offering. In connection
therewith, the Company has agreed to increase the applicable margins under the
Senior Credit Facility. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
GENERAL
The Senior Credit Facility provides for borrowings in a principal amount
of up to $350.0 million, subject to certain covenants and conditions.
Borrowings under the Senior Credit Facility may be used by the Company to
finance Permitted Acquisitions (as defined in the Senior Credit Facility), for
working capital and for general corporate purposes. Up to $20.0 million of the
Revolver is available for the issuance of standby letters of credit. Each
Permitted Acquisition must be in the same line of business (or other business
incidental or related thereto) as the Company and must have the prior written
consent of the Required Lenders (as defined in the Senior Credit Facility) if
the cost of the Permitted Acquisition exceeds $50.0 million.
INTEREST RATES; FEES
Loans outstanding under the Senior Credit Facility bear interest, at the
Company's option, at certain spreads over LIBOR or the greater of the Federal
Funds rate plus 0.50% or The Bank of New York's prime rate. The interest rate
spreads on the Term Loan and the Revolver are adjusted based on the Company's
Total Leverage Ratio (as defined below). The Company pays an annual commitment
fee on unused availability under the Revolver of 0.50% if the Company's Total
Leverage Ratio is greater than or equal to 4.0 to 1.0, and 0.375% if that ratio
is less than 4.0 to 1.0. The Company also pays an annual letter of credit fee
equal to the Applicable LIBOR Margin (as defined in the Senior Credit Facility)
for the Revolver then in effect.
MANDATORY PREPAYMENTS AND COMMITMENT REDUCTIONS
Commitments to lend under the Revolver will be reduced in equal quarterly
installments commencing March 31, 2000 in annual percentages of the borrowings
under the Revolver as of December 31, 1999
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according to the following schedule: by 10.0% in 2000; by 15.0% in 2001; by
20.0% in 2002; by 25.0% in 2003; by 25.0% in 2004; and by the remaining 5.0%
upon final maturity. The Term Loan will be reduced by $1.0 million per year
until final maturity, at which point the remaining balance will be due and
payable. Amounts outstanding under the Senior Credit Facility will be subject
to, among others, the following mandatory prepayments, which will also
permanently reduce commitments:
o 100.0% of the net cash proceeds received from permitted Asset Sales (as
defined in the Senior Credit Facility), subject to standard reinvestment
provisions;
o 50.0% of Excess Cash Flow (as defined in the Senior Credit Facility),
calculated for each fiscal year beginning with the year ending December
31, 2000; and
o 50.0% of net proceeds of any equity issuance, to the extent that the
Total Leverage Ratio is greater than or equal to 5.0 to 1.0.
COLLATERAL AND GUARANTEES
Each of the Company's present and future direct and indirect domestic
subsidiaries (the "Senior Guarantors") must provide guarantees under the Senior
Credit Facility. In order to secure its obligations under the Senior Credit
Facility, the Company and each of the Senior Guarantors must also grant to the
lenders a continuing security interest in all of their assets (subject to
certain non-material exceptions), all of the capital stock of each Senior
Guarantor and not less than 66% of the capital stock of the Company's present
and future direct and indirect foreign subsidiaries.
The Senior Credit Facility contains various covenants that, subject to
certain specified exceptions, restrict the Company's and its subsidiaries'
ability to:
o incur additional indebtedness and other obligations;
o grant liens;
o consummate mergers, acquisitions, investments and asset dispositions;
o declare or pay Restricted Payments (as defined in the Senior Credit
Facility);
o declare or pay dividends, distributions and other prepayments or
repurchases of other indebtedness;
o amend certain agreements, including the Company's organizational
documents, the Old Indenture, the Old Notes, the Notes and the
Indenture;
o make acquisitions and dispositions;
o engage in transactions with affiliates;
o engage in sale and leaseback transactions; and
o change lines of business.
The Senior Credit Facility also includes covenants relating to compliance with
ERISA, environmental and other laws, payment of taxes, maintenance of corporate
existence and rights, maintenance of insurance and financial reporting. In
addition, the Senior Credit Facility requires the Company to maintain
compliance with certain specified financial covenants relating to:
o a maximum ratio (the "Total Leverage Ratio") of (a) all outstanding
amounts under the Senior Credit Facility and any other borrowed money
and similar type indebtedness (including capital lease obligations) of
the Company and its subsidiaries, on a consolidated basis ("Total
Debt"), less cash and cash equivalents in excess of $5.0 million, to (b)
for the most recently completed four fiscal quarters, (i) revenues less
(ii) expenses (excluding depreciation, amortization other than
amortization of capitalized pre-production costs, interest expense and
income tax expense), plus (iii) non-recurring expense items or non-cash
expense items mutually agreed upon by the Company and the Required
Lenders, plus (iv) the lesser of (a) the equity income from
Unconsolidated Investments (as defined in the Senior Credit Facility)
and (b) cash dividends and
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other cash distributions from Unconsolidated Investments (however, the
total amount determined under this clause (iv) will not exceed 10.0% of
Operating Cash Flow before overhead) (the amount referred to in this
clause (b), "Operating Cash Flow"); Operating Cash Flow is to be
adjusted to reflect acquisitions and dispositions consummated during the
calculation period as if those transactions were consummated at the
beginning of the period (with adjustment, "Adjusted Operating Cash
Flow");
o a maximum ratio (the "Senior Leverage Ratio") of (a) Total Debt less
the principal amount outstanding under the Notes, less cash and cash
equivalents in excess of $5.0 million, to (b) Operating Cash Flow;
o minimum ratio (the "Pro Forma Interest Expense Ratio") of (a) Adjusted
Operating Cash Flow to (b) the sum of all interest expense and
commitment fees calculated for the four fiscal quarters following the
calculation quarter, giving effect to the Total Debt outstanding and the
interest rates in effect as of the date of the determination and the
commitment reductions and debt amortization scheduled during that
period;
o minimum ratio (the "Debt Service Ratio") of (a) Adjusted Operating Cash
Flow to (b) the sum of (i) the sum of all interest expense and
commitment fees calculated for the four fiscal quarters following the
calculation quarter, giving effect to the Total Debt outstanding and the
interest rates in effect as of the date of the determination and the
commitment reductions and debt amortization scheduled during that period
and (ii) the scheduled current maturities of Total Debt and current
commitment reductions with respect to the Revolver, each measured for
the four fiscal quarters immediately succeeding the date of
determination; and
o a minimum ratio (the "Fixed Charges Ratio") of (a) the sum of Operating
Cash Flow to (b) the sum of, for the four most recently completed fiscal
quarters, the following paid during that period: (i) Interest Expense
(as defined in the Senior Credit Facility) plus the scheduled maturities
of Total Debt and current commitment reductions with respect to the
Revolver, (ii) cash income taxes, (iii) capital expenditures (excluding
certain special capital expenditures to be mutually agreed upon) and
(iv) Unconsolidated Investments (as defined in the Senior Credit
Facility).
The Total Leverage Ratio for the most recently completed 12 month period
may not at any time exceed (a) 6.50x from September 30, 1998 to December 30,
1998, (b) 6.25x from December 31, 1998 to June 29, 1999, (c) 5.75x from June
30, 1999 to December 30, 1999, (d) 5.25x from December 31, 1999 to December 30,
2000, (e) 4.50x from December 31, 2000 to December 30, 2001 and (f) 3.75x on
December 31, 2001 and thereafter.
The Senior Leverage Ratio for the most recently completed 12 month period
may not at any time exceed (a) 3.25x from September 30, 1998 to December 30,
1999, (b) 3.00x from December 31, 1999 to December 30, 2000 and (c) 2.50x on
December 31, 2000 and thereafter.
The Pro Forma Interest Expense Ratio may not at the end of any fiscal
quarter be less than (a) 1.50x before December 31, 1998 and (b) 2.00x on
January 1, 1999 and thereafter.
The Pro Forma Debt Service Ratio may not at any fiscal quarter end be less
than (a) 1.25x before December 31, 1998 and (b) 1.50x on January 1, 1999 and
thereafter.
The Fixed Charges Ratio may not at any quarter end be less than 1.05x.
The Senior Credit Facility also prohibits prepayment of any subordinated
notes, including the Notes.
EVENTS OF DEFAULT
The Senior Credit Facility contains customary events of default, including
payment defaults, the occurrence of a Change of Control (as defined below), the
invalidity of guarantees or security documents under the Senior Credit
Facility, any Material Adverse Change (as defined in the Senior Credit
Facility), breach of any representation or warranty under the Senior Credit
Facility and any cross-default to other indebtedness of the Company and its
subsidiaries. The occurrence of any event of default could result in
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termination of the commitments to extend credit under the Senior Credit
Facility and foreclosure on the collateral securing those obligations, each of
which, individually, could have a material adverse effect on the Company.
CHANGE OF CONTROL
"Change of Control" is defined in the Senior Credit Facility as, inter
alia: (i) the failure of Mr. Sillerman, any Affiliate (as defined therein) of
Mr. Sillerman, or any Affiliate of Mr. Sillerman together with any executor,
heir or successor appointed to take control of Mr. Sillerman's affairs in the
event of his death, disability or incapacity, to own directly or indirectly, in
the aggregate, of record and beneficially, more than 30% of the voting power of
all issued and outstanding capital stock of the Company or (ii) the occurrence
of any Person (as defined in the Senior Credit Facility), other than as
provided in clause (i) above, owning, beneficially, more than 10% of the voting
power of all issued and outstanding capital stock of the Company.
THE OLD NOTES
For a full description of the terms of the Old Notes, reference is made to
the Old Indenture, which was filed on Form 8-K (File No. 000-22486) with the
SEC and is publicly available. See "Available Information."
In February 1998, the Company issued $350.0 million of its 9 1/8% Senior
Subordinated Notes due 2008. The Old Notes mature on February 1, 2008, ten
months prior to the maturity date of the Notes offered hereby. The Old Notes
are optionally redeemable commencing on February 1, 2003. The terms of the Old
Notes are substantially identical to the terms of the Notes offered hereby.
OTHER DEBT
In addition to the amounts outstanding under the Senior Credit Facility
and the Old Notes, the Company has approximately $46.5 million of long-term
debt outstanding at September 30, 1998, which was incurred primarily in
connection with the 1997 and 1998 Acquisitions. See Note 5 to the Notes to the
Consolidated Financial Statements of the Company.
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DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to the Indenture among the Company, the
Guarantors and The Chase Manhattan Bank, as trustee (the "Trustee"), in a
private transaction that is not subject to the registration requirements of the
Securities Act. See "Transfer Restrictions." The terms of the Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
Notes are subject to all such terms, and Holders of Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Indenture does not purport to be
complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. Copies of the
proposed form of Indenture and Registration Rights Agreement will be made
available to prospective investors as set forth under the caption "--Additional
Information." The definitions of certain terms used in the following summary
are set forth below under the caption "--Certain Definitions." For purposes of
this "Description of the Notes," the term "Company" refers only to SFX
Entertainment, Inc. and not to any of its Subsidiaries.
The Notes will be general unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior Debt of the
Company. See "--Subordination." As of September 30, 1998, after giving pro
forma effect to this Offering and the application of the net proceeds
therefrom, anticipated borrowings under the Senior Credit Facility and the
consummation of the Pending Acquisitions, the Company would have had
approximately $347.4 million of Senior Debt outstanding. The Indenture will
permit the incurrence of additional indebtedness, including additional Senior
Debt, subject to certain restrictions. See "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock."
As of the date of the Indenture, all of the Company's Subsidiaries will be
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture. The Company's payment
obligations under the Notes will be jointly and severally guaranteed, on a
senior subordinated basis, by all of the Company's domestic Restricted
Subsidiaries except for the Non-Guarantor Subsidiaries. See "--Subsidiary
Guarantees" and "Risk Factors--Risks Relating to the Notes--Substantial
Leverage."
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $200.0 million
and will mature on December 1, 2008. Interest on the Notes will accrue at the
rate of 9 1/8% per annum and will be payable semi-annually in arrears on
December 1 and June 1 of each year, commencing on June 1, 1999, to Holders of
record on the immediately preceding November 15 and May 15. Interest on the
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of original issuance. Interest will
be computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of and premium, interest and Liquidated Damages, if any, on the Notes
will be payable at the office or agency of the Company maintained for such
purpose within the City and State of New York or, at the option of the Company,
payment of premium, interest and Liquidated Damages, if any, may be made by
check mailed to the Holders of the Notes at their respective addresses set
forth in the register of Holders of Notes; provided that all payments of
principal, premium, interest and Liquidated Damages, if any, with respect to
Notes the Holders of which have given wire transfer instructions to the Company
will be required to be made by wire transfer of immediately available funds to
the accounts specified by the Holders thereof. Until otherwise designated by
the Company, the Company's office or agency in New York will be the office of
the Trustee maintained for such purpose. The Notes will be issued in
denominations of $1,000 and integral multiples thereof.
SUBORDINATION
The payment of principal of and premium, interest and Liquidated Damages,
if any, on the Notes will be subordinated in right of payment, as set forth in
the Indenture, to the prior payment in full in cash or Cash Equivalents of all
Senior Debt of the Company, whether outstanding on the date of the Indenture or
thereafter incurred.
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Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Debt of the Company will be
entitled to receive payment in full in cash or Cash Equivalents of all
Obligations due in respect of such Senior Debt (including interest after the
commencement of any such proceeding at the rate specified in the applicable
Senior Debt) before the Holders of Notes will be entitled to receive any
payment with respect to the Notes, and until all Obligations with respect to
Senior Debt are paid in full in cash or Cash Equivalents, any distribution to
which the Holders of Notes would be entitled shall be made to the holders of
Senior Debt (except that Holders of Notes may receive Permitted Junior
Securities and payments made from the trust described under the caption
"--Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in Permitted Junior Securities or from the trust described under the
caption "--Legal Defeasance and Covenant Defeasance") if (i) a default in the
payment of the principal of or premium or interest on any Designated Senior
Debt occurs and is continuing beyond any applicable period of grace or (ii) any
other default occurs and is continuing with respect to any Designated Senior
Debt that permits holders of the Designated Senior Debt as to which such
default relates to accelerate its maturity and the Trustee receives a notice of
such default (a "Payment Blockage Notice") from the Company or the holders of
such Designated Senior Debt. Payments on the Notes may and shall be resumed (a)
in the case of a payment default, upon the date on which such default is cured
or waived or has ceased to exist or such Designated Senior Debt has been
discharged or repaid in full in cash or Cash Equivalents and (b) in case of a
nonpayment default, the earlier of the date on which such nonpayment default is
cured or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received or has ceased to exist or such Designated Senior
Debt has been discharged or repaid in full in cash or Cash Equivalents, unless
the maturity of any Designated Senior Debt has been accelerated. No new period
of payment blockage may be commenced unless and until 360 days have elapsed
since the effectiveness of the immediately prior Payment Blockage Notice. No
nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the basis for
a subsequent Payment Blockage Notice unless such default has been cured or
waived for a period of at least 90 consecutive days.
The Indenture will further require that the Company promptly notify
holders of Senior Debt if payment of the Notes is accelerated because of an
Event of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Debt. As of September 30,
1998, after giving pro forma effect to this Offering and the application of the
net proceeds therefrom, anticipated borrowings under the Senior Credit Facility
and the consummation of the Pending Acquisitions, the Company would have had
approximately $347.4 million of Senior Debt outstanding. The Company will be
able to incur additional Senior Debt in the future, subject to certain
limitations. See "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock."
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
Senior Credit Facility and (ii) any other Senior Debt or Guarantor Senior Debt
permitted under the Indenture the principal amount of which is $25.0 million or
more and that has been designated by the Company as "Designated Senior Debt."
"Permitted Junior Securities" means Equity Interests in the Company or
debt securities of the Company or the relevant Guarantor that are subordinated
to all Senior Debt (and any debt securities issued in exchange for Senior Debt)
or Guarantor Senior Debt (and any debt securities issued in exchange for
Guarantor Senior Debt), as applicable, to substantially the same extent as, or
to a greater extent than, the Notes are subordinated to Senior Debt or the
Subsidiary Guarantees are subordinated to Guarantor Senior Debt, as applicable,
pursuant to the Indenture.
"Senior Debt" means (i) all Indebtedness outstanding under Credit
Facilities and all Hedging Obligations with respect thereto, (ii) any other
Indebtedness of the Company or any Guarantor permitted to be incurred under the
terms of the Indenture (other than the Old Notes), unless the instrument under
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which such Indebtedness is incurred expressly provides that it is on a parity
with or subordinated in right of payment to the Notes or the Subsidiary
Guarantees and (iii) all Obligations of the Company or any Guarantor with
respect to the foregoing. Notwithstanding anything to the contrary in the
foregoing, Senior Debt will not include (a) any liability for federal, state,
local or other taxes owed or owing by the Company, (b) any Indebtedness of the
Company or any Guarantor to any of its Subsidiaries or other Affiliates, (c)
any trade payables or (d) any Indebtedness that is incurred in violation of the
Indenture; provided that Indebtedness under Credit Facilities will not cease to
be Senior Debt if borrowed based upon a written certificate from a purported
officer of the Company to the effect that such Indebtedness was permitted by
the Indenture to be incurred. The Notes will be pari passu with the Old Notes.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes will be jointly and
severally guaranteed (the "Subsidiary Guarantees") by each of the Company's
current and future domestic Restricted Subsidiaries (the "Guarantors") except
for the Non-Guarantor Subsidiaries. See "Risk Factors--Risks Relating to the
Notes--Substantial Leverage." The Subsidiary Guarantee of each Guarantor will
be subordinated in right of payment to all existing and future Senior Debt of
such Guarantor to the same extent as the Notes are subordinated to Senior Debt
of the Company. See "--Subordination." As of September 30, 1998, after giving
pro forma effect to this Offering and the application of the net proceeds
therefrom, anticipated borrowings under the Senior Credit Facility and the
consummation of the Pending Acquisitions, the Guarantors would have had
approximately $347.4 million of Guarantor Senior Debt outstanding, $290.4
million of which represented Indebtedness incurred pursuant to guarantees of
the Senior Credit Facility. The Indenture will permit the Guarantors to incur
additional indebtedness, including additional Senior Debt, subject to certain
restrictions. See "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock." The obligations of each Guarantor under its Subsidiary
Guarantee will be limited so as not to constitute a fraudulent conveyance under
applicable law. See "Risk Factors--Risks Relating to the Notes--Fraudulent
Conveyance."
The Indenture will provide that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Notes, the Indenture and the Registration Rights Agreement;
(ii) immediately after giving effect to such transaction, no Default or Event
of Default exists; and (iii) the Company would be permitted by virtue of the
Company's pro forma Debt to Cash Flow Ratio, immediately after giving effect to
such transaction, to incur at least $1.00 of additional Indebtedness pursuant
to the Debt to Cash Flow Ratio test set forth in the covenant described below
under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock."
The Indenture will provide that in the event of a sale or other
disposition of all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Guarantor, then such Guarantor (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the capital stock of such Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Guarantor) will be released and relieved of any obligations under its
Subsidiary Guarantee; provided that the Net Proceeds, if any, of such sale or
other disposition are applied in accordance with the applicable provisions of
the Indenture. See "--Repurchase at the Option of Holders--Asset Sales."
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to December
1, 2003. Thereafter, the Notes will be subject to redemption at any time at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on December 1 of the years
indicated below:
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<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------- ------------
<S> <C>
2003 ........................ 104.563%
2004 ........................ 103.042
2005 ........................ 101.521
2006 and thereafter ......... 100.000%
</TABLE>
Notwithstanding the foregoing, prior to December 1, 2001, the Company may,
on any one or more occasions, redeem up to 35% of the aggregate principal
amount of Notes originally issued in the Offering at a redemption price of
109.125% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the redemption date, with the net cash
proceeds of an offering of common equity of the Company (other than
Disqualified Stock); provided that (i) at least 65% of the aggregate principal
amount of the Notes originally issued in the Offering remain outstanding
immediately after the occurrence of each such redemption (excluding Notes held
by the Company and its Subsidiaries) and (ii) each such redemption shall occur
within 75 days after the date of the closing of any such offering of common
equity of the Company.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each Holder of Notes to be redeemed at its
registered address. Notices of redemption may not be conditional. If any Note
is to be redeemed in part only, the notice of redemption that relates to such
Note shall state the portion of the principal amount thereof to be redeemed. A
new Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Note. Notes called for redemption become due on the date fixed for redemption.
On and after the redemption date, interest ceases to accrue on Notes or
portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under the caption "--Repurchase at the Option of
Holders," the Company is not required to make mandatory redemption or sinking
fund payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be obligated
to make an offer (a "Change of Control Offer") to each Holder of Notes to
repurchase all or any part (equal to $1,000 or an integral multiple thereof) of
such Holder's Notes at an offer price in cash equal to 101% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if
any, thereon to the date of purchase (the "Change of Control Payment"). Within
ten days following a Change of Control, the Company will mail a notice to each
Holder describing the transaction or transactions that constitute the Change of
Control and offering to repurchase Notes on the date specified in such notice,
which date shall be no earlier than 30 days and no later than 60 days from the
date such notice is mailed (the "Change of Control Payment Date"), pursuant to
the procedures required by the Indenture and described in such notice. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of the
Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes
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or portions thereof so tendered and (iii) deliver or cause to be delivered to
the Trustee the Notes so accepted together with an Officers' Certificate
stating the aggregate principal amount of Notes or portions thereof being
purchased by the Company. The Paying Agent will promptly mail to each Holder of
Notes so tendered the Change of Control Payment for such Notes, and the Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each Holder a new Note equal in principal amount to any unpurchased portion
of the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture will
provide that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Company will either
repay all outstanding Senior Debt or obtain the requisite consents, if any,
under all agreements governing outstanding Senior Debt to permit the repurchase
of Notes required by this covenant. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require the Company
to repurchase or redeem the Notes in the event of a takeover, recapitalization
or similar transaction.
The Senior Credit Facility prohibits, and other future credit agreements
or other agreements relating to Senior Debt to which the Company becomes a
party may prohibit, the Company from purchasing any Notes following a Change of
Control and provide that certain change of control events with respect to the
Company would constitute a default thereunder. In the event a Change of Control
occurs at a time when the Company is prohibited from purchasing Notes, the
Company could seek the consent of its lenders to the purchase of Notes or could
attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing Notes. The Company's failure to purchase
tendered Notes following a Change of Control would constitute an Event of
Default under the Indenture which, in turn, is expected to constitute as
default under the Senior Credit Facility. In such circumstances, the
subordination provisions in the Indenture would likely restrict payments to the
Holders of Notes. See "--Subordination."
The Company will not be required to make a Change of Control Offer
following a Change of Control if a third party makes the Change of Control
Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in the Indenture applicable to a Change of Control Offer
made by the Company and purchases all Notes validly tendered and not withdrawn
under such Change of Control Offer.
ASSET SALES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of cash; provided that the amount of (a) any liabilities (as shown
on the Company's or such Restricted Subsidiary's most recent balance sheet) of
the Company or such Restricted Subsidiary (other than contingent liabilities
and liabilities that are by their terms subordinated to the Notes or any
guarantee thereof) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability, (b) any securities, notes or
other obligations received by the Company or such Restricted Subsidiary from
such transferee that are immediately converted by the Company or such
Restricted Subsidiary into cash (to the extent of the cash received) and (c)
escrowed cash that the Company reasonably believes will be released from escrow
within 365 days from the date of consummation of such Asset Sale, in each case
shall be deemed to be cash for purposes of this provision.
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Notwithstanding the immediately preceding paragraph, the Company and its
Restricted Subsidiaries will be permitted to consummate an Asset Sale without
complying with such paragraph if (i) the Company or the applicable Restricted
Subsidiary, as the case may be, receives consideration at the time of such
Asset Sale at least equal to the fair market value of the assets or other
property sold, issued or otherwise disposed of (as evidenced by a resolution of
the Company's Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) and (ii) at least 75% of the consideration for such
Asset Sale constitutes a controlling interest in a Permitted Business,
long-term assets used or useful in a Permitted Business and/or cash or Cash
Equivalents; provided that any cash or Cash Equivalents received by the Company
or any of its Restricted Subsidiaries in connection with any Asset Sale
permitted to be consummated under this paragraph shall constitute Net Proceeds
subject to the provisions of the next succeeding paragraph.
Within 365 days of the receipt of any Net Proceeds from an Asset Sale, the
Company may apply such Net Proceeds, at its option, (i) to repay Senior Debt
under a Credit Facility (and to correspondingly reduce commitments with respect
thereto in the case of revolving borrowings) or (ii) to the acquisition of a
controlling interest in a Permitted Business, the making of a capital
expenditure or the acquisition of other long-term assets, in each case, used or
useful in a Permitted Business. Pending the final application of any such Net
Proceeds, the Company may temporarily reduce Senior Debt or otherwise invest
such Net Proceeds in any manner that is not prohibited by the Indenture. Any
Net Proceeds from Asset Sales that are not applied or invested as provided in
the first sentence of this paragraph will be deemed to constitute "Excess
Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million,
the Company will be required to make an offer to all Holders of Notes and all
holders of other pari passu Indebtedness containing provisions similar to those
set forth in the Indenture with respect to offers to purchase or redeem such
other pari passu Indebtedness with the proceeds of sales of assets (an "Asset
Sale Offer") to purchase the maximum principal amount of Notes and such other
pari passu Indebtedness that may be purchased out of the Excess Proceeds at an
offer price in cash in an amount equal to 100% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the
date of purchase, in accordance with the procedures set forth in the Indenture
and in such other pari passu Indebtedness. To the extent that the aggregate
amount of Notes and such other pari passu Indebtedness tendered pursuant to an
Asset Sale Offer is less than the Excess Proceeds, the Company may use any
remaining Excess Proceeds for any purpose not otherwise prohibited by the
Indenture. If the aggregate principal amount of Notes and such other pari passu
Indebtedness surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Notes and such other pari passu
Indebtedness to be purchased on a pro rata basis. Upon completion of an Asset
Sale Offer, the amount of Excess Proceeds shall be reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiary's Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company or any Restricted Subsidiary) or to any direct or
indirect holders of the Company's Equity Interests in their capacity as such
(other than dividends or distributions (a) payable in Equity Interests (other
than Disqualified Stock) of the Company or (b) to the Company or any Wholly
Owned Restricted Subsidiary of the Company); (ii) purchase, redeem or otherwise
acquire or retire for value (including, without limitation, in connection with
any merger or consolidation involving the Company) any Equity Interests of the
Company or any of its Restricted Subsidiaries or any direct or indirect parent
of the Company (other than any such Equity Interests owned by the Company or
any Restricted Subsidiary of the Company); (iii) make any payment on or with
respect to, or purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness of the Company or any Restricted Subsidiary that is
subordinated to the Notes or any guarantee of the Notes, except a payment of
interest or principal at Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth
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in clauses (i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Debt to
Cash Flow Ratio test set forth in the first paragraph of the covenant
described below under caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after February 11, 1998 (excluding Restricted Payments
permitted by clauses (ii), (iii) and (vi) of the next succeeding
paragraph), is less than the sum, without duplication, of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after February 11, 1998 to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company as a
contribution to its common equity capital or from the issue or sale since
February 11, 1998 of Equity Interests of the Company (other than
Disqualified Stock) or from the issue or sale of Disqualified Stock or debt
securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Company and other
than Disqualified Stock or convertible debt securities that have been
converted into Disqualified Stock), plus (iii) 50% of any dividends
received by the Company or a Wholly Owned Restricted Subsidiary after
February 11, 1998 from an Unrestricted Subsidiary of the Company, to the
extent that such dividends were not otherwise included in Consolidated Net
Income of the Company for such period, plus (iv) to the extent that any
Restricted Investment that was made after February 11, 1998 is sold for
cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash
return of capital with respect to such Restricted Investment (less the cost
of disposition, if any) and (B) the initial amount of such Restricted
Investment.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at the date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Equity Interests of the Company or subordinated Indebtedness
of the Company or any Guarantor in exchange for, or out of the net cash
proceeds of the substantially concurrent sale (other than to a Subsidiary of
the Company) of, other Equity Interests of the Company (other than any
Disqualified Stock); provided that the amount of any such net cash proceeds
that are utilized for any such redemption, repurchase, retirement, defeasance
or other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph; and provided further that no Default or Event of Default shall have
occurred and be continuing immediately after such transaction; (iii) the
defeasance, redemption, repurchase or other acquisition of subordinated
Indebtedness with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness; provided that no Default or Event of Default shall
have occurred and be continuing immediately after such transaction; (iv) the
payment of any dividend by a Restricted Subsidiary of the Company to the
holders of Equity Interests on a pro rata basis; (v) the repurchase, redemption
or other acquisition or retirement for value of any Equity Interests of the
Company or any Restricted Subsidiary of the Company held by any member of the
Company's (or any of its Restricted Subsidiaries') management or board of
directors pursuant to any management equity subscription agreement, stock
option agreement or other similar agreement; provided that the aggregate price
paid for all such repurchased, redeemed, acquired or retired Equity Interests
shall not exceed $250,000 in any twelve-month period and no Default or Event of
Default shall have occurred and be continuing immediately after such
transaction; and (vi) the repurchase, redemption or other acquisition or
retirement for value or payment made in respect of any Equity Interests of the
Company or any Restricted
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Subsidiary of the Company pursuant to any of the agreements relating to the
Pending Acquisitions, each as in effect on the date of the Indenture; provided
that no Default or Event of Default shall have occurred and be continuing
immediately after such transaction.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined in
good faith by the Board of Directors whose resolution with respect thereto
shall be delivered to the Trustee. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant "Restricted
Payments" were computed.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, the aggregate fair market value of all
outstanding Investments by the Company and its Restricted Subsidiaries in the
Subsidiary so designated will be deemed to be a Restricted Payment at the time
of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. Such designation will only
be permitted if such Restricted Payment would be permitted at such time and if
such Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by filing with the Trustee a certified copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions. If, at any time, any
Unrestricted Subsidiary would fail to meet the definition of an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such date
(and, if such Indebtedness is not permitted to be incurred as of such date
under the covenant described under the caption "--Incurrence of Indebtedness
and Issuance of Preferred Stock," the Company shall be in default of such
covenant). The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such
Indebtedness is permitted under the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock," calculated on a
pro forma basis as if such designation had occurred at the beginning of the
four-quarter reference period and (ii) no Default or Event of Default would be
in existence immediately following such designation.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) or issue any shares of Disqualified
Stock and will not permit any of its Subsidiaries to issue any shares of
preferred stock; provided, however, that, so long as no Default or Event of
Default has occurred and is continuing, the Company may incur Indebtedness
(including Acquired Debt) or issue shares of Disqualified Stock and the
Guarantors may issue shares of preferred stock if, in each case, the Company's
Debt to Cash Flow Ratio at the time of incurrence of such Indebtedness or the
issuance of such Disqualified Stock or preferred stock, as the case may be,
after giving pro forma effect to such incurrence or issuance as of such date
and to the use of the proceeds therefrom as if the same had occurred at the
beginning of the most recently ended four full fiscal quarter period of the
Company for which internal financial statements are available, would have been
no greater than (a) 7.0 to 1.0, if such incurrence or issuance is prior to
December 31, 1999 or (b) 6.5 to 1.0 thereafter.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following (collectively, "Permitted Debt"):
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(i) the incurrence by the Company (and the guarantee thereof by
Guarantors) of Indebtedness and Letters of Credit under one or more Credit
Facilities in an aggregate principal amount at any time outstanding not to
exceed $400.0 million (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of the Company
and the Guarantors thereunder), less the aggregate amount of all
repayments, optional or mandatory, of the principal of any term
Indebtedness under a Credit Facility that have been made since the date of
the Indenture and less the aggregate amount of all commitment reductions of
any revolving Indebtedness under a Credit Facility pursuant to clause (i)
of the third paragraph of the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales";
(ii) the incurrence by the Company and the guarantee thereof by the
Guarantors of Indebtedness represented by the Notes and the Subsidiary
Guarantees;
(iii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness;
(iv) the incurrence by the Company or its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of the
Company or such Restricted Subsidiary, in an aggregate amount not to exceed
$5.0 million at any time outstanding, including all Permitted Refinancing
Debt incurred pursuant to clause (v) below to refund, replace or refinance
any Indebtedness pursuant to this clause (iv);
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indenture to be
incurred by the first paragraph of this covenant, or by clauses (ii),
(iii), (iv), (v), (vii) or (x) of this paragraph;
(vi) the incurrence of Indebtedness between or among the Company and any
of its Restricted Subsidiaries; provided, however, that (a) if the Company
is the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full of all Obligations with respect
to the Notes and (b) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being held by a Person
other than the Company or a Restricted Subsidiary, and any sale or other
transfer of any such Indebtedness to a Person that is not either the
Company or a Restricted Subsidiary, shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by the Company or such
Restricted Subsidiary, as the case may be;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of this Indenture to be outstanding;
(viii) the guarantee by the Company or any of the Guarantors of
Indebtedness that was permitted to be incurred by another provision of this
covenant;
(ix) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (ix);
(x) the issuance of preferred stock by the Company pursuant to the
Contemporary Agreement, as in effect on the date of the Indenture; and
(xi) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount at any time
outstanding, including all Permitted Refinancing Indebtedness incurred
pursuant to clause (v) above to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (xi), not to exceed $10.0
million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through
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(xi) above or is entitled to be incurred pursuant to the first paragraph of
this covenant, the Company shall, in its sole discretion, classify such item of
Indebtedness in any manner that complies with this covenant and such item of
Indebtedness will be treated as having been incurred pursuant to only one of
such clauses or pursuant to the first paragraph hereof. Accrual of interest,
the accretion of accreted value, the payment of interest on any Indebtedness in
the form of additional Indebtedness with the same terms and the payment of
dividends on Disqualified Stock in the form of additional shares of the same
class of Disqualified Stock will not be deemed to be an incurrence of
Indebtedness or an issuance of Disqualified Stock for purposes of this
covenant.
LIMITATION ON OTHER SENIOR SUBORDINATED DEBT
The Indenture will provide that (i) the Company will not directly or
indirectly incur any Indebtedness that is subordinate or junior in right of
payment to any Senior Debt and senior in any respect in right of payment to the
Notes and (ii) no Guarantor will incur any Indebtedness that is subordinate or
junior in right of payment to its Guarantor Senior Debt and senior in any
respect in right of payment to such Guarantor's Subsidiary Guarantee.
LIENS
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien securing Indebtedness or trade payables on
any asset now owned or hereafter acquired, or any income or profits therefrom
or assign or convey any right to receive income therefrom, except Permitted
Liens.
SALE AND LEASEBACK TRANSACTIONS
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; provided that the Company and the Guarantors may enter into a sale
and leaseback transaction if (i) the Company or such Guarantor could have (a)
incurred Indebtedness in an amount equal to the Attributable Debt relating to
such sale and leaseback transaction pursuant to the Debt to Cash Flow Ratio
test set forth in the first paragraph of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock" and (b)
incurred a Lien to secure such Indebtedness pursuant to the covenant described
above under the caption "--Liens," (ii) the gross cash proceeds of such sale
and leaseback transaction are at least equal to the fair market value (as
determined in good faith by the Board of Directors and set forth in an
Officers' Certificate delivered to the Trustee) of the property that is the
subject of such sale and leaseback transaction and (iii) the transfer of assets
in such sale and leaseback transaction is permitted by, and the proceeds of
such transaction are applied in compliance with, the covenant described above
under the caption "--Repurchase at the Option of Holders--Asset Sales."
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (a) Existing Indebtedness as in effect on the date of the Indenture,
(b) the Senior Credit Facility and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
thereof, and any other agreement governing or relating to Senior Debt, provided
that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings and other agreements are
no more restrictive with respect to such dividend and other payment
restrictions than those contained in the Senior Credit Facility, (c) the
Indenture, the Notes and
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the Subsidiary Guarantees, (d) applicable law, (e) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired; provided
that, in the case of Indebtedness, such Indebtedness was permitted by the terms
of the Indenture to be incurred, (f) by reason of customary non-assignment
provisions in leases entered into in the ordinary course of business and
consistent with past practices, (g) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, (h)
Permitted Refinancing Indebtedness; provided that the restrictions contained in
the agreements governing such Permitted Refinancing Indebtedness are no more
restrictive than those contained in the agreements governing the Indebtedness
being refinanced, (i) secured Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the caption
"--Liens" that limits the right of the debtor to dispose of the assets securing
such Indebtedness, (j) provisions with respect to the disposition or
distribution of assets or property in joint venture agreements and other
similar agreements entered into in the ordinary course of business and (k)
restrictions on cash or other deposits or net worth imposed by customers under
contracts entered into in the ordinary course of business.
ISSUANCES AND SALES OF EQUITY INTERESTS IN RESTRICTED SUBSIDIARIES
The Indenture will provide that the Company (i) will not, and will not
permit any Restricted Subsidiary of the Company to, transfer, convey, sell,
lease or otherwise dispose of any Equity Interests in any Restricted Subsidiary
of the Company to any Person (other than the Company or a Restricted Subsidiary
of the Company), unless (a) such transfer, conveyance, sale, lease or other
disposition is of all the Equity Interests in such Restricted Subsidiary and
(b) the cash Net Proceeds, if any, from such transfer, conveyance, sale, lease
or other disposition are applied in accordance with the covenant described
above under the caption "--Repurchase at the Option of Holders--Asset Sales,"
and (ii) will not permit any Restricted Subsidiary of the Company to issue any
of its Equity Interests (other than, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to the
Company or a Restricted Subsidiary of the Company except as permitted pursuant
to the covenant described above under the caption "--Incurrence of Indebtedness
and Issuance of Preferred Stock."
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company
is the surviving corporation or the entity or the Person formed by or surviving
any such consolidation or merger (if other than the Company) or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Notes, the Indenture and the Registration
Rights Agreement pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a merger of
the Company with or into a Wholly Owned Restricted Subsidiary of the Company,
the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made will, both immediately prior to and immediately after giving pro forma
effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt to Cash Flow Ratio test set forth
in the first paragraph of the covenant described above under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock."
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TRANSACTIONS WITH AFFILIATES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
that are no less favorable to the Company or such Restricted Subsidiary than
those that would have been obtained in a comparable transaction by the Company
or such Restricted Subsidiary with an unrelated Person and (ii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess
of $1.0 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies with
clause (i) above and that such Affiliate Transaction has been approved by a
majority of the members of the Board of Directors that are disinterested as to
such Affiliate Transaction and (b) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $5.0 million, an opinion as to the fairness to the Company of such
Affiliate Transaction from a financial point of view issued by an accounting,
appraisal or investment banking firm of national standing; provided that (1)
any employment agreement entered into by, and any compensation paid by, the
Company or any of its Restricted Subsidiaries, in each case, approved by the
Compensation Committee, (2) transactions between or among the Company and/or
its Restricted Subsidiaries, (3) fees and compensation paid to members of the
Board of Directors of the Company and of its Restricted Subsidiaries in their
capacity as such, to the extent such fees and compensation are reasonable,
customary and consistent with past practices and the issuance of shares of the
Company to the Directors who were holders of options or stock appreciation
rights in Broadcasting as of the Spin-Off record date, whether or not vested,
(4) fees and compensation paid to, and indemnity provided on behalf of,
officers, directors or employees of the Company or any of its Restricted
Subsidiaries, as determined by the Board of Directors of the Company or of any
such Restricted Subsidiary, to the extent such fees and compensation are
reasonable, customary and consistent with past practices, (5) the transactions
specifically contemplated by the Merger Agreement, the agreements relating to
the Pending Acquisitions or by instruments referred to in any such agreements,
in each case, as the same are in effect on the date of the Indenture, (6) the
Spin-Off Transactions, (7) the transactions specifically contemplated by the
Delsener/Slater Employment Agreements, in each case as in effect on the date of
the Indenture, (8) the Meadows Repurchase and the Series E Preferred
Repurchase; provided that the Company receives either (x) a cash payment from
Broadcasting or Broadcasting Buyer or an Affiliate thereof at or prior to the
date of the Merger at least equal to the aggregate amount expended by the
Company in the Meadows Repurchase and the Series E Preferred Repurchase less
$3.0 million or (y) an increase in favor of the Company in the Working Capital
Adjustment (including the avoidance of a decrease) contemplated by the Merger
Agreement in an amount at least equal to the aggregate amount expended by the
Company in the Meadows Repurchase and the Series E Preferred Repurchase less
$3.0 million or (z) any combination thereof adding up to an amount at least
equal to the aggregate amount expended by the Company in the Meadows Repurchase
and the Series E Preferred Repurchase less $3.0 million and (9) any Restricted
Payment that is permitted by the provisions of the Indenture described above
under the caption "--Restricted Payments," in each case, shall not be deemed to
be Affiliate Transactions.
ADDITIONAL SUBSIDIARY GUARANTEES
The Indenture will provide that if the Company or any of its Restricted
Subsidiaries shall acquire or create another domestic Restricted Subsidiary
after the date of the Indenture (other than the Non-Guarantor Subsidiaries), or
any domestic Unrestricted Subsidiary shall become a Restricted Subsidiary of
the Company, then such Subsidiary shall execute a Subsidiary Guarantee of the
Notes and deliver an opinion of counsel, in accordance with the terms of the
Indenture.
PAYMENTS FOR CONSENT
The Indenture will provide that neither the Company nor any of the
Company's Subsidiaries will, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or
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otherwise, to any Holder of any Notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the Indenture or the
Notes unless such consideration is offered to be paid or is paid to all Holders
of the Notes that consent, waive or agree to amend in the time frame set forth
in the solicitation documents relating to such consent, waiver or agreement.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent
as would not be material to the Company and its Restricted Subsidiaries taken
as a whole.
REPORTS
The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company will furnish to the Holders of Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company was required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that describes the financial condition and results
of operations of the Company and its consolidated Subsidiaries (showing in
reasonable detail, either on the face of the financial statements or in the
footnotes thereto and in Management's Discussion and Analysis of Financial
Condition and Results of Operations, the financial condition and results of
operations of the Company and its Restricted Subsidiaries separate from the
financial information and results of operations of the Unrestricted
Subsidiaries of the Company) and, with respect to the annual information only,
a report thereon by the Company's certified independent accountants and (ii)
all current reports that would be required to be filed with the Commission on
Form 8-K if the Company was required to file such reports, in each case, within
the time periods specified in the Commission's rules and regulations. In
addition, following the consummation of the exchange offer contemplated by the
Registration Rights Agreement, whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability within the
time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available
to securities analysts and prospective investors upon request.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the Notes (whether or not
prohibited by the subordination provisions of the Indenture), (ii) default in
payment when due of the principal of or premium, if any, on the Notes (whether
or not prohibited by the subordination provisions of the Indenture); (iii)
failure by the Company or any Restricted Subsidiary to comply with the
provisions described under the captions "--Repurchase at the Option of
Holders--Change of Control" or "--Certain Covenants--Merger, Consolidation or
Sale of Assets"; (iv) failure by the Company or any Restricted Subsidiary for
30 days after written notice by the Trustee or the Holders of at least 25% in
principal amount of the then outstanding Notes to comply with the provisions
described under the captions "--Repurchase at the Option of Holders--Asset
Sales," "--Certain Covenants--Restricted Payments" or "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock"; (v)
failure by the Company or any Restricted Subsidiary for 60 days after written
notice by the Trustee or the Holders of at least 25% in principal amount of the
then outstanding Notes to comply with any of its other agreements in the
Indenture or the Notes; (vi) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the Company
or any of its Restricted Subsidiaries), whether such Indebtedness or guarantee
now exists or is created after the date of the Indenture, which default (a) is
caused by a failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b)
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results in the acceleration of such Indebtedness prior to its express maturity
and, in each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there has been
a Payment Default or the maturity of which has been so accelerated, aggregates
$10.0 million or more; (vii) failure by the Company or any of its Restricted
Subsidiaries to pay final judgments aggregating in excess of $10.0 million,
which judgments are not paid, discharged or stayed for a period of 60 days;
(viii) except as permitted by the Indenture, any Subsidiary Guarantee shall be
held in any judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in full force and effect or any Guarantor, or any Person
acting on behalf of any Guarantor, shall deny or disaffirm its obligations
under its Subsidiary Guarantee; and (ix) certain events of bankruptcy or
insolvency with respect to the Company or any of the Company's Restricted
Subsidiaries that constitutes a Significant Subsidiary or any group of
Restricted Subsidiaries of the Company that, taken together, would constitute a
Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Restricted
Subsidiary of the Company that constitutes a Significant Subsidiary or any
group of Restricted Subsidiaries of the Company that, taken together, would
constitute a Significant Subsidiary, all outstanding Notes will become due and
payable without further action or notice. Holders of the Notes may not enforce
the Indenture or the Notes except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders of the Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
December 1, 2003 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to such date, then the premium
specified in the Indenture shall also become immediately due and payable to the
extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee or stockholder of the Company or any
Guarantor, as such, shall have any liability for any obligations of the Company
or any Guarantor under the Notes, the Subsidiary Guarantees, the Indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder of Notes by accepting a Note waives and releases
all such liability. The waiver and release are part of the consideration for
issuance of the Notes. Such waiver may not be effective to waive liabilities
under the federal securities laws and it is the view of the Commission that
such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes and to have each
Guarantor's obligation discharged with respect to its
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Subsidiary Guarantee ("Legal Defeasance") except for (i) the rights of Holders
of outstanding Notes to receive payments in respect of the principal of and
premium, interest and Liquidated Damages, if any, on the Notes when such
payments are due from the trust referred to below, (ii) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company and
each Guarantor released with respect to certain covenants that are described in
the Indenture ("Covenant Defeasance") and thereafter any omission to comply
with such obligations shall not constitute a Default or Event of Default with
respect to the Notes. In the event Covenant Defeasance occurs, certain events
(not including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under the caption "Events of Default" will no
longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of and premium, interest and
Liquidated Damages, if any, on the outstanding Notes on the stated maturity or
on the applicable redemption date, as the case may be, and the Company must
specify whether the Notes are being defeased to maturity or to a particular
redemption date; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (a) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (b) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company shall have delivered
to the Trustee an Officers' Certificate and an opinion of counsel, each stating
that all conditions precedent provided for relating to the Legal Defeasance or
the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer
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documents and the Company may require a Holder to pay any taxes and fees
required by law or permitted by the Indenture. The Company is not required to
transfer or exchange any Note selected for redemption. Also, the Company is not
required to transfer or exchange any Note for a period of 15 days before a
selection of Notes to be redeemed. The registered Holder of a Note will be
treated as the owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture,
the Notes and the Subsidiary Guarantees may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the Notes
then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes),
and any existing default or compliance with any provision of the Indenture, the
Notes or the Subsidiary Guarantees may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange
offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under the
caption "--Repurchase at the Option of Holders"), (iii) reduce the rate of or
change the time for payment of interest on any Note, (iv) waive a Default or
Event of Default in the payment of principal of or premium, interest or
Liquidated Damages, if any, on the Notes (except a rescission of acceleration
of the Notes by the Holders of at least a majority in aggregate principal
amount of the Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Note payable in money other than that stated in the
Notes, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive payments
of principal of or premium, interest or Liquidated Damages, if any, on the
Notes, (vii) waive a redemption payment with respect to any Note (other than a
payment required by one of the covenants described above under the caption
"--Repurchase at the Option of Holders"), (viii) release any Guarantor from its
Subsidiary Guarantee or (ix) make any change in the foregoing amendment and
waiver provisions. In addition, any amendment to the provisions of Article 10
of the Indenture (which relate to subordination) will require the consent of
the Holders of at least 75% in aggregate principal amount of the Notes then
outstanding if such amendment would adversely affect the rights of Holders of
Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company, a Guarantor (with respect to a Subsidiary Guarantee or the
Indenture to which it is a party) and the Trustee may amend or supplement the
Indenture, the Notes or any Subsidiary Guarantee to cure any ambiguity, defect
or inconsistency, to provide for uncertificated Notes in addition to or in
place of certificated Notes, to provide for the assumption of the Company's or
any Guarantor's obligations to Holders of Notes in the case of a merger or
consolidation or sale of substantially all of the Company's assets, to make any
change that would provide any additional rights or benefits to the Holders of
Notes or that does not adversely affect the legal rights under the Indenture of
any such Holder or to comply with requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust Indenture
Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the
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Trustee, subject to certain exceptions. The Indenture provides that in case an
Event of Default shall occur (which shall not be cured), the Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Offering Memorandum may obtain a copy of the
Indenture and Registration Rights Agreement without charge by writing to SFX
Entertainment, Inc., 650 Madison Avenue, New York, New York 10022, Attention:
Investor Relations.
BOOK-ENTRY, DELIVERY AND FORM
The Notes are being offered and sold to qualified institutional buyers in
reliance on Rule 144A ("Rule 144A Notes"). Notes also may be offered and sold
in offshore transactions in reliance on Regulation S ("Regulation S Notes").
Except as set forth below, Notes will be issued in registered, global form in
minimum denominations of $1,000 and integral multiples of $1,000 in excess
thereof. Notes will be issued at the Closing only against payment in
immediately available funds.
Rule 144A Notes initially will be represented by one or more Notes in
registered, global form without interest coupons (collectively, the "Rule 144A
Global Notes"). Regulation S Notes initially will be represented by one or more
Notes in registered, global form without interest coupons (collectively, the
"Regulation S Global Notes" and, together with the Rule 144A Global Notes, the
"Global Notes"). The Global Notes will be deposited upon issuance with the
Trustee as custodian for The Depository Trust Company ("DTC"), in New York, New
York, and registered in the name of DTC or its nominee, in each case, for
credit to an account of a direct or indirect participant in DTC as described
below. Through and including the 40th day after the later of the commencement
of the Offering and the Closing (such period through and including such 40th
day, the "Distribution Compliance Period"), beneficial interests in the
Regulation S Global Notes may be held only through the Euroclear System
("Euroclear") and Cedel, S.A. ("Cedel") (as indirect participants in DTC),
unless transferred to a person that takes delivery through a Rule 144A Global
Note in accordance with the certification requirements described below.
Beneficial interests in the Rule 144A Global Notes may not be exchanged for
beneficial interests in the Regulation S Global Notes at any time except in the
limited circumstances described below. See "--Exchanges between Regulation S
Notes and Rule 144A Notes."
Except as set forth below, the Global Notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
Notes in certificated form except in the limited circumstances described below.
See "--Exchange of Book-Entry Notes for Certificated Notes." Except in the
limited circumstances described below, owners of beneficial interests in the
Global Notes will not be entitled to receive physical delivery of Certificated
Notes (as defined below).
Rule 144A Notes (including beneficial interests in the Rule 144A Global
Notes) will be subject to certain restrictions on transfer and will bear a
restrictive legend as described under "Transfer Restrictions." Regulation S
Notes will also bear the legend as described under "Transfer Restrictions." In
addition, transfers of beneficial interests in the Global Notes will be subject
to the applicable rules and procedures of DTC and its direct or indirect
participants (including, if applicable, those of Euroclear and Cedel), which
may change from time to time.
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of
the Registrar.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Cedel are provided solely as a matter of convenience. These
operations and procedures are solely within the control
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of the respective settlement systems and are subject to changes by them from
time to time. The Company takes no responsibility for these operations and
procedures and urges investors to contact the system or their participants
directly to discuss these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may beneficially
own securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interests in, and transfers of ownership
interests in, each security held by or on behalf of DTC are recorded on the
records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established
by it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Notes and (ii) ownership of such interests in
the Global Notes will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interest in the Global Notes).
Investors in the Rule 144A Global Notes may hold their interests therein
directly through DTC, if they are Participants in such system, or indirectly
through organizations (including Euroclear and Cedel) which are Participants in
such system. Investors in the Regulation S Global Notes must initially hold
their interests therein through Euroclear or Cedel, if they are participants in
such systems, or indirectly through organizations that are participants in such
systems. After the expiration of the Distribution Compliance Period (but not
earlier), investors may also hold interests in the Regulation S Global Notes
through Participants in the DTC system other than Euroclear and Cedel.
Euroclear and Cedel will hold interests in the Regulation S Global Notes on
behalf of their participants through customers' securities accounts in their
respective names on the books of their respective depositories, which are
[Bank], as operator of Euroclear, and [Bank], as operator of Cedel. All
interests in a Global Note, including those held through Euroclear or Cedel,
may be subject to the procedures and requirements of DTC. Those interests held
through Euroclear or Cedel may also be subject to the procedures and
requirements of such systems. The laws of some states require that certain
persons take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a Global Note to
such persons will be limited to that extent. Because DTC can act only on behalf
of Participants, which in turn act on behalf of Indirect Participants and
certain banks, the ability of a person having beneficial interests in a Global
Note to pledge such interests to persons or entities that do not participate in
the DTC system, or otherwise take actions in respect of such interests, may be
affected by the lack of a physical certificate evidencing such interests.
Except as described below, owners of interests in the Global Notes will
not have Notes registered in their names, will not receive physical delivery of
Notes in certificated form and will not be considered the registered owners or
"Holders" thereof under the Indenture for any purpose.
Payments in respect of the principal of, and premium, if any, Liquidated
Damages, if any, and interest on a Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered Holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee will treat the persons in whose names the Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, none of
the Company, the Trustee or any agent of the Company or the Trustee has or will
have any responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made on
account of any beneficial ownership interest in the Global Notes, or for
maintaining, supervising or reviewing any of DTC's records or any Participant's
or
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Indirect Participant's records relating to the beneficial ownership interests
in the Global Notes or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised the Company that its current practice, upon receipt of any payment in
respect of securities such as the Notes (including principal and interest), is
to credit the accounts of the relevant Participants with the payment on the
payment date, in amounts proportionate to their respective holdings in the
principal amount of beneficial interest in the relevant security as shown on
the records of DTC unless DTC has reason to believe it will not receive payment
on such payment date. Payments by the Participants and the Indirect
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the responsibility of
DTC, the Trustee or the Company. Neither the Company nor the Trustee will be
liable for any delay by DTC or any of its Participants in identifying the
beneficial owners of the Notes, and the Company and the Trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
Except for trades involving only Euroclear and Cedel participants,
interests in the Global Notes are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity in such
interests will, therefore, settle in immediately available funds, subject in
all cases to the rules and procedures of DTC and its Participants. See "--Same
Day Settlement and Payment."
Subject to the transfer restrictions set forth under "Transfer
Restrictions," transfers between Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in same day funds, and
transfers between participants in Euroclear and Cedel will be effected in the
ordinary way in accordance with their respective rules and operating
procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes described herein, cross-market transfers between the Participants in DTC,
on the one hand, and Euroclear or Cedel participants, on the other hand, will
be effected through DTC in accordance with DTC's rules on behalf of Euroclear
or Cedel, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Cedel, as the case may be, by the counterparty in such system in accordance
with the rules and procedures and within the established deadlines (Brussels
time) of such system. Euroclear or Cedel, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf
by delivering or receiving interests in the relevant Global Note in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Euroclear participants and Cedel
participants may not deliver instructions directly to the depositories for
Euroclear or Cedel.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Notes only at the direction of one or more Participants to
whose account DTC has credited the interests in the Global Notes and only in
respect of such portion of the aggregate principal amount of the Notes as to
which such Participant or Participants has or have given such direction.
However if there is an Event of Default under the Notes, DTC reserves the right
to exchange the Global Notes for legended Notes in certificated form, and to
distribute such Notes to its Participants.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures
to facilitate transfers of interests in the Regulation S Global Notes and in
the Rule 144A Global Notes among Participants in DTC, Euroclear and Cedel, they
are under no obligation to perform or to continue to perform such procedures,
and such procedures may be discontinued at any time. Neither the Company nor
the Trustee nor any of their respective agents will have any responsibility for
the performance by DTC, Euroclear or Cedel or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive Notes in registered
certificated form ("Certificated Notes") if (i) DTC (x) notifies the Company
that it is unwilling or unable to continue as depositary for the Global Notes
and the Company thereupon fails to appoint a successor depositary or (y) has
ceased
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to be a clearing agency registered under the Exchange Act, (ii) the Company, at
its option, notifies the Trustee in writing that it elects to cause the
issuance of the Certificated Notes or (iii) there shall have occurred and be
continuing a Default or Event of Default with respect to the Notes. In
addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon request but only upon prior written notice given to the
Trustee by or on behalf of DTC in accordance with the Indenture. In all cases,
Certificated Notes delivered in exchange for any Global Note or beneficial
interests therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures) and will bear the applicable restrictive legend
referred to in "Transfer Restrictions," unless the Company determines otherwise
in compliance with applicable law.
EXCHANGE OF CERTIFICATED NOTES FOR BOOK-ENTRY NOTES
Notes issued in certificated form may not be exchanged for beneficial
interests in any Global Note unless the transferor first delivers to the
Trustee a written certificate (in the form provided in the Indenture) to the
effect that such transfer will comply with the appropriate transfer
restrictions applicable to such Notes. See "Transfer Restrictions."
EXCHANGES BETWEEN REGULATION S NOTES AND RULE 144A NOTES
Prior to the expiration of the Distribution Compliance Period, beneficial
interests in the Regulation S Global Note may be exchanged for beneficial
interests in the Rule 144A Global Note only if such exchange occurs in
connection with a transfer of the Notes pursuant to Rule 144A and the
transferor first delivers to the Trustee a written certificate (in the form
provided in the Indenture) to the effect that the Notes are being transferred
to a person who the transferor reasonably believes to be a qualified
institutional buyer within the meaning of Rule 144A, purchasing for its own
account or the account of a qualified institutional buyer in a transaction
meeting the requirements of Rule 144A and in accordance with all applicable
securities laws of the states of the United States and other jurisdictions.
Beneficial interest in a Rule 144A Global Note may be transferred to a
person who takes delivery in the form of an interest in the Regulation S Global
Note, whether before or after the expiration of the Distribution Compliance
Period, only if the transferor first delivers to the Trustee a written
certificate (in the form provided in the Indenture) to the effect that such
transfer is being made in accordance with Rule 903 or 904 of Regulation S and
that, if such transfer occurs prior to the expiration of the Restricted Period,
the interest transferred will be held immediately thereafter through Euroclear
or Cedel.
Transfers involving an exchange of a beneficial interest in the Regulation
S Global Note for a beneficial interest in a Rule 144A Global Note or vice
versa will be effected in DTC by means of an instruction originated by the
Trustee through the DTC Deposit/Withdraw at Custodian system. Accordingly, in
connection with any such transfer, appropriate adjustments will be made to
reflect a decrease in the principal amount of the Regulation S Global Note and
a corresponding increase in the principal amount of the Rule 144A Global Note
or vice versa, as applicable. Any beneficial interest in one of the Global
Notes that is transferred to a person who takes delivery in the form of an
interest in the other Global Note will, upon transfer, cease to be an interest
in such Global Note and will become an interest in the other Global Note and,
accordingly, will thereafter be subject to all transfer restrictions and other
procedures applicable to beneficial interests in such other Global Note for so
long as it remains such an interest. The policies and practices of DTC may
prohibit transfers of beneficial interests in the Regulation S Global Note
prior to the expiration of the Distribution Compliance Period.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes
represented by the Global Notes (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of immediately
available funds to the accounts specified by the Global Note Holder. With
respect to Notes in certificated form, the Company will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available funds to the accounts specified by
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the Holders thereof or, if no such account is specified, by mailing a check to
each such Holder's registered address. The Notes represented by the Global
Notes are expected to be eligible to trade in the PORTAL market and to trade in
the Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in any certificated Notes will also be settled in
immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Note from a Participant in
DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing day
(which must be a business day for Euroclear and Cedel) immediately following
the settlement date of DTC. DTC has advised the Company that cash received in
Euroclear or Cedel as a result of sales of interests in a Global Note by or
through a Euroclear or Cedel participant to a Participant in DTC will be
received with value on the settlement date of DTC but will be available in the
relevant Euroclear or Cedel cash account only as of the business day for
Euroclear or Cedel following DTC's settlement date.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Guarantors and the Initial Purchasers will enter into the
Registration Rights Agreement on or prior to the Closing Date. Pursuant to the
Registration Rights Agreement, the Company and the Guarantors will agree to
file with the Commission the Exchange Offer Registration Statement on the
appropriate form under the Securities Act with respect to the Exchange Notes.
Upon the effectiveness of the Exchange Offer Registration Statement, the
Company will offer to the Holders of Transfer Restricted Securities pursuant to
the Exchange Offer who are able to make certain representations the opportunity
to exchange their Transfer Restricted Securities for Exchange Notes. If (i) the
Company and the Guarantors are not required to file the Exchange Offer
Registration Statement or permitted to consummate the Exchange Offer because
the Exchange Offer is not permitted by applicable law or Commission policy or
(ii) any Holder of Transfer Restricted Securities notifies the Company prior to
the 20th day following consummation of the Exchange Offer that (a) it is
prohibited by law or Commission policy from participating in the Exchange Offer
or (b) that it may not resell the Exchange Notes acquired by it in the Exchange
Offer to the public without delivering a prospectus and the prospectus
contained in the Exchange Offer Registration Statement is not appropriate or
available for such resales or (c) that it is a broker-dealer and owns Notes
acquired directly from the Company or an affiliate of the Company, the Company
and the Guarantors will file with the Commission a Shelf Registration Statement
to cover resales of the Notes by the Holders thereof who satisfy certain
conditions relating to the provision of information in connection with the
Shelf Registration Statement. The Company and the Guarantors will use their
best efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. For purposes of the
foregoing, "Transfer Restricted Securities" means each Note until (i) the date
on which such Note has been exchanged by a person other than a broker-dealer
for an Exchange Note in the Exchange Offer, (ii) following the exchange by a
broker-dealer in the Exchange Offer of a Note for an Exchange Note, the date on
which such Exchange Note is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in the Exchange Offer Registration Statement, (iii) the date on which
such Note has been effectively registered under the Securities Act and disposed
of in accordance with the Shelf Registration Statement or (iv) the date on
which such Note is distributed to the public pursuant to Rule 144 under the
Securities Act.
The Registration Rights Agreement will provide that (i) the Company and
the Guarantors will file an Exchange Offer Registration Statement with the
Commission on or prior to 100 days after the Closing Date, (ii) the Company and
the Guarantors will use their best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior to 145
days after the Closing Date, (iii) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, the Company will commence the
Exchange Offer and use its best efforts to issue, on or prior to 30 business
days after the date on which the Exchange Offer Registration Statement was
declared effective by the Commission, Exchange Notes in exchange for all Notes
tendered prior thereto in the Exchange Offer and (iv) if obligated to file the
Shelf Registration Statement, the Company and the Guarantors will use their
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best efforts to file the Shelf Registration Statement with the Commission on or
prior to 30 days after such filing obligation arises and to cause the Shelf
Registration to be declared effective by the Commission on or prior to 90 days
after such obligation arises. If (a) the Company and the Guarantors fail to
file any of the Registration Statements required by the Registration Rights
Agreement on or before the date specified for such filing, (b) any of such
Registration Statements is not declared effective by the Commission on or prior
to the date specified for such effectiveness (the "Effectiveness Target Date"),
(c) the Company fails to consummate the Exchange Offer within 30 business days
of the Effectiveness Target Date with respect to the Exchange Offer
Registration Statement or (d) the Shelf Registration Statement or the Exchange
Offer Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in the Registration Rights Agreement
(each such event referred to in clauses (a) through (d) above a "Registration
Default"), then the Company and the Guarantors will pay Liquidated Damages to
each Holder of Notes, with respect to the first 90-day period immediately
following the occurrence of the first Registration Default, in an amount equal
to $.05 per week per $1,000 principal amount of Notes held by such Holder. The
amount of the Liquidated Damages will increase by an additional $.05 per week
per $1,000 principal amount of Notes with respect to each subsequent 90-day
period until all Registration Defaults have been cured, up to a maximum amount
of Liquidated Damages for all Registration Defaults of $.50 per week per $1,000
principal amount of Notes. All accrued Liquidated Damages will be paid by the
Company on each Damages Payment Date to the Global Note Holder by wire transfer
of immediately available funds or by federal funds check and to Holders of
Certificated Securities by wire transfer to the accounts specified by them or
by mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the Voting Stock of a Person shall be
deemed to be control.
"Acquired Businesses" means each of the businesses to be acquired by the
Company pursuant to the Pending Acquisitions.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback), excluding sales of services and ancillary products in the ordinary
course of business consistent with past practices (provided that the sale,
lease,
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conveyance or other disposition of all or substantially all of the assets of
the Company and its Restricted Subsidiaries taken as a whole will be governed
by the provisions of the Indenture described above under the caption
"--Repurchase at the Option of Holders--Change of Control" and/or the
provisions described above under the caption "--Certain Covenants--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant) and (ii) the issue or sale by the Company or any of its Subsidiaries
of Equity Interests of any of the Company's Subsidiaries, in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $5.0 million or (b)
for net proceeds in excess of $5.0 million. Notwithstanding the foregoing: (i)
a transfer of assets by the Company to a Wholly Owned Restricted Subsidiary or
by a Wholly Owned Restricted Subsidiary to the Company or to another Wholly
Owned Restricted Subsidiary, (ii) an issuance of Equity Interests by a Wholly
Owned Restricted Subsidiary to the Company or to another Wholly Owned
Restricted Subsidiary, (iii) the transfer of obsolete equipment in the ordinary
course of business, (iv) the sale and leaseback of any assets within 90 days of
the acquisition of such assets and (v) a Restricted Payment that is permitted
by the covenant described above under the caption "--Certain
Covenants--Restricted Payments" will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Broadcasting Merger" means the merger of SBI Radio Acquisition
Corporation with and into SFX Broadcasting, Inc., pursuant to which SFX
Broadcasting, Inc. became a subsidiary of SBI Holding Co.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500.0 million and a Thompson Bank Watch
Rating of "B" or better, (iv) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clauses
(ii) and (iii) above entered into with any financial institution meeting the
qualifications specified in clause (iii) above and (v) commercial paper having
the highest rating obtainable from Moody's Investors Service, Inc. or Standard
& Poor's Corporation and in each case maturing within six months after the date
of acquisition and (vi) money market funds at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (i) -- (v) of
this definition.
"Cellar Door Agreement" means any agreement by the Company to acquire the
Cellar Door music promotion and entertainment business, on terms similar to the
letter of intent dated August 12, 1998, and any additional agreements related
thereto.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than the Spin-Off
or by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and its
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Subsidiaries taken as a whole to any "person" (as such term is used in Section
13(d)(3) of the Exchange Act) other than the Principal or a Related Party of
the Principal, (ii) the adoption of a plan relating to the liquidation or
dissolution of the Company, (iii) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of
which is that any "person" (as defined above), other than the Principal and his
Related Parties, becomes the "beneficial owner" (as such term is defined in
Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has
the right to acquire, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition), directly or
indirectly, of Voting Stock of the Company having more than 35% of the combined
voting power of all classes of Voting Stock of the Company then outstanding or
(iv) the first day on which a majority of the members of the Board of Directors
of the Company are not Continuing Directors.
"Compensation Committee" means a committee of at least two members of the
board of directors of the Company, a majority of whom are (i) independent
directors elected by the holders of Class A Common Stock of the Company and
(ii) not interested in the particular transactions being approved.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus, without
duplication, (i) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale, to the extent such losses were
deducted in computing such Consolidated Net Income, plus (ii) provision for
taxes based on income or profits of such Person and its Restricted Subsidiaries
for such period, to the extent that such provision for taxes was deducted in
computing such Consolidated Net Income, plus (iii) consolidated interest
expense of such Person and its Restricted Subsidiaries for such period, whether
paid or accrued and whether or not capitalized (including, without limitation,
amortization of debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing
such Consolidated Net Income, plus (iv) depreciation expense for such period,
to the extent the same was deducted in computing such Consolidated Net Income,
plus (v) all amortization expense and other non-cash expenses (excluding any
such non-cash expense to the extent that it represents an accrual of or reserve
for cash expenses in any future period) for such period, to the extent the same
was deducted in computing such Consolidated Net Income, plus (vi) unusual and
nonrecurring charges paid or accrued in 1997 or 1998 (including, but not
limited to, legal, accounting, investment banking, severance, termination,
non-compete and consent fees) relating to the Merger Agreement, the Spin-Off,
the Pending Acquisitions and transactions related thereto, minus (vii) non-cash
items increasing such Consolidated Net Income for such period, minus (viii)
except to the extent already deducted in computing Consolidated Net Income for
such period, preproduction expenses and investments in theatrical productions
incurred or made during such period by the Company or any Restricted Subsidiary
as set forth in the Company's Consolidated Statement of Cash Flows, plus (ix)
any cash return of capital paid to the Company or a Restricted Subsidiary
during such period associated with a preproduction expense or investment in
theatrical productions to the extent the same was deducted pursuant to clause
(viii) above in computing Consolidated Cash Flow for such period or a prior
period, in each case, on a consolidated basis and determined in accordance with
GAAP.
"Consolidated Indebtedness" means, with respect to any Person as of any
date of determination, the sum, without duplication, of (i) the total amount of
Indebtedness and Attributable Debt of such Person and its Restricted
Subsidiaries, plus (ii) the total amount of Indebtedness and Attributable Debt
of any other Person, to the extent that such Indebtedness or Attributable Debt
has been guaranteed by the referent Person or by one or more of its Restricted
Subsidiaries or is secured by a Lien on assets of the referent Person or any of
its Restricted Subsidiaries, plus (iii) the aggregate liquidation value of all
Disqualified Stock of such Person and all preferred stock of Restricted
Subsidiaries of such Person, in each case, determined on a consolidated basis
in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis,
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determined in accordance with GAAP; provided that (i) the Net Income (but not
loss) of any Person that is not a Restricted Subsidiary or that is accounted
for by the equity method of accounting shall be included only to the extent of
the amount of dividends or distributions paid in cash to the referent Person or
a Restricted Subsidiary thereof, (ii) the Net Income of any Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
that Restricted Subsidiary or its stockholders, (iii) the Net Income of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded, (iv) the cumulative effect of a
change in accounting principles shall be excluded and (v) the Net Income (but
not loss) of any Unrestricted Subsidiary shall be excluded, whether or not
distributed to the Company or one of its Restricted Subsidiaries.
"Contemporary Agreement" means the agreement by the Company to acquire The
Contemporary Group, dated as of December 12, 1997, and the agreements related
thereto, each as in effect on the date of the Indenture.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Facility" or "Credit Facilities" means one or more debt facilities
(including, without limitation, the Senior Credit Facility) or commercial paper
facilities with banks or other institutional lenders providing for revolving
credit loans, term loans, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow
from such lenders against such receivables) or letters of credit, in each case,
as amended, restated, modified, renewed, refunded, replaced or refinanced in
whole or in part from time to time. Indebtedness under Credit Facilities
outstanding on the date on which Notes are first issued and authenticated under
the Indenture shall be deemed to have been incurred on such date in reliance on
the exception provided by clause (i) of the definition of Permitted Debt.
"Debt to Cash Flow Ratio" means, with respect to any Person as of any date
of determination (the "Calculation Date"), the ratio of (a) the Consolidated
Indebtedness of such Person as of such date to (b) the Consolidated Cash Flow
of such Person for the four most recent full fiscal quarters ending immediately
prior to such date for which internal financial statements are available,
determined on a pro forma basis after giving effect to all acquisitions and
dispositions of assets made by such Person and its Restricted Subsidiaries from
the beginning of such four-quarter period through and including such date of
determination (including any related financing transactions) as if such
acquisitions and dispositions had occurred at the beginning of such
four-quarter period. For purposes of making the computation referred to above,
(i) acquisitions that have been made by such Person or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be calculated
without giving effect to clause (iii) of the proviso set forth in the
definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of by the Company or any of its
Restricted Subsidiaries prior to the Calculation Date, shall be excluded.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Delsener/Slater Employment Agreements" means (i) the employment agreement
dated January 2, 1997, among Broadcasting, Delsener/Slater Enterprises, Inc.
and Mitch Slater and (ii) the employment agreement dated January 2, 1997 among
Broadcasting, Delsener/Slater Enterprises, Inc. and Ron Delsener, in each case
as in effect on the date of the Indenture.
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"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature, provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the right
to require the Company to repurchase such Capital Stock upon the occurrence of
a Change of Control or an Asset Sale shall not constitute Disqualified Stock if
the terms of such Capital Stock provide that the Issuer may not repurchase or
redeem any such Capital Stock pursuant to such provisions unless such
repurchase or redemption complies with the covenant described above under the
caption "--Certain Covenants--Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness in existence on the date of the
Indenture (other than Indebtedness under Credit Facilities), until such
Indebtedness is repaid.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit and reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person without duplication, (i)
any indebtedness of such Person, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
banker's acceptances or representing Capital Lease Obligations or the balance
deferred and unpaid of the purchase price of any property or representing any
Hedging Obligations, except any such balance that constitutes an accrued
expense or trade payable, if and to the extent any of the foregoing
indebtedness (other than letters of credit and Hedging Obligations) would
appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, (ii) all indebtedness of others secured by a Lien on any
asset of such Person (whether or not such indebtedness is assumed by such
Person) and (iii) to the extent not otherwise included, the guarantee by such
Person of any indebtedness of any other Person. The amount of any Indebtedness
outstanding as of any date shall be (i) the accreted value thereof, in the case
of any Indebtedness issued with original issue discount, and (ii) the principal
amount thereof, together with any interest thereon that is more than 30 days
past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Subsidiary of the Company sells or otherwise disposes of
any Equity Interests of any direct or indirect Subsidiary of the Company such
that, after giving effect to any such sale or disposition, such Person is no
longer a Subsidiary of the Company, the Company shall be deemed to have made an
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Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Subsidiary not sold or disposed of in an
amount determined as provided in the third paragraph of the covenant described
above under the caption "--Certain Covenants--Restricted Payments."
"Marquee" means The Marquee Group, Inc., a Delaware corporation.
"Marquee Merger Agreement" means the Agreement and Plan of Merger dated
July 23, 1998, as amended, providing for the merger of a wholly owned
subsidiary of the Company with and into Marquee, and all transactions and
agreements specifically contemplated thereby or by instruments referred to
therein, each as in effect on the date of this Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Meadows Repurchase" means the transfer by Broadcasting to the Company of
an option to repurchase, and the purchase by the Company, of up to 250,838
shares of Class A Common Stock of Broadcasting for $33.00 per share, pursuant
to an option granted in connection with the Agreement of Merger, dated February
12, 1997, by and among Broadcasting, NOC Acquisition Corp., CAPCO Acquisition
Corp., QN Acquisition Corp., Nederlander of Connecticut, Inc., Connecticut
Amphitheater Development Corporation, QN Corp., Connecticut Performing Arts,
Inc. and Connecticut Performing Arts Partners and the stockholders of
Nederlander of Connecticut, Inc., Connecticut Amphitheater Development
Corporation and QN Corp. listed on the signature pages thereto and the transfer
of such stock to Broadcasting prior to the Broadcasting Merger.
"Merger Agreement" means the Agreement and Plan of Merger dated as of
August 24, 1997, that provides for the Broadcasting Merger and all transactions
and agreements specifically contemplated thereby or by instruments referred to
therein, each as in effect on the date of the Indenture.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary gain (but not loss),
together with any related provision for taxes on such extraordinary gain (but
not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company
or any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"Non-Guarantor Subsidiaries" means Walnut Creek Amphitheater Partnership,
Coral Sky Amphitheater Partnership, PACE Entertainment Charitable Foundation
and PTG-Florida, Inc./BSMG Joint Venture.
"Non-Recourse Debt" means Indebtedness: (i) as to which neither the
Company nor any of its Restricted Subsidiaries (a) provides credit support of
any kind (including any undertaking, agreement or
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instrument that would constitute Indebtedness), (b) is directly or indirectly
liable (as a guarantor or otherwise) or (c) constitutes the lender; (ii) no
default with respect to which (including any rights that the holders thereof
may have to take enforcement action against an Unrestricted Subsidiary) would
permit (upon notice, lapse of time or both) any holder of any other
Indebtedness (other than the Notes being offered hereby) of the Company or any
of its Restricted Subsidiaries to declare a default on such other Indebtedness
or cause the payment thereof to be accelerated or payable prior to its stated
maturity; and (iii) as to which the lenders have been notified in writing that
they will not have any recourse to the stock or assets of the Company or any of
its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Old Notes" means the Company's outstanding 9 1/8% Senior Subordinated
Notes due February 1, 2008.
"Pace Agreement" means the agreement by the Company to acquire PACE
Entertainment Corporation (including the Agreements relating to the Sony
Acquisition and the Blockbuster Acquisition to acquire a 100% interest in
Pavilion Partners), dated December 12, 1997 and the agreements related thereto,
each as in effect on the date of the Indenture.
"Pace Acquisition Facility" means the agreement by the Company, pursuant
to the Pace Agreement, to provide to PACE Entertainment Corporation up to an
aggregate of $25.0 million to be used to fund certain acquisitions, as in
effect on the date of the Indenture.
"Pending Acquisitions" means the acquisition by the Company of (i) Cellar
Door and (ii) Marquee and including the transactions and agreements
specifically related thereto.
"Permitted Business" means the live entertainment business and any
business reasonably similar, complementary, ancillary or related thereto,
including the Pending Acquisitions.
"Permitted Investments" means (i) any Investment in the Company or in a
Guarantor; (ii) any Investment in Cash Equivalents; (iii) any Investment by the
Company or any Restricted Subsidiary of the Company in a Person engaged in a
Permitted Business, if (a) as a result of, or concurrently with, such
Investment such Person becomes a Guarantor or (b) as a result of, or
concurrently with, such Investment such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Guarantor; or (c) the
Company or a Guarantor has entered into a binding agreement to acquire such
Person or all or substantially all of the assets of such Person, which
agreement is in effect on the date of such Investment, and such Person becomes
a Guarantor or such transaction is consummated, in each case within 180 days of
the date of such Investment; (iv) any Restricted Investment made as a result of
the receipt of non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales"; (v) any obligations or
shares of Capital Stock received in connection with or as a result of a
bankruptcy, workout or reorganization of the issuer of such obligations or
shares of Capital Stock; (vi) any Investment received involuntarily; (vii) any
acquisition of assets solely in exchange for the issuance of Equity Interests
(other than Disqualified Stock) of the Company; (viii) any Investment made
under the Pace Acquisition Facility pursuant to the Pace Agreement as in effect
on the date of the Indenture; (ix) Investments owned by any of the Acquired
Businesses as of the date such Acquired Business is acquired; (x) other
Investments in Persons engaged in Permitted Businesses (measured on the date
each such Investment was made and without giving effect to subsequent changes
in value), when taken together with all other Investments made pursuant to this
clause (x) that are at the time outstanding, not to exceed 5% of Total Tangible
Assets; (xi) the consummation of the Pending Acquisitions; (xii) the Meadows
Repurchase and the Series E Preferred Repurchase; provided that the Company
receives either (x) a cash payment from Broadcasting or Broadcasting Buyer or
an Affiliate thereof at or prior to the date of the Merger at least equal to
the aggregate amount expended by the Company in the Meadows Repurchase and the
Series E Preferred Repurchase less $3.0 million or (y) an increase in favor of
the Company in the Working Capital Adjustment (including the avoidance of a
decrease) contemplated by the Merger Agreement in an
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amount at least equal to the aggregate amount expended by the Company in the
Meadows Repurchase and the Series E Preferred Repurchase less $3.0 million or
(z) any combination thereof adding up to an amount at least equal to the
aggregate amount expended by the Company in the Meadows Repurchase and the
Series E Preferred Repurchase less $3.0 million; and (xiii) other Investments
in any Person (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (xiii) that are at the time
outstanding, not to exceed $4.0 million.
"Permitted Liens" means (i) Liens securing Senior Debt that was permitted
by the terms of the Indenture to be incurred; (ii) Liens in favor of the
Company or any of its Restricted Subsidiaries; (iii) Liens on property of a
Person existing at the time such Person is merged into or consolidated with the
Company or any Restricted Subsidiary of the Company; provided that such Liens
were not incurred in contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with the Company; (iv) Liens on property existing at the time of acquisition
thereof by the Company or any Restricted Subsidiary of the Company, provided
that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (vi) Liens existing on the date of
the Indenture; (vii) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded, provided
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefore; and (viii) Liens incurred
in the ordinary course of business of the Company or any Restricted Subsidiary
of the Company with respect to obligations that do not exceed $2.0 million at
any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries or any Disqualified Stock of the Company
issued in exchange for, or the net proceeds of which are used to extend,
refinance, renew, replace, defease or refund other Indebtedness of the Company
or any of its Restricted Subsidiaries; provided that: (i) the principal amount
(or accreted value or liquidation preference, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or accreted
value, if applicable), plus accrued interest on, the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is pari passu with the Notes, such Permitted Refinancing Indebtedness
is pari passu with or subordinated in right of payment to the Notes or is
Disqualified Stock; (iv) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Notes, such Permitted Refinancing Indebtedness is subordinated in right of
payment to the Notes on terms at least as favorable to the Holders of Notes as
those contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded or is Disqualified Stock;
and (v) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary that is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded, or such Disqualified Stock
is issued by the Company, as applicable.
"Principal" means Robert F.X. Sillerman.
"Related Party" with respect to the Principal means (i) any spouse or
immediate family member of the Principal or (ii) any trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners, owners
or Persons beneficially holding an 80% or more controlling interest of which
consist of the Principal and/or such other Persons referred to in the
immediately preceding clause (i).
"Restricted Investment" means an Investment other than a Permitted
Investment.
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"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Credit Facility" means that certain credit agreement by and among
the Company, the Guarantors, the lenders party thereto, The Bank of New York,
as Administrative Agent, Lehman Commercial Paper Inc. and Goldman Credit
Partners L.P., each as Co-Agents, as contemplated by that certain commitment
letter by and among the Company, the Guarantors, The Bank of New York, as
Arranger, and Lehman Brothers Inc. and Goldman, Sachs & Co., each as
Co-Arrangers, each as amended, restated, modified, renewed, refunded, replaced
or refinanced in whole or in part from time to time.
"Series E Preferred Repurchase" means the purchase by the Company of up to
$14.2 million in liquidation preference of 12 5/8% Series E Cumulative
Exchangeable Preferred Stock due October 31, 2006 of Broadcasting and the
dividend or other transfer of such stock to Broadcasting prior to the
Broadcasting Merger.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"Spin-Off" means the distribution of the common stock of the Company pro
rata to the holders of SFX Broadcasting, Inc. or other disposition pursuant to,
or as permitted by, the Merger Agreement of all the capital stock and assets of
the Company and its Subsidiaries.
"Spin-Off Transaction" means the Spin-Off, the Merger Agreement and
related transactions described or referred to in the Offering Memorandum of the
Company dated February 5, 1998.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a
combination thereof).
"Total Tangible Assets" means, as of any date, (i) the total consolidated
assets of the Company and its Restricted Subsidiaries, as set forth on the
Company's most recently available internal consolidated balance sheet, minus
(ii) the total consolidated intangible assets of the Company and its Restricted
Subsidiaries, as set forth on such consolidated balance sheet.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted
Subsidiary than those that might be obtained at the time from Persons who are
not Affiliates of the Company; (c) is a Person with respect to which neither
the Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (1) to subscribe for additional Equity Interests or (2) to maintain
or preserve such Person's financial condition or to cause such Person to
achieve any specified levels of operating results; (d) has not guaranteed or
otherwise directly or indirectly provided credit support for any Indebtedness
of the Company or any of its Restricted Subsidiaries; and (e) has at least one
director on its board of directors that is not a director or executive officer
of the Company or any of its Restricted Subsidiaries and has at least one
executive officer that is not a director or executive officer of the Company or
any of its Restricted Subsidiaries.
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"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board
of Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following summary describes material U.S. federal income tax
consequences of the ownership of the Notes to holders of Notes as of the date
hereof. As used herein, a "U.S. Holder" means a holder of a Note that is a
citizen or resident of the United States, a corporation, a partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof, an estate the income of which is subject to U.S.
federal income taxation regardless of its source, or a trust which is subject
to the supervision of a court within the United States and the control of a
U.S. fiduciary as described in Section 7701(a)(30) of the Internal Revenue Code
of 1986, as amended (the "Code"). A "Non-U.S. Holder" is a holder of a Note
that is not a U.S. Holder. Except where noted, it deals only with Notes held as
capital assets and does not deal with special situations, such as those of
dealers in securities or currencies, financial institutions, life insurance
companies, tax exempt organizations, persons holding Notes as part of a hedging
or conversion transaction or a straddle or holders of Notes whose "functional
currency" is not the U.S. dollar. Furthermore, the discussion below is based
upon the provisions of the Code, and regulations, rulings and judicial
decisions thereunder as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in federal income tax
consequences different from those discussed below. In addition, except as
otherwise indicated, the following does not consider the effect of any
applicable foreign, state or local or other tax laws or estate or gift tax
considerations. Persons considering the purchase, ownership or disposition of
Notes should consult their own tax advisors concerning the federal income and
estate tax consequences in light of their particular situations, as well as any
consequences arising under the laws of any other taxing jurisdiction or under
any applicable treaty.
STATED INTEREST ON NOTES; LIQUIDATED DAMAGES; CHANGE OF CONTROL
Except as set forth below, interest on a Note will generally be taxable to
a U.S. Holder as ordinary income from domestic sources at the time it is paid
or accrued in accordance with the U.S. Holder's method of accounting for U.S.
federal income tax purposes.
The Company intends to take the position that the possibility that the
Liquidated Damages described above under "Description of the Notes--Liquidated
Damages" will be paid, or that a U.S. Holder will acquire the option to require
the Company to purchase such holder's Notes at 101% of the principal amount
thereof described in "Description of the Notes--Change of Control" (the "Change
of Control Put Option"), is remote, and that therefore the Liquidated Damages
provisions and Change of Control Put Option do not give rise to any original
issue discount for United States federal income tax purposes. Thus, the Company
intends to take the position that the Liquidated Damages will be taxable to a
holder of a Note as interest income in accordance with the holder's usual
method of income tax accounting and that the Change of Control Put Option, if
exercised, will give rise to an increase in the amount realized on the Note.
The Internal Revenue Service (the "IRS") may take a different position,
however, which could affect the timing of the U.S. Holder's income with respect
to the Liquidated Damages or the Change of Control Put Option.
MARKET DISCOUNT
If a U.S. Holder purchases a Note for an amount that is less than its
stated redemption price at maturity, the amount of the difference will be
treated as "market discount" for federal income tax purposes, unless such
difference is less than a specified de minimis amount. Under the market
discount rules, a U.S. Holder will be required to treat any principal payments
on, or any gain on the sale, exchange, retirement or other disposition of, a
Note as ordinary income to the extent of the market discount that has not
previously been included in income and is treated as having accrued on such
Note at the time of such payment or disposition. In addition, the U.S. Holder
may be required to defer, until the maturity of the Note or its earlier
disposition in a taxable transaction, the deduction of all or a portion of the
interest expense on any indebtedness incurred or continued to purchase or carry
such Note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Note, unless the U.S.
Holder elects to accrue on a constant interest method. A U.S. Holder of a Note
may elect to include market discount in income currently as it accrues
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(on either a ratable or constant interest method), in which case the rule
described above regarding deferral of interest deductions will not apply. This
election to include market discount in income currently, once made, applies to
all market discount obligations acquired on or after the first taxable year to
which the election applies and may not be revoked without the consent of the
IRS.
AMORTIZABLE BOND PREMIUM
A U.S. Holder that purchases a Note for an amount in excess of the sum of
all amounts payable on the Note after the purchase date other than stated
interest will be considered to have purchased the Note at a "premium." A U.S.
Holder generally may elect to amortize the premium over the remaining term of
the Note on a constant yield method. The amount amortized in any year will be
treated as a reduction of the U.S. Holder's interest income from the Note. Bond
premium on a Note held by a U.S. Holder that does not make such an election
will decrease the gain or increase the loss otherwise recognized on disposition
of the Note. The election to amortize premium on a constant yield method, once
made, applies to all debt obligations held or subsequently acquired by the
electing U.S. Holder on or after the first day of the first taxable year to
which the election applies and may not be revoked without the consent of the
IRS.
SALE, EXCHANGE AND RETIREMENT OF NOTES
A U.S. Holder's tax basis in a Note will, in general, be the U.S. Holder's
cost therefor, increased by market discount previously included in income by
the U.S. Holder and reduced by any amortized premium. Upon the sale, exchange,
retirement or other disposition of a Note, a U.S. Holder will generally
recognize gain or loss equal to the difference between the amount realized upon
the sale, exchange, retirement or other disposition and such holder's tax basis
in the Note. Except as described above with respect to market discount, such
gain or loss will be capital gain or loss and will be long-term capital gain or
loss if at the time of sale, exchange, retirement or other disposition the Note
has been held for more than one year. Net capital gain recognized by an
individual from the sale, exchange or retirement of a Note that has been held
more than 12 months will generally be subject to tax at a rate not to exceed
20%. The deductibility of capital losses is subject to limitations.
The exchange of a Note by a U.S. Holder for an Exchange Note should not
constitute a taxable exchange. Consequently, no gain or loss will be recognized
by a holder upon receipt of an Exchange Note, the holding period of the
Exchange Note will include the holding period the Note and the basis of the
Exchange Note will be the same as the basis of the Note immediately before the
exchange.
NON-U.S. HOLDERS
Under present U.S. federal income and estate tax law, and subject to the
discussion below concerning backup withholding:
(a) no withholding of U.S. federal income tax will be required with respect
to the payment by the Company or any paying agent of principal, premium,
if any, or interest on or Liquidated Damages, if any, in respect of a
Note owned by a Non-U.S. Holder (the "Portfolio Interest Exception"),
provided (i) that the beneficial owner does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote within the meaning of
section 871(h)(3) of the Code and the regulations thereunder, (ii) the
beneficial owner is not a controlled foreign corporation that is related
to the Company, actually or constructively, through stock ownership,
(iii) the beneficial owner is not a bank whose receipt of interest on a
Note is described in section 881(c)(3)(A) of the Code and (iv) the
beneficial owner satisfies the statement requirement (described
generally below) set forth in section 871(h) and section 881(c) of the
Code and the regulations thereunder;
(b) no withholding of U.S. federal income tax will be required with respect
to any gain or income realized by a Non-U.S. Holder upon the sale,
exchange, retirement or other disposition of a Note; and
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(c) a Note beneficially owned by an individual who at the time of death is
a Non-U.S. Holder will not be subject to U.S. federal estate tax as a
result of such individual's death, provided that such individual does
not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the Company entitled to vote
within the meaning of section 871 (h) (3) of the Code and provided that
the interest payments with respect to such Note would not have been, if
received at the time of such individual's death, effectively connected
with the conduct of a U.S. trade or business by such individual.
To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified procedures, a paying
agent of the Company with a statement to the effect that the beneficial owner
is not a U.S. person. Pursuant to current temporary Treasury regulations, these
requirements will be met if (i) the beneficial owner provides his name and
address, and certifies, under penalties of perjury, that he is not a U.S.
person (which certification may be made on an Internal Revenue Service Form W-8
(or successor form)) or (ii) a financial institution holding the Note on behalf
of the beneficial owner certifies, under penalties of perjury, that such
statement has been received by it and furnishes a paying agent with a copy
thereof.
If a Non-U.S. Holder cannot satisfy the requirements of the Portfolio
Interest Exception described in (a) above, interest payments on a Note made to
such Non-U.S. Holder will be subject to a 30% withholding tax unless the
beneficial owner of the Note provides the Company or its paying agent, as the
case may be, with a properly executed (i) IRS Form 1001 (or successor form)
claiming an exemption from withholding under the benefit of a tax treaty or
(ii) IRS Form 4224 (or successor form) stating that interest paid on the Note
is not subject to withholding tax because it is effectively connected with the
beneficial owner's conduct of a trade or business in the United States.
Recently issued regulations, effective for payments made after December 31,
1999, have changed to some extent the documentation requirements discussed
above. Non-U.S. Holders are advised to consult their own tax advisors to
discuss the effect of these regulations in light of such Holders' situations.
If a Non-U.S. Holder is engaged in a trade or business in the United
States and payment on a Note is effectively connected with the conduct of such
trade or business, the Non-U.S. Holder, although exempt from the withholding
tax discussed above, will be subject to U.S. federal income tax on such payment
on a net income basis in the same manner as if it were a U.S. Holder. In
addition, if such holder is a foreign corporation, it may be subject to a
branch profits tax equal to 30% of its effectively connected earnings and
profits for the taxable year, subject to adjustments. For this purpose, such
payment on a Note will be included in such foreign corporation's earnings and
profits.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of a Note generally will not be subject to U.S. federal income tax
unless (i) such gain or income is effectively connected with a trade or
business in the United States of the Non-U.S. Holder, or (ii) in the case of a
Non-U.S. Holder who is an individual, such individual is present in the United
States for a period or periods aggregating 183 days or more in the taxable year
of such sale, exchange, retirement or other disposition, and certain other
conditions are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments on a
Note and to the proceeds of sale of a Note made to U.S. Holders other than
certain exempt recipients (such as corporations). A 31% backup withholding tax
will apply to such payments if the U.S. Holder (i) fails to furnish or certify
his correct taxpayer identification number to the payor in the manner
requested, (ii) is notified by the IRS that he has failed to report payments of
interest and dividends properly, or (iii) under certain circumstances, fails to
certify that he has not been notified by the IRS that he is subject to backup
withholding for failure to report interest and dividend payments.
No information reporting or backup withholding will be required with
respect to payments made by the Company or any paying agent to Non-U.S. Holders
if a statement described in (a)(iv) under "--Non-U.S. Holders" has been
received and the payor does not have actual knowledge that the beneficial owner
is a U.S. persons.
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In addition, backup withholding and information reporting will not apply
if payments on a Note are paid or collected by a foreign office of a custodian,
nominee or other foreign agent on behalf of the beneficial owner of such Note,
or if a foreign office of a broker (as defined in applicable Treasury
regulations) pays the proceeds of the sale of a Note to the owner thereof. If,
however, such nominee, custodian, agent or broker is, for U.S. federal income
tax purposes, a U.S. person, a controlled foreign corporation or a foreign
person that derives 50% or more of its gross income for certain periods from
the conduct of a trade or business in the United States, such payments will be
subject to information reporting (but not backup withholding), unless (i) such
custodian, nominee, agent or broker has documentary evidence in its records
that the beneficial owner is not a U.S. person and certain other conditions are
met or (ii) the beneficial owner otherwise establishes an exemption. Temporary
Treasury regulations provide that the Treasury is considering whether backup
withholding will apply with respect to payments of principal, interest or the
proceeds of a sale that are not subject to backup withholding under the current
regulations.
Payments on a Note paid to the beneficial owner of a Note by a U.S. office
of a custodian, nominee or agent, or the payment by the U.S. office or a broker
of the proceeds of sale of a Note, will be subject to both backup withholding
and information reporting unless the beneficial owner provides the statement
referred to in (a)(iv) above and the payor does not have actual knowledge that
the beneficial owner is a U.S. person or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a credit against such holder's U.S. federal income tax liability and may
entitle such holder to a refund, provided the required information is furnished
to the IRS.
The Treasury Department has issued final regulations regarding certain of
the backup withholding and information reporting rules discussed above. In
general, the final regulations, which are generally effective for payments made
after December 31, 1999, subject to certain transition rules, do not alter the
substantive withholding and information reporting requirements but unify
current forms and procedures.
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PRIVATE PLACEMENT
TRANSFER RESTRICTIONS
Because the following restrictions will apply unless the Company completes
the Exchange Offer for the Notes or causes a registration statement with
respect to resales of the Notes to be declared effective, purchasers are
advised to consult legal counsel prior to making any offer, resale, pledge or
transfer of Notes. The Company is obligated to have a registration statement
for the Exchange Offer for the Notes, or cause a registration statement with
respect to resales of the Notes, to be declared effective, on or prior to the
date which is 145 days after the Closing Date. See "Description of the Notes --
Registration Rights; Liquidated Damages."
The Notes have not been registered under the Securities Act and may not be
offered or sold in the United States or to, or for the account or benefit of,
U.S. persons except pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act. Accordingly,
the
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Notes are being offered and sold only to "qualified institutional buyers" (as
defined in Rule 144A) in compliance with Rule 144A. After the initial offering,
the Notes may be sold to (i) qualified institutional buyers in reliance on, and
in conformity with, Rule 144A, (ii) to Institutional Accredited Investors that,
prior to their purchase of Notes, deliver to the Trustee a letter containing
certain representations and agreements in the form attached to this Offering
Memorandum as Appendix A and (iii) outside the United States to persons other
than U.S. persons ("foreign purchasers"), which term shall include dealers or
other professional fiduciaries in the United States acting on a discretionary
basis for foreign beneficial owners (other than an estate or trust), in
reliance upon Regulation S.
By its purchase of Notes, each purchaser of Notes will be deemed to:
1. represent that it is purchasing the Notes for its own account or an
account with respect to which it exercises sole investment discretion and
that it and any such account is a qualified institutional buyer and is
aware that the sale to it is being made in reliance on Rule 144A;
2. acknowledge that the Notes have not been registered under the
Securities Act and may not be offered or sold within the United States or
to, or for the account or benefit of, U.S. persons except as set forth
below;
3. agree that if it should resell or otherwise transfer the Notes within
the time period referred to in Rule 144(k) under the Securities Act after
the issuance of such Notes, it will do so only (i) to the Company or any
subsidiary thereof, (ii) to a qualified institutional buyer in compliance
with Rule 144A, (iii) inside the United States to an Institutional
Accredited Investor that, prior to such transfer, furnishes to the Trustee
a signed letter containing certain representations and agreements relating
to the restrictions on transfer of the Notes (the form of which letter can
be obtained from the Trustee) and, if such transfer is in respect of an
aggregate principal amount of Notes of less than $100,000, an opinion of
counsel acceptable to the Company that such transfer is in compliance with
the Securities Act, (iv) outside the United States in compliance with Rule
904 under the Securities Act, (v) pursuant to the exemption from
registration provided by Rule 144 under the Securities Act (if available)
or (vi) pursuant to an effective registration statement under the
Securities Act. Subject to the procedures set forth under "Description of
the Notes--Book-Entry; Delivery and Form," prior to any proposed transfer
of the Notes (otherwise than pursuant to an effective registration
statement) within the period referred to in Rule 144(k) under the
Securities Act, the Holder thereof must check the appropriate box set forth
on the reverse of its certificate relating to the manner of such transfer
and submit the certificate to the Trustee;
4. agree that it will deliver to each person to whom it transfers any of
the Notes notice of any restrictions on transfer of such Notes;
5. understand that, unless or until registered under the Securities Act,
the Notes (other than those issued to foreign purchasers after expiration
of the applicable period and appropriate certification) will bear a legend
to the following effect (as applicable) unless otherwise agreed by the
Company and the holder thereof:
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS
EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE
HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL
"ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF
REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR")
OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2)
AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO UNDER RULE 144(k)
UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS NOTE,
RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A)
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TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL
BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE
UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH
TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS
NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE), AND, IF SUCH
TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $100,000,
AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN
COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN
OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E)
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH
PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF
THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN THE TIME
PERIOD REFERRED TO ABOVE, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH
ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS
CERTIFICATE TO THE TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL
ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE
TRUSTEE AND THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER
INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED
HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON"
HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE
INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY
TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS; and
6. acknowledge that the Company, the Initial Purchasers and others will
rely upon the truth and accuracy of the foregoing acknowledgements,
representations and agreements, and agrees that if any of the acknowledgements,
representations or warranties deemed to have been made by it by its purchase of
Notes are no longer accurate, it shall promptly notify the Company and the
Initial Purchasers. If it is acquiring any Note as a fiduciary or agent for one
or more investor accounts, it represents that it has sole investment discretion
with respect to each such account and it has full power to make the foregoing
acknowledgements, representations and agreements on behalf of each such
account.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by Baker & McKenzie, New York, New York. Certain legal matters relating
to this Offering will be passed upon for the Initial Purchasers by Latham &
Watkins, New York, New York.
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INDEPENDENT AUDITORS
The consolidated financial statements of the Company as of December 31,
1997, and for the year ended December 31, 1997; the consolidated financial
statements of Delsener/Slater Enterprises, Ltd. and Affiliated Companies
(Predecessor) as of December 31, 1996, and for the years ended December 31,
1995 and 1996; the consolidated financial statements of PACE Entertainment
Corporation and Subsidiaries as of September 30, 1996, and for the years ended
September 30, 1995 and 1996; the combined financial statements of Contemporary
Group as of December 31, 1996 and 1997, and for the three years in the period
ended December 31, 1997; the combined financial statements of The Album
Network, Inc. and Affiliated Companies as of September 30, 1996 and 1997, and
for the years ended September 30, 1996 and 1997; the consolidated financial
statements of BG Presents, Inc. and Subsidiaries as of January 31, 1997 and
1998 and for the three years in the period ended January 31, 1998; the combined
financial statements of Concert/Southern Promotions and Affiliated Companies as
of December 31, 1997, and for the year ended December 31, 1997; the combined
financial statements of Falk Associates Management Enterprises, Inc. as of
December 31, 1996 and 1997, and for the years ended December 31, 1996 and 1997;
the combined financial statements of Blackstone Entertainment LLC as of
December 31, 1996 and 1997 and for the years ended December 31, 1996 and 1997;
and the consolidated financial statements of The Marquee Group, Inc. as of
December 31, 1997 and for the years ended December 31, 1996 and 1997, included
in this Offering Memorandum have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein.
Arthur Andersen LLP, independent public accountants, audited the following
financial statements (as set forth in their reports thereon appearing elsewhere
herein), each appearing in this Offering Memorandum: the combined financial
statements of Connecticut Performing Arts, Inc. and Connecticut Performing Arts
Partners as of December 31, 1995 and 1996, and for the years ended December 31,
1995 and 1996; the combined financial statements of Deer Creek Partners, L.P.
and Murat Centre, L.P. as of December 31, 1995 and 1996, and for the years
ended December 31, 1995 and 1996; the consolidated financial statements of PACE
Entertainment Corporation and Subsidiaries as of September 30, 1997, and for
the year ended September 30, 1997; the consolidated financial statements of
Pavilion Partners as of September 30, 1997, and for the year ended September
30, 1997; the financial statements of Riverport Performing Arts Centre, Joint
Venture as of December 31, 1997 and 1996 and for the years ended December 31,
1997 and 1996; and the consolidated financial statements of Magicworks
Entertainment Incorporated as of December 31, 1996 and 1997, and for the years
ended December 31, 1996 and 1997.
The financial statements of Pavilion Partners for the year ended October
31, 1995, for the eleven months ended September 30, 1996 and as of September
30, 1996 included in this Offering Memorandum have been so included in reliance
on the report of Price Waterhouse LLP, independent accountants.
AVAILABLE INFORMATION
The Company is a reporting company under the Exchange Act and files
annual, quarterly and current reports, proxy statements and other information
with the SEC. For copies of such reports, statements or other information with
respect to the Company, reference is hereby made to the Company's documents
filed with the SEC, which may be inspected without charge at the office of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the SEC located at Seven World Trade Center, 13th Floor, New York,
New York 10048 and at 500 West Madison (Suite 1400), Chicago, Illinois 60661.
Copies of this material may also be obtained at prescribed rates from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. The SEC maintains a Web site at http:// www.sec.gov that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC. Statements contained in this
Offering Memorandum as to the contents of any contract or other document
referred to are not necessarily complete; in each instance, reference is made
to the copy of the contract or document filed with the SEC, and each such
statement is qualified in all respects by this reference.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SFX ENTERTAINMENT, INC.
Consolidated Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997 F-5
Consolidated Statements of Operations for the three months ended September 30, 1998 and
1997 (unaudited) ..................................................................... F-6
Consolidated Statements of Operations for the nine months ended September 30, 1998
and 1997 (unaudited) ................................................................. F-7
Consolidated Statements of Shareholders' Equity for the nine months ended September 30,
1998 and 1997 (unaudited) ............................................................ F-8
Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and
1997 (unaudited) ..................................................................... F-9
Notes to Consolidated Financial Statements (unaudited) ................................ F-10
Reports of Independent Auditors ....................................................... F-20
Consolidated Balance Sheets as of December 31, 1997 and 1996 (Predecessor) ............ F-22
Consolidated Statements of Operations for the years ended December 31, 1997, 1996
(Predecessor) and 1995 (Predecessor) ................................................. F-23
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996
(Predecessor) and 1995 (Predecessor) ................................................. F-24
Notes to Consolidated Financial Statements ............................................ F-25
CONNECTICUT PERFORMING ARTS, INC. AND CONNECTICUT PERFORMING
ARTS PARTNERS
Report of Independent Public Accountants .............................................. F-39
Combined Balance Sheets as of December 31, 1995 and 1996 .............................. F-40
Combined Statements of Operations for the years ended December 31, 1995 and 1996 ...... F-41
Combined Statements of Shareholders' and Partners' Equity (Deficit) for the years ended
December 31, 1995 and 1996 ........................................................... F-42
Combined Statements of Cash Flows for the years ended December 31, 1995 and 1996 ...... F-43
Notes to Combined Financial Statements ................................................ F-44
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
Report of Independent Public Accountants .............................................. F-52
Combined Balance Sheets as of December 31, 1995 and 1996 .............................. F-53
Combined Statements of Operations and Partners' Equity (Deficit) for the years ended
December 31, 1995 and 1996 ........................................................... F-55
Combined Statements of Cash Flows for the years ended December 31, 1995 and 1996 ...... F-56
Notes to Combined Financial Statements ................................................ F-57
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants .............................................. F-63
Report of Independent Auditors ........................................................ F-64
Consolidated Balance Sheets as of September 30, 1996 and 1997 and December 31, 1997
(unaudited) .......................................................................... F-65
Consolidated Statements of Operations for the years ended September 30, 1995, 1996 and
1997 and the three months ended December 31, 1996 and 1997 (unaudited) ............... F-66
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Consolidated Statements of Shareholders' Equity for the years ended September 30, 1995,
1996 and 1997 and the three months ended December 31, 1997 (unaudited) ................. F-67
Consolidated Statements of Cash Flows for the years ended September 30, 1995, 1996 and
1997 and the three months ended December 31, 1996 and 1997 (unaudited) ................. F-68
Notes to Consolidated Financial Statements .............................................. F-69
PAVILION PARTNERS
Report of Independent Public Accountants ................................................ F-83
Report of Independent Accountants ....................................................... F-84
Consolidated Balance Sheets as of September 30, 1996 and 1997 and December 31, 1997
(unaudited) ............................................................................ F-85
Consolidated Statements of Income for the year ended October 31, 1995, eleven months
ended September 30, 1996, the year ended September 30, 1997 and the three months ended
December 31, 1996 and 1997 (unaudited) ................................................. F-86
Consolidated Statements of Partners' Capital for the year ended October 31, 1995, eleven
months ended September 30, 1996, the year ended September 30, 1997 and the three
months ended December 31, 1997 (unaudited) ............................................. F-87
Consolidated Statements of Cash Flows for the year ended October 31, 1995, eleven months
ended September 30, 1996, the year ended September 30, 1997 and the three months ended
December 31, 1996 and 1997 (unaudited) ................................................. F-88
Notes to Consolidated Financial Statements .............................................. F-89
CONTEMPORARY GROUP
Report of Independent Auditors .......................................................... F-98
Combined Balance Sheets as of December 31, 1996 and 1997 ................................ F-99
Combined Statements of Operations for the years ended December 31, 1995, 1996 and 1997 .. F-100
Combined Statements of Cash Flows for the years ended December 31, 1996 and 1997 ........ F-101
Combined Statements of Stockholders' Equity for the years ended December 31, 1996 and
1997 ................................................................................... F-102
Notes to Combined Financial Statements .................................................. F-103
RIVERPORT PERFORMING ART CENTRE, JOINT VENTURE
Report of Independent Public Accountants ................................................ F-107
Balance Sheets as of December 31, 1997 and 1996 ......................................... F-108
Statements of Income and Changes in Partners' Equity for the years ended December 31,
1997 and 1996 .......................................................................... F-109
Statements of Cash Flows for the years ended December 31, 1997 and 1996 ................. F-110
Notes to Financial Statements ........................................................... F-111
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
Report of Independent Auditors .......................................................... F-114
Combined Balance Sheets as of September 30, 1996 and 1997 ............................... F-115
Combined Balance Sheets as of December 31, 1997 (unaudited) ............................. F-116
Combined Statements of Operations and Stockholders' Deficit for the years ended September
30, 1996 and 1997 ...................................................................... F-117
Combined Statements of Operations and Stockholders' Deficit for the three months ended
December 31, 1997 (unaudited) .......................................................... F-118
</TABLE>
F-2
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Combined Statements of Cash Flows for the years ended September 30, 1996 and 1997 ........ F-119
Combined Statements of Cash Flows for the three months ended December 31, 1997
(unaudited) ............................................................................. F-120
Notes to Combined Financial Statements ................................................... F-121
BG PRESENTS, INC. AND SUBSIDIARIES
Report of Independent Auditors ........................................................... F-125
Consolidated Balance Sheets as of January 31, 1997 and 1998 .............................. F-126
Consolidated Income Statements for the years ended January 31, 1996, 1997 and 1998 ....... F-127
Consolidated Statements of Cash Flows for the years ended January 31, 1996, 1997 and 1998 F-128
Consolidated Statements of Stockholders' Equity for the years ended January 31, 1996, 1997
and 1998 ................................................................................ F-129
Notes to Consolidated Financial Statements .............................................. F-130
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
Report of Independent Auditors ........................................................... F-136
Combined Balance Sheet as of December 31, 1997 ........................................... F-137
Combined Statement of Operations for the year ended December 31, 1997 .................... F-138
Combined Statement of Cash Flows for the year ended December 31, 1997 .................... F-139
Combined Statements of Stockholders' Equity for the year ended December 31, 1997 ......... F-140
Notes to Combined Financial Statements ................................................... F-141
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
Report of Independent Auditors ........................................................... F-144
Combined Balance Sheets as of December 31, 1996 and 1997 ................................. F-145
Combined Statements of Operations and Stockholders' Equity (Deficit) for the years ended
December 31, 1996 and 1997 .............................................................. F-146
Combined Statements of Cash Flows for the years ended December 31, 1996 and 1997 ......... F-147
Notes to Combined Financial Statements ................................................... F-148
BLACKSTONE ENTERTAINMENT LLC
Report of Independent Auditors ........................................................... F-152
Combined Balance Sheets as of December 31, 1996 and 1997 ................................. F-153
Combined Statements of Income for the years ended December 31, 1996 and 1997 ............. F-154
Combined Statements of Cash Flows for the years ended December 31, 1996 and 1997 ......... F-155
Combined Statement of Members' Equity .................................................... F-156
Notes to Combined Financial Statements ................................................... F-157
MAGICWORKS ENTERTAINMENT INCORPORATED
Report of Independent Certified Public Accountants ....................................... F-164
Consolidated Balance Sheets as of December 31, 1997 and 1996 ............................. F-165
Consolidated Statements of Income for the years ended December 31, 1997 and 1996 ........ F-166
Consolidated Statements of Stockholders Equity for the years ended December 31, 1997 and
1996 .................................................................................... F-167
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996 ..... F-168
Notes to Consolidated Financial Statements ............................................... F-169
</TABLE>
F-3
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
THE MARQUEE GROUP, INC.
Consolidated Balance Sheets at September 30, 1998 (unaudited) and December 31, 1997 ... F-181
Consolidated Statements of Operations for the three and nine months ended September 30,
1998 and 1997 (unaudited) ............................................................ F-182
Consolidated Statements of Cash Flows for the three and nine months ended September 30,
1998 and 1997 (unaudited) ............................................................ F-183
Consolidated Statements of Stockholders' Equity for the nine months ended September 30,
1998 (unaudited) ..................................................................... F-184
Notes to Consolidated Financial Statements ............................................ F-185
Report of Independent Auditors ........................................................ F-188
Consolidated Balance Sheet as of December 31, 1997 .................................... F-189
Consolidated Statements of Operations for the years ended December 31, 1996 and 1997 .. F-190
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996
and 1997 ............................................................................. F-191
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1997 .. F-192
Notes to Consolidated Financial Statements ............................................ F-193
</TABLE>
F-4
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------- --------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 65,589 $ 5,979
Accounts receivable 68,042 3,831
Prepaid expenses 27,375 --
Receivables from equity investees 974 --
Other current assets 3,747 1,410
---------- --------
Total current assets 165,727 11,220
Property and equipment, net 275,000 59,685
Deferred acquisition costs 551 6,213
Goodwill and other intangible assets, net 904,929 60,306
Investment in and receivables from equity investees, less current portion 22,406 937
Note receivable from related parties and employees 12,610 --
Other assets 10,325 8,581
---------- --------
TOTAL ASSETS $1,391,548 $146,942
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 66,202 $ 2,715
Deferred revenue 73,608 3,603
Income taxes payable 480 1,707
Due to SFX Broadcasting 26,250 11,539
Current portion of long-term debt 4,238 755
Current portion of capital lease obligations 674 168
Current portion of deferred purchase consideration 2,313 1,950
---------- --------
Total current liabilities 173,765 22,437
Long-term debt, less current portion 714,884 14,929
Capital lease obligations, less current portion 12,248 326
Deferred purchase consideration, less current portion 8,117 4,289
Deferred income taxes 60,601 2,817
Other 5,354 --
---------- --------
TOTAL LIABILITIES 974,969 44,798
Minority interest 3,868 --
Temporary equity - stock subject to redemption 16,500 --
Shareholders' equity:
Preferred Stock, $.01 par value, 25,000,000 shares authorized, none
issued and outstanding as of September 30, 1998 and December 31,
1997 -- --
Class A common stock, $.01 par value, 100,000,000 shares
authorized,28,753,194 and 13,579,024 shares issued and outstanding
as of September 30, 1998 and December 31, 1997, respectively 288 136
Class B common stock, $.01 par value, 10,000,000 shares
authorized,1,697,037 and 1,047,037 shares issued and outstanding as
of September 30, 1998 and December 31, 1997, respectively 17 10
Additional paid in capital 431,617 98,184
Deferred compensation (7,397) --
Accumulated (deficit) earnings (28,314) 3,814
---------- --------
Total shareholders' equity 396,211 102,144
---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,391,548 $146,942
========== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1998 1997
-------------- ----------------
<S> <C> <C>
Revenue $ 388,034 $ 43,425
Operating expenses:
Cost of revenue 331,857 35,569
Depreciation and amortization, including $1,014 of integration
costs in 1998 21,207 2,345
Corporate expenses, net of Triathlon fees 2,510 259
Non-cash charges 843 --
------------ -----------
356,417 38,173
------------ -----------
Income from operations 31,617 5,252
Income from equity investments (2,139) (1,344)
Interest expense 13,488 378
Investment income (967) (95)
Minority interest 916 --
------------ -----------
Income before provision for income taxes 20,319 6,313
Provision for income taxes 1,983 2,952
------------ -----------
Net income 18,336 3,361
Accretion on stock subject to redemption (825) -
------------ -----------
Net income applicable to common shares $ 17,511 $ 3,361
============ ===========
Basic Earnings per common share $ 0.58 $ 0.23
============ ===========
Dilutive earnings per common share $ 0.57 $ 0.23
============ ===========
Weighted average basic common shares outstanding 30,420,883 14,626,061
Weighted average dilutive common shares outstanding 30,881,777 14,626,061
</TABLE>
See accompanying notes.
F-6
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1998 1997
-------------- ----------------
<S> <C> <C>
Revenue $ 680,376 $ 74,396
Operating expenses:
Cost of revenue 602,538 63,045
Depreciation and amortization, including $1,264 of integration
costs in 1998 40,381 4,041
Corporate expenses, net of Triathlon fees 5,839 1,307
Non-cash charges 32,895 --
------------ -----------
681,653 68,393
------------ -----------
Income (loss) from operations (1,277) 6,003
Income from equity investments (3,964) (1,344)
Interest expense 31,709 956
Investment income (3,466) (213)
Minority interest 1,314 --
------------ -----------
Income (loss) before provision for income taxes (26,870) 6,604
Provision for income taxes 3,333 2,952
------------ -----------
Net income (loss) (30,203) 3,652
Accretion on stock subject to redemption (1,925) --
------------ -----------
Net income (loss) applicable to common shares $ (32,128) $ 3,652
============ ===========
Basic and dilutive net income (loss) per share $ (1.38) $ 0.25
============ ===========
Weighted average basic and dilutive common shares outstanding 23,262,122 14,382,778
</TABLE>
See accompanying notes.
F-7
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Balances at January 1, $ 102,144 $ --
Net assets contributed by SFX Broadcasting -- 97,726
Liabilities in excess of assets of SFX Broadcasting, Inc. assumed in
the Spin-Off, principally federal income taxes of $105.0 million (129,237) --
Sale of 8,050,000 Shares of Class A Common Stock 329,004 --
Issuance of 5,837,874 shares of Class A Common Stock for
acquisitions 97,466 --
Issuance of 190,000 shares of Class A Common Stock pursuant to
employment agreements 8,511 --
Issuance of 650,000 shares of Class B Common Stock pursuant to
employment agreements 18,526 --
Net income (loss) (30,203) 3,652
----------- ---------
Balances at September 30 $ 396,211 $101,378
=========== =========
</TABLE>
See accompanying notes.
F-8
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
-------- -------
<S> <C> <C>
Operating activities:
Net (loss) income $ (30,203) $ 3,652
Adjustment to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization, including $1,264 of integration
costs 40,381 4,041
Pretax income of equity investees, net of distributionsreceived 1,030 458
Non-cash charges 32,895 --
Minority interest 1,314 --
Changes in operating assets and liabilities, net of amounts
acquired:
Accounts receivable (9,620) (1,019)
Prepaid expenses (6,296) (2,419)
Other current assets (1,744) --
Other assets (3,191) (275)
Receivable from related parties and employees (2,162) --
Accountspayable and accrued expenses (14,475) 2,641
Accrued interest and dividends 7,595 --
Deferred revenue 6,783 (6,290)
----------- ----------
Net cash provided by operating activities 22,307 789
----------- ----------
Investing activities:
Purchases of businesses, net of cash acquired (807,135) (69,645)
Deposits and other payments for pending acquisitions (551) --
Purchases of property and equipment (44,554) (2,352)
----------- ----------
Net cash used in investing activities (852,240) (71,997)
----------- ----------
Financing activities:
Capital contributed by SFX Broadcasting -- 78,855
Proceedsfrom issuance of senior subordinated debt and
borrowings under the credit agreement 723,500 --
Proceeds from sale of common stock 330,683 --
Repayment of debt and capital lease obligation (33,049) (553)
Payments made to SFX Broadcasting pursuant to the Spin-Off (113,876) --
Other, principally debt issuance costs (17,715) --
----------- ----------
Net cash provided by financing activities 889,543 78,302
----------- ----------
Net increase in cash and cash equivalents 59,610 7,094
Cash and cash equivalents at beginning of period 5,979 --
=========== ==========
Cash and cash equivalents at end of period $ 65,589 $ 7,094
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 22,807 $ 897
=========== ==========
Cash paid for income taxes $ 17,217 $ --
=========== ==========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
o Issuance of equity securities, including deferred equity security issuance
and assumption of debt in connection with certain acquisitions (see Note
1).
o Agreements to pay future cash consideration in connection with certain
acquisitions (see Note 1).
o The balance sheet includes certain assets and liabilities that have been
contributed to the Company by SFX Broadcasting.
See accompanying notes.
F-9
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
SFX Entertainment, Inc. ("SFX" or the "Company") is a leading promoter,
producer and venue operator for live entertainment events. In addition, the
Company is a leading full-service marketing and management company specializing
in the representation of team sports athletes, primarily in professional
basketball.
The Company owns and/or operates the largest network of venues in the country
used principally for music concerts and other live entertainment events. Upon
completion of all pending acquisitions, it will have 68 venues either directly
owned or operated under lease or exclusive arrangements, including 13
amphitheaters in 9 of the top 10 markets. The Company also develops and manages
touring Broadway shows, selling subscriptions series in 38 of the markets that
maintain active touring schedules with approximately 240,000 subscribers last
year. Through its large number of venues and the long operating histories of
the businesses it has acquired, SFX operates an integrated franchise that
promotes and produces a broad variety of live entertainment events locally,
regionally and nationally. Pro forma for all completed acquisitions, during
1997, approximately 30 million people attended 11,300 events promoted and/or
produced by SFX, including approximately 5,400 music concerts, 5,600 theatrical
shows and over 200 specialized motor sports events.
SFX was formed as a wholly-owned subsidiary of SFX Broadcasting, Inc. in
December 1997 and as the parent company of SFX Concerts, Inc ("Concerts").
Concerts was formed in January 1997 to acquire and hold SFX Broadcasting's live
entertainment operations. The Company had no substantive operations until its
acquisition of Delsener/Slater Enterprises, Ltd. and affiliated companies
("Delsener/Slater") in January 1997.
In August 1997, SFX Broadcasting agreed to the merger (the "Broadcasting Merger
Agreement") among SBI Holdings, Inc. (the "Buyer"), SBI Radio Acquisition
Corporation, a wholly owned subsidiary of the Buyer, and SFX Broadcasting (the
"Broadcasting Merger") and to the spin-off of the Company to the shareholders
of SFX Broadcasting (the "Spin-Off"). The Spin-Off was completed on April 27,
1998 and the Broadcasting Merger was completed on May 29, 1998.
Information with respect to the three and nine months ended September 30, 1998
and 1997 is unaudited. The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, the unaudited interim financial statements contain
all adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the financial position, results of operations and cash flows of
the Company, for the periods presented.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131
("SFAS 131"), "Disclosure About Segments of an Enterprise and Related
Information," which establishes new standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that these enterprises report selected information
about operating segments in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. SFAS 131 is effective for financial statements for fiscal
years beginning after December 31, 1997, and therefore the Company will adopt
the new requirements in 1998. Management has completed its review of SFAS 131
and as such has preliminarily determined that its reportable segments will be
music, theatrical, sports and other.
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
F-10
<PAGE>
quarters. To the extent that the Company's entertainment marketing and
consulting relate to musical concerts, they also predominantly generate
revenues in the second and third quarters. However, this seasonality is
somewhat offset by typically non-summer seasonal businesses such as touring
Broadway Shows (which typically tour between September and May) and motor
sports (which produces revenue predominantly in the first quarter).
2. ACQUISITIONS
1997 Acquisitions
In January 1997, SFX Broadcasting acquired Delsener/Slater, a concert promotion
company which has long-term leases or is the exclusive promoter for seven of
the major concert venues in the New York City metropolitan area. In March 1997,
the Company acquired the stock of certain companies which own and operate the
Meadows Music Theater (the "Meadows"), an indoor/outdoor complex located in
Hartford, Connecticut. In June 1997, the Company acquired the stock of Sunshine
Promotions, Inc. and certain other related companies ("Sunshine Promotions"),
an owner-operator of venues and a concert promoter in the Midwest.
The Delsener/Slater, Meadows, and Sunshine Promotions acquisitions are
collectively referred to herein as the "1997 Acquisitions." The 1997
Acquisitions were financed through capital contributions from SFX Broadcasting
and were accounted for under the purchase method of accounting.
1998 Acquisitions
Westbury
On January 8, 1998, the Company acquired certain companies which hold a
long-term lease for Westbury Music Fair, located in Westbury, New York, (the
"Westbury Acquisition") for an aggregate consideration of approximately $3.0
million in cash and 75,019 shares of the Company's Class A Common Stock. During
the period between the closing and January 8, 2000, the Company has the right
to repurchase all of such shares for an aggregate consideration of $2.0 million
and the seller has the right to require the Company to purchase all of such
shares for an aggregate consideration of $750,000.
BGP
On February 24, 1998, the Company acquired all of the outstanding capital stock
of BG Presents ("BGP"), an owner-operator of venues for live entertainment and
a promoter in the San Francisco Bay area (the "BGP Acquisition"), for total
consideration of approximately $80.3 million (including the repayment of $12.0
million in BGP debt and the issuance upon the Spin-Off of 562,640 shares of
Class A Common Stock of the Company valued by the parties at $7.5 million). The
sellers of BGP provided net working capital (as defined in the acquisition
agreement) at the closing in an amount equal to or greater than long-term debt.
PACE
On February 25, 1998, the Company acquired all of the outstanding capital stock
of PACE Entertainment Corporation ("PACE"), a diversified producer and promoter
of live entertainment in the United States (the "PACE Acquisition"), for total
consideration of approximately $150.1 million (including issuance upon the
Spin-Off of 1,500,000 shares of the Company's Class A Common Stock valued by
the parties at $20.0 million and assumption of approximately $20.6 million of
debt). In related transactions, the Company acquired, for total consideration
of $90.6 million comprised of $41.4 million in cash, the repayment of
approximately $43.1 million of debt and the assumption of approximately $6.1
million of debt related to a capital lease, the 66 2/3% ownership interests of
Blockbuster Entertainment Corporation and Sony Music Entertainment, Inc. in
Amphitheater Entertainment Partnership, a partner of PACE in the Pavilion
Partners venue partnership. As a result, the Company owns 100% of Pavilion
Partners.
The PACE Acquisition agreement further provides that each seller of PACE shall
have an option, exercisable during a period beginning on the fifth anniversary
of the closing of the PACE Acquisition and ending 90 days thereafter, to
require the Company to purchase up to one-third of the PACE consideration stock
received by such PACE seller for a cash purchase price of $33.00 per share.
With certain limited
F-11
<PAGE>
exceptions, these option rights are not assignable by the PACE sellers. The
stock, which is subject to redemption, has been recorded as temporary equity on
the accompanying consolidated balance sheet and is being accreted over a
five-year period.
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 its fair value. In
addition, on March 25, 1998, PACE paid $4.0 million to acquire a 67% interest
in certain assets and liabilities of USA Motor Sports, a producer and promoter
of motor sports events. The remaining 33% interest is owned by the Contemporary
Group.
Contemporary
On February 27, 1998, the Company acquired the Contemporary Group
("Contemporary"), a fully-integrated live entertainment and special event
promoter and producer, venue owner and operator and consumer marketer, for
total consideration of approximately $101.4 million comprised of $72.8 million
in cash, a payment for working capital of approximately $9.9 million and the
issuance of preferred stock of the Company valued by the parties at $18.7
million which, upon the Spin-Off, was converted into 1,402,850 shares of Class
A Common Stock of the Company (the "Contemporary Acquisition"). The
Contemporary Acquisition involved the merger of Contemporary International
Productions Corporation with and into the Company, the acquisition by a wholly
owned subsidiary of the Company of substantially all of the assets, excluding
certain cash and receivables, of the remaining members of Contemporary and the
acquisition by Contemporary of the 50% interest in the Riverport Amphitheater
Joint Venture not owned by Contemporary. If any of the Contemporary sellers
owns any shares of the Company's Class A Common Stock received in the
Contemporary Acquisition on the second anniversary of the closing date and the
average trading price of such stock over the 20-day period ending on such
anniversary date is less than $13.33 per share, then the Company will make a
one-time cash payment to each individual holding 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's received by such individual in the Contemporary Acquisition and owned
as of such anniversary date. In May 1998 the Company placed 140,000 of the
shares issued in connection with the Contemporary Acquisition into an escrow
account. The Company may, at its sole discretion, cancel such shares at any
time.
Network
On February 27, 1998, the Company acquired the Network Magazine Group ("Network
Magazine"), a publisher of trade magazines for the radio broadcasting industry,
and SJS Entertainment Corporation ("SJS"), an independent creator, producer and
distributor of music-related radio programming, services and research which it
exchanges with radio broadcasters for commercial air-time which, in turn, is
sold to national network advertisers (the "Network Acquisition"), for total
consideration of approximately $66.8 million comprised of $52.0 million in
cash, a payment for working capital of approximately $1.8 million, reimbursed
sellers costs of $500,000, the purchase of an office building and property for
$2.5 million and the issuance upon the Spin-Off of approximately 750,000 shares
of Class A Common Stock of the Company valued by the parties at $10.0 million.
The $2.5 million purchase of the office building and property is comprised of
cash of approximately $700,000 and the assumption of debt of approximately $1.8
million. The Company is also obligated to pay the sellers an additional payment
in Class A Common Stock or, at the Company's option, cash based on future
operating results, as defined, generated on a combined basis by Network
Magazine and SJS in 1998, up to a maximum of $14.0 million. In the Network
Acquisition, the Company, through a wholly owned subsidiary, acquired all of
the outstanding capital stock of each of The Album Network, Inc. and SJS
Entertainment Corporation and purchased substantially all of the assets and
properties and assumed substantially all of the liabilities and obligations of
The Network 40, Inc.
F-12
<PAGE>
Concert/Southern
On March 4, 1998, the Company acquired Concert/Southern Promotions
("Concert/Southern"), a promoter of live music events in the Atlanta, Georgia
metropolitan area (the "Concert/Southern Acquisition"), for total cash
consideration of approximately $16.9 million, which includes a $300,000 payment
for working capital.
Avalon
On May 14, 1998, the Company acquired all of the outstanding equity interests
of Irvine Meadows Amphitheater, New Avalon, Inc., TBA Media, Inc. and West
Coast Amphitheater (collectively, "Avalon") for a cash purchase price of $26.8
million (subject to upward adjustment), including approximately $300,000 that
the Company paid to reimburse the Avalon sellers for certain third party out of
pocket expenses incurred in the development of the Camarillo Creek Amphitheatre
(the "Avalon Acquisition"). Avalon is a concert promoter and producer that
operates predominantly in the Los Angeles area.
Oakdale
On June 3, 1998, the Company acquired certain assets of Oakdale Concerts, LLC
and Oakdale Development Limited Partnership (collectively, "Oakdale"), a
promoter and producer of concerts in Connecticut and the owner of the 4,800
seat Oakdale Music Theater, for a purchase price of $9.4 million in cash and
the assumption of $2.5 million in liabilities (the "Oakdale Acquisition"). The
Company also made a non-recourse loan to the Oakdale sellers in the amount of
$11.4 million. In addition, pursuant the Oakdale Agreement, if the future
operating results (as defined in the Oakdale Agreement) of the Oakdale Theater
and the Meadows exceeds $5.5 million in 1999, the Company will be obligated to
pay between 5.0 to 5.8 times the amount of such excess to the Oakdale sellers.
FAME
On June 4, 1998, the Company acquired Falk Associates Management Enterprises,
Inc. and Financial Advisory Management Enterprises, Inc. (collectively,
"FAME"), a full-service marketing and management company which specializes in
the representation of team sports athletes, primarily in professional
basketball. The aggregate purchase price for FAME was approximately $82.2
million in cash (including approximately $7.9 million which the Company paid in
connection with certain taxes incurred by FAME and the FAME sellers and
excluding $4.7 million of taxes paid on behalf of the sellers which will be
refunded to the Company in 1999) and 1.0 million shares of Class A Common
Stock, valued at approximately $36.0 million (the "FAME Acquisition"). The
agreement also provides for payments by the Company to the FAME sellers of
additional amounts up to an aggregate of $15.0 million in equal annual
installments over 5 years contingent on the achievement of certain operating
performance targets. The agreement also provides for additional payments by the
Company if FAME's operating performance exceed the targets by certain amounts.
Don Law
On July 2, 1998, the Company acquired certain assets of Blackstone
Entertainment, LLC ("Don Law"), a concert and theater promoter in New England,
for an aggregate consideration of approximately $92.2 million, including the
repayment of approximately $7.0 million in debt. Don Law currently owns and/or
operates three venues in New England with an aggregate seating capacity of
27,400. Don Law also acts as the sole ticket operator for all of its own venues
as well as several third party venues.
Magicworks
On September 11, 1998, the Company purchased all of the outstanding shares of
common stock of Magicworks Entertainment Incorporated ("Magicworks"), a
producer and promoter of theatrical shows, musical concerts, ice skating shows
and other live entertainment events. The total consideration was $118.9 million
in cash, including approximately $3.2 million in fees and expenses and the
repayment of $2.4 million in convertible notes which the Company is required to
repay upon presentation for conversion into Magicworks stock (the "Magicworks
Acquisition"). The acquisition was consummated by means of a tender offer (in
which approximately 98.7% of Magicworks shares were purchased) followed by a
merger (in which the remaining shares were converted into cash consideration).
F-13
<PAGE>
Other Acquisitions
During the third quarter of 1998, the Company completed the acquisition of
seven companies in the theatrical and music segments, principally in the areas
of programming, touring and merchandising (collectively the "Other
Acquisitions"). The aggregate purchase price was $104.7 million in cash,
approximately $10.0 million in stock (300,000 shares of the Company's Class A
Common Stock) and $10.0 million of deferred payments. In addition, the Company
is required to make a loan to certain sellers in an amount equal to taxes
incurred by the sellers in connection with one of the transactions. The Company
expects that the amount of the loan will be approximately $750,000.
The Westbury Acquisition, the BGP Acquisition, the PACE Acquisition, the
Contemporary Acquisition, the Network Acquisition, the Concert/Southern
Acquisition, the Avalon Acquisition, the Oakdale Acquisition, the FAME
Acquisition, the Don Law Acquisition, the Magicworks Acquisition and the Other
Acquisitions are collectively referred to herein as the "1998 Acquisitions."
The 1998 Acquisitions were accounted for under the purchase method of
accounting and funded with the proceeds of the Note Offering, the Equity
Offering, the Credit Agreement (each as defined herein) and available cash. The
purchase prices of the 1998 Acquisitions have been preliminarily allocated to
the assets acquired and liabilities assumed and are subject to change.
Operating results for the 1997 Acquisitions and the 1998 Acquisitions are
included herein from their respective acquisition dates. Operating results
associated with the assets and liabilities contributed by SFX Broadcasting are
also included herein. Prior to the Spin-Off, SFX Broadcasting provided various
administrative services to the Company. SFX Broadcasting allocated these
expenses on the basis of direct usage. In the opinion of management, this
method of allocation was reasonable and allocated expenses approximated what
the Company would have incurred on a stand-alone basis. Intercompany
transactions and balances have been eliminated in consolidation.
The following pro forma summary represents the consolidated results for the
nine months ended September 30, 1998 and the year ended December 31, 1997 as if
the 1997 Acquisitions and the 1998 Acquisitions had occurred at January 1,
1997, after giving effect to certain adjustments, including amortization of
intangible assets and interest expense on the acquisition debt. These pro forma
results have been included for comparative purposes only and do not purport to
be indicative of what would have occurred had the acquisitions been made as of
that date or of results which may occur in the future (in thousands).
<TABLE>
<CAPTION>
PRO FORMA
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
-------------------- ------------------
<S> <C> <C>
Revenues $ 925,531 $ 833,582
Net loss $ (19,659) $ (42,559)
Loss applicable to common shares $ (0.65) $ (1.40)
</TABLE>
3. FINANCING
Note Offering and Guarantees by Subsidiaries
On February 11, 1998, the Company completed an offering of $350.0 million 9
1/8% Senior Subordinated Notes (the "Notes" and "Note Offering") due 2008.
Interest is payable on the Notes on February 1 and August 1 of each year. On
July 15, 1998, the Company consummated the exchange of substantially identical
publicly registered notes (the "Exchange Notes") for all outstanding Notes. All
Notes were tendered for exchange and were cancelled upon the issuance of the
same principal amount of Exchange Notes.
The Company is a holding company that has no operating assets or operations of
its own. Substantially all of the Company's subsidiaries are wholly owned and
have jointly and severally guaranteed the Company's indebtedness represented by
the Exchange Notes (the "Guarantors"). Certain subsidiaries which are not
wholly owned (the "Non-Guarantor Subsidiaries"), do not guarantee such
indebtedness.
Full financial statements of the Guarantors and Non-Guarantor Subsidiaries have
not been included because, pursuant to their respective guarantees, the
Guarantors are jointly and severally liable with
F-14
<PAGE>
respect to the Exchange Notes and management believes that the Non-Guarantor
Subsidiaries are not material to the Company on a consolidated basis.
Accordingly, the Company does not believe that the information contained in
separate full financial statements of the Guarantors or Non-Guarantor
Subsidiaries would be material to investors. The following are summarized
unaudited statements setting forth certain financial information concerning the
Guarantors and Non-Guarantor Subsidiaries as of and for the nine months ended
September 30, 1998 (in thousands).
<TABLE>
<CAPTION>
SFX SFX
Entertainment Non-Guarantor Entertainment
Inc. Guarantors Subsidiaries Eliminations Consolidated
--------------- -------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Current assets $ 8,910 $ 148,522 $ 8,295 $ -- $ 165,727
Property and equipment, net 8,905 256,182 9,913 -- 275,000
Goodwill and other intangible assets,
net 29,972 853,660 21,297 -- 904,929
Investment in subsidiaries 1,111,914 22,406 -- (1,111,914) 22,406
Other assets 3,648 16,768 3,070 -- 23,486
---------- ---------- ------- ------------ ----------
Total assets $1,163,349 $1,297,538 $42,575 $ (1,111,914) $1,391,548
========== ========== ======= ============ ==========
Current liabilities $ 42,455 $ 127,678 $ 3,632 $ -- $ 173,765
Long-term debt, less current portion 697,753 29,379 12,767 (12,767) 727,132
Other liabilities 10,430 63,179 463 -- 74,072
Minority interest -- 2,579 1,289 -- 3,868
Temporary equity 16,500 -- -- -- 16,500
Shareholders' equity 396,211 1,074,723 24,424 (1,099,147) 396,211
---------- ---------- ------- ------------ ----------
Total liabilities and shareholders'
equity $1,163,349 $1,297,538 $42,575 $ (1,111,914) $1,391,548
========== ========== ======= ============ ==========
Revenue $ -- $ 659,858 $20,518 $ -- $ 680,376
Operating expenses 48,047 615,916 17,690 -- 681,653
Interest expense, net 27,669 591 507 (524) 28,243
Minority interest -- 392 922 -- 1,314
Income from equity investments -- (3,964) -- -- (3,964)
Provision for income taxes -- 3,333 -- -- 3,333
---------- ---------- ------- ------------ ----------
Net (loss) income $ (75,716) $ 43,590 $ 1,399 $ 524 $ (30,203)
========== ========== ======= ============ ==========
Cash flow from operations $ (45,994) $ 70,023 $(1,722) $ -- $ 22,307
Cash flow used in investing activities (844,051) (7,816) (373) -- (852,240)
Cash flow from financing activities 891,252 (1,704) (5) -- 889,543
Cash at the beginning of the period -- 2,916 3,063 -- 5,979
---------- ---------- --------- ------------ ----------
Cash at the end of the period $ 1,207 $ 63,419 $ 963 $ -- $ 65,589
========== ========== ========= ============ ==========
</TABLE>
The following are summarized unaudited statements setting forth certain
financial information concerning the Guarantors and Non-Guarantor Subsidiaries
as of and for the three months ended September 30, 1998 (in thousands).
<TABLE>
<CAPTION>
SFX SFX
Entertainment Non-Guarantor Entertainment
Inc. Guarantors Subsidiaries Eliminations Consolidated
--------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue $ -- $372,039 $15,995 $ -- $388,034
Operating expenses 7,745 335,722 12,950 -- 356,417
Interest expense, net 12,361 119 208 (167) 12,521
Minority interest -- (7) 923 -- 916
Income from equity investments -- (2,139) -- -- (2,139)
Provision for income taxes -- 1,983 -- -- 1,983
--------- --------- ------- ------ --------
Net (loss) income $ (20,106) $36,361 $ 1,914 $ 167 $ 18,336
========= ========= ======= ====== ========
</TABLE>
F-15
<PAGE>
Credit Agreement
On February 26, 1998, the Company executed a Credit and Guarantee Agreement
(the "Credit Agreement" or "Credit Facility") which established a $300.0
million senior secured credit facility comprised of (i) a $150.0 million
eight-year term loan (the "Term Loan") and (ii) a $150.0 million seven-year
reducing revolving credit facility (the "Revolver"). In addition, in September
1998, the Company received an increase in its borrowing availability under the
Revolver by $50.0 million, which increased the Company's availability under the
Credit Agreement to $350.0 million. Loans outstanding under the Credit Facility
bear interest, at the Company's option, at 1.875 to 2.375 percentage points
over LIBOR or the greater of the Federal Funds rate plus 0.50% or the Bank of
New York's prime rate. The interest rate spreads on the Term Loan and the
Revolver are adjusted based on the Company's Total Leverage Ratio (as defined
in the Credit Agreement). The Company pays a per annum commitment fee on unused
availability under the Revolver of 0.50% to the extent that the Company's
Leverage Ratio is greater than or equal to 4.0 to 1.0, and 0.375% if such ratio
is less than 4.0 to 1.0 and a per annum letter of credit fee equal to the
Applicable LIBOR Margin (as defined in the Credit Agreement) for the Revolver
then in effect. Borrowings under the Credit Agreement are secured by
substantially all of the assets of the Company, including a pledge of the
outstanding stock of substantially all of its subsidiaries and guaranteed by
all of the Company's subsidiaries. As of November 13, 1998, the Company had
borrowed $346.0 million under the Credit Agreement to consummate certain of the
1998 Acquisitions.
In addition, the Company has received a commitment letter from its lenders to
replace its existing credit facility with a new $600.0 million credit facility.
The new facility is subject to the execution of a definitive agreement and will
differ from the current credit facility in several respects including
applicable financial ratios, interest rate margins and term of repayment. The
Company and its lenders are presently reviewing the pending commitment in light
of recent developments in the credit markets. The Company may renegotiate the
existing commitment, which renegotiations may significantly alter the principal
terms, or the Company may consider alternative forms of debt financing. If a
new credit facility is consummated and the terms of the agreement are
substantially different than the terms of the existing credit facility, the
Company may be required to write off the remaining deferred financing costs
related to the current credit facility in the form of an extraordinary loss.
Equity Offering
On May 27, 1998, the Company consummated an offering of 8,050,000 shares of
Class A Common Stock at an offering price of $43.25 per share (the "Equity
Offering"). The proceeds received by the Company, after deducting the
underwriting discount and offering expenses, were approximately $329.0 million.
The proceeds were used to (i) repay certain indebtedness and consummate certain
of the 1998 Acquisitions and (ii) pay $93.7 million of the tax indemnification
obligation related to the Spin-Off (see Note 6).
4. CAPITAL STOCK
In order to facilitate the Spin-Off, the Company revised its capital structure
to increase its authorized capital stock and to effect a stock split. The
authorized capital stock of the Company consists of 110,000,000 shares of
Common Stock (comprised of 100,000,000 shares of Class A Common Stock and
10,000,000 shares of Class B Common Stock), and 25,000,000 shares of preferred
stock, par value $.01 per share.
In the Spin-Off, (a) 13,579,024 shares of Class A Common Stock were distributed
to holders on the Spin-Off record date of SFX Broadcasting's Class A Common
Stock, Series D preferred stock and interests in SFX Broadcasting's director
deferred stock ownership plan, including 609,856 shares of Class A Common Stock
issued upon the exercise of certain warrants of SFX Broadcasting and (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. 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.
F-16
<PAGE>
The Board of Directors has the authority to issue preferred stock and will
assign the designations and rights at the time of issuance.
During January 1998, the Board of Directors and SFX Broadcasting, as sole
stockholder, approved and adopted a stock option and restricted stock plan
providing for the issuance of restricted shares of the Company's Class A Common
Stock and options to purchase shares of the Company's Class A Common Stock
totaling up to 2,000,000 shares. In January 1998, the Company granted options
exercisable for an aggregate of 345,000 shares of the Company's Class A Common
Stock at an exercise price of $5.50 which will vest over three years and 7,500
shares of the Company's Class A Common Stock at an exercise price of $5.50
which vests over one year. The Company will record non-cash compensation
charges over the three-year vesting period of approximately $3.3 million
annually. Between April and August 1998, the Company granted options
exercisable for an aggregate of 1,629,666 shares of Class A Common Stock at
exercise prices ranging from $29.125 to $45.875.
During January 1998, in connection with the expectation of certain executive
officers entering into employment agreements with the Company, the Board of
Directors, upon recommendation of the Compensation Committee, approved the sale
of an aggregate of 650,000 shares of the Company's Class B Common Stock and
190,000 shares of the Company's Class A Common Stock to certain officers for a
purchase price of $2.00 per share. Such shares were issued in April 1998. A
non-cash charge to earnings was recorded by the Company in the second quarter
of approximately $23.9 million associated with the sale.
The Board of Directors also approved the issuance of shares of the Company's
Class A Common Stock to holders of stock options or stock appreciation rights
("SARs") of SFX Broadcasting as of the Spin-Off record date, whether or not
vested. The issuance was approved to allow such holders of these options or
SARs to participate in the Spin-Off in a similar manner to holders of SFX
Broadcasting's Class A Common Stock. Additionally, many of the option holders
will become officers, directors and employees of the Company.
5. NON-CASH CHARGES
Non-cash charges recorded in the second and third quarters of 1998 of $32.9
million consisted of (a) $23.9 million of compensation related to the sale of
650,000 shares of Class B Common Stock and 190,000 shares of Class A Common
Stock at a purchase price of $2.00 per share to certain executive officers
pursuant to employment agreements, (b) $7.5 million associated with the
issuance of 247,177 shares of Class A Common Stock to Mr. Robert F.X.
Sillerman, Executive Chairman of the Company, in connection with the repurchase
of shares of SFX Broadcasting issued to the sellers of the Meadows and (c) $1.5
million related to the issuance of stock options to certain executive officers
pursuant to employment agreements exercisable for an aggregate of 352,500
shares of Class A Common Stock.
In addition, a $2.7 million write down of the remaining balance of the deferred
expense relating to the Triathlon Broadcasting Company ("Triathlon") agreement
was recorded in the second quarter of 1998 as a result of Triathlon's recent
agreement to be acquired by a third party. If a third party acquires Triathlon,
the consulting fee agreement would be terminated. The write down was recorded
as a charge to amortization expense.
6. SPIN-OFF
Pursuant to the terms of the Spin-Off, SFX Broadcasting contributed to the
Company all of the assets relating to its live entertainment businesses and the
Company assumed all of SFX Broadcasting's liabilities pertaining to the live
entertainment businesses, as well as certain other liabilities including the
obligation to make change of control payments to certain employees of SFX
Broadcasting of approximately $5.0 million, as well as the obligation to
indemnify one-half of certain of these employees' excise tax. At the time of
the Broadcasting Merger, the Company preliminarily received $2.0 million of net
Working Capital (as defined in the Broadcasting Merger Agreement). Any
additional payments which may be payable upon the final determination of the
Working Capital will be reflected as an increase or decrease, as the case may
be, to equity.
F-17
<PAGE>
In connection with the Spin-Off, the Company entered into a tax sharing
agreement with SFX Broadcasting. Pursuant to the tax sharing agreement, as
amended, the Company is responsible for certain taxes incurred by SFX
Broadcasting, including income taxes imposed with respect to income generated
by the Company for periods prior to the Spin-Off and taxes resulting from gain
recognized by SFX Broadcasting in the Spin-Off. The Company believes that the
amount of taxes it will be required to pay in connection with the Spin-Off will
be approximately $120.0 million, of which $93.7 million was paid on or before
September 30, 1998. The remaining $26.3 million portion of the tax indemnity
payment is payable on December 31, 1998. Management's estimates of the amount
of the indemnity payment are based on assumptions which management believes are
reasonable. However, upon the completion of all final tax returns, including
any potential tax audits, such assumptions could be modified in a manner that
would result in a significant variance in the actual amount of the tax
indemnity.
7. DILUTIVE EARNINGS PER SHARE
A reconciliation of the number of shares used for calculating basic earnings
per common share and diluted earnings per common share for the three months
ended September 30, 1998 follows:
<TABLE>
<CAPTION>
<S> <C>
Average number of common shares outstanding 30,420,883
Effect of stock options 460,894
----------
30,881,777
==========
</TABLE>
Options to purchase 1,117,666 shares of common stock at prices ranging from
$43.25 to $45.88 were outstanding at September 30, 1998, but were not included
in the computation of diluted earnings per common share because the options'
exercise price was greater than the average market price of the Company's
common stock during the three months ended September 30, 1998. In addition,
diluted earnings per share was not adjusted for the impact of common stock
issued to the PACE sellers, which is subject to redemption by the Company,
because to do so would have been antidilutive.
Outstanding stock options at September 30, 1998 had no dilutive effect on basic
earnings per share during the nine months ended September 30, 1998 due to the
Company's net loss position. The Company did not have any dilutive securities
outstanding during the nine-months and three-months ended September 30, 1997.
8. COMMITMENTS AND CONTINGENCIES
Pursuant to a real estate purchase agreement with the sellers of Oakdale, the
Company has agreed to purchase the land, building and improvements of the
Oakdale Theater at the end of the Company's fifteen-year lease of the premises
in June 2013 for $15.4 million. In June 1998, the Company extended an $11.4
million note receivable to the sellers which is secured by the property.
While the Company is involved in several law suits and claims arising in the
ordinary course of business, the Company is not currently 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.
9. SUBSEQUENT EVENTS
Pending Acquisitions
Marquee
The Company has entered into an agreement and plan of merger (the "Marquee
Merger Agreement"), dated as of July 23, 1998, as amended, with The Marquee
Group, Inc. ("Marquee"), pursuant to which Marquee will become a wholly-owned
subsidiary of the Company. Pursuant to the Marquee Merger Agreement, at the
effective time of the merger, each outstanding share of common stock of Marquee
will be converted into the right to receive shares of the Company's Class A
Common Stock based on the exchange ratio, calculated as follows: (i) if the
Company's stock price (the average of the last reported sale for the fifteen
consecutive trading days ending on the fifth trading day prior to the effective
time of the
F-18
<PAGE>
merger) is $42.75 or less, then the exchange ratio will equal 0.1111; and (ii)
if the Company's stock price is greater than $42.75, then the exchange ratio
will equal the quotient obtained by dividing $4.75 by the Company's stock
price. Marquee is a publicly traded company that provides integrated event
management, television production, marketing and consulting services in the
sports, news and entertainment industries. The Company expects to incur
approximately $6.0 million in fees and expenses related to the transaction.
Cellar Door
On August 13, 1998, the Company and the beneficial owner of all of the
outstanding equity interests of the entities comprising the Cellar Door Group
of Companies (collectively, "Cellar Door") entered into a letter of intent with
respect to the Company's acquisition of all of the outstanding capital stock of
Cellar Door (the "Cellar Door Acquisition"). Pursuant to the letter of intent,
the aggregate purchase price for Cellar Door will be $70.0 million in cash
payable at closing, Class A Common Stock with a value of $20.0 million (based
upon the average closing price of the Class A Common Stock for the twenty
business day period ending on the business day prior to the closing) and $8.5
million payable in five equal annual installments beginning on the first
anniversary of the closing date. In addition, the Company will issue to the
seller options to purchase 100,000 shares of the Company's Class A Common
Stock. The closing will be subject to customary closing conditions, including
the entry into a definitive acquisition agreement and obtaining the required
approval under the HSR Act (as defined herein). If the Company is unable to
complete the Cellar Door Acquisition, it may be required to pay the seller
$10.0 million as liquidated damages. Cellar Door is a leading promoter and
producer of live entertainment events. The Company expects to incur
approximately $1.5 million in fees and expenses related to the transaction.
The Marquee merger and the Cellar Door Acquisition are collectively referred to
herein as the "Pending Acquisitions." The Company expects to complete the
Pending Acquisitions during the first quarter of 1999. However, the timing and
completion of the Pending Acquisitions are subject to a number of conditions,
including the approval of the stockholders of Marquee, the expiration or
termination of any applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 for the Cellar Door Acquisition, and the
receipt of all applicable consents from third parties and regulatory agencies.
Certain of these conditions are beyond the Company's control and there can be
no assurance that each of the Pending Acquisitions will be consummated during
the first quarter of 1999, on the terms described herein, or at all. In
connection with the HSR Act filing for the Marquee merger, the Company received
notice of a preliminary inquiry from the Antitrust Division of the U.S.
Department of Justice relating to the Cellar Door Acquisition and seeking
information on the overall scope of the Company's operations. The Company
intends to cooperate with the Department of Justice inquiry. While the Company
believes that the Cellar Door Acquisition, along with the Company's overall
business and plan of acquisitions, are in compliance with applicable antitrust
laws, there can be no assurance that the results of such inquiry will not have
a material adverse impact on the Company's ability to consummate the Cellar
Door Acquisition or its business, results of operations and financial
conditions.
Stock Incentive Plan
Following a recommendation of the Company's compensation committee, the Company
has, subject to stockholder approval, adopted a new incentive stock option plan
covering options to acquire up to three million shares of the Company's Class A
Common Stock. The plan will be designed to broaden the equity ownership of the
Company's employees at all levels. The Company anticipates that the proposed
stock plan will be submitted to a vote of the stockholders at the Company's
first annual meeting scheduled to be held in the spring of 1999.
F-19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SFX Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of SFX
Entertainment, Inc. as of December 31, 1997, and the related consolidated
statements of operations and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of SFX Entertainment, Inc. at December 31, 1997, and the consolidated results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
March 5, 1998, except
for Notes 1 and 11, as to
which the date is April 27, 1998
F-20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Delsener/Slater Enterprises, Ltd.
We have audited the accompanying consolidated balance sheet of
Delsener/Slater Enterprises, Ltd. and Affiliated Companies as of December 31,
1996, and the related consolidated statements of operations and cash flows for
each of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Delsener/Slater Enterprises, Ltd. and Affiliated Companies at December 31,
1996, and the consolidated results of their operations and their cash flows for
each of the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
October 2, 1997
F-21
<PAGE>
SFX ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
PREDECESSOR
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 5,979 $5,253
Accounts receivable ......................................................... 3,831 159
Prepaid expenses and other current assets ................................... 1,410 779
-------- ------
Total current assets ......................................................... 11,220 6,191
Property and equipment, net .................................................. 59,685 2,231
Deferred acquisition costs ................................................... 6,213 --
Goodwill, net ................................................................ 60,306 --
Investment in unconsolidated subsidiaries .................................... 937 458
Note receivable from employee ................................................ 900 --
Other assets ................................................................. 7,681 --
-------- ------
Total assets ................................................................. $146,942 $8,880
======== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses ....................................... $ 2,715 $6,078
Deferred revenue ............................................................ 3,603 18
Income taxes payable ........................................................ 1,707 --
Due to stockholder .......................................................... -- 1,877
Due to SFX Broadcasting ..................................................... 11,539 --
Current portion of long-term debt ........................................... 923 --
Current portion of deferred purchase consideration .......................... 1,950 --
-------- ------
Total current liabilities .................................................... 22,437 7,973
Long-term debt, less current portion ......................................... 15,255 --
Deferred purchase consideration, less current portion ........................ 4,289 --
Deferred income taxes ........................................................ 2,817 --
Commitment and contingencies .................................................
Shareholder's equity (Note 11):
Capital contributed by SFX Broadcasting ...................................... 98,184 --
Preferred Stock, $.01 par value, 25,000,000 shares authorized, none issued and
outstanding ................................................................. -- --
Class A common stock, $.01 par value, 100,000,000 shares authorized,
13,579,024 issued and outstanding ........................................... 136 --
Class B common stock, $.01 par value, 10,000,000 shares authorized, 1,047,037
issued and outstanding ...................................................... 10 --
Combined stockholder's equity--predecessor ................................... -- 907
Retained earnings ............................................................ 3,814 --
-------- ------
Total shareholder's equity ................................................... 102,144 907
-------- ------
Total Liabilities and shareholder's Equity ................................... $146,942 $8,880
======== ======
</TABLE>
See accompanying notes.
F-22
<PAGE>
SFX ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
PREDECESSOR PREDECESSOR
1997 1996 1995
---------- ------------- ------------
<S> <C> <C> <C>
Concert revenue ................................................ $ 96,144 $ 50,362 $47,566
Operating expenses:
Cost of concerts .............................................. 83,417 50,686 47,178
Depreciation and amortization ................................. 5,431 747 750
Corporate expenses, net of Triathlon fees of $1,794 in
1997 ......................................................... 2,206 -- --
-------- -------- -------
$ 91,054 $ 51,433 $47,928
-------- -------- -------
Income (loss) from operations .................................. 5,090 (1,071) (362)
Investment income .............................................. 295 198 178
Interest expense ............................................... (1,590) (60) (144)
Equity in pretax income of unconsolidated subsidiaries ......... 509 524 488
-------- -------- -------
Income (loss) before provision for income taxes ................ $ 4,304 $ (409) $ 160
Provision for income taxes ..................................... 490 106 13
-------- -------- -------
Net income (loss) .............................................. $ 3,814 $ (515) $ 147
======== ======== =======
</TABLE>
See accompanying notes.
F-23
<PAGE>
SFX ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
PREDECESSOR PREDECESSOR
1997 1996 1995
----------- ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ........................................... $ 3,814 $ (515) $ 147
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property and equipment ..................... 2,686 746 750
Amortization of goodwill ................................... 2,745 -- --
Equity in pretax income of unconsolidated subsidiaries,
net of distributions received ............................ (479) 16 2
Deferred income taxes .................................... (427) -- --
Changes in operating assets and liabilities, net of
amounts acquired:
Accounts receivable ...................................... (923) (159) 384
Prepaid expenses and other current assets ................ 419 (649) 374
Other assets ............................................. (275) -- --
Accounts payable and accrued expenses .................... (325) 4,759 (1,326)
Income taxes payable ..................................... 917 -- --
Deferred revenue ......................................... (7,147) 16 (784)
--------- -------- --------
Net cash provided by (used in) operating activities ......... 1,005 4,214 (453)
INVESTING ACTIVITIES:
Purchase of concert promotion businesses, net of cash
acquired ................................................. (71,213) -- --
Investment in GSAC Partnership ............................. -- (435) --
Purchase of property and equipment ......................... (2,083) -- --
--------- -------- --------
Net cash used in investing activities ....................... (73,296) (435) --
--------- -------- --------
FINANCING ACTIVITIES:
Capital contributed by SFX Broadcasting .................... 79,093 -- --
Payment of debt ............................................ (823) -- --
Proceeds from issuance of common stock and capital
contributions ............................................ -- 152 --
Loan from stockholder ...................................... -- 47 --
Distributions paid ......................................... -- (1,630) (216)
--------- -------- --------
Net cash provided by (used in) financing activities ......... 78,270 (1,431) (216)
Net increase in cash and cash equivalents ................... 5,979 2,348 (669)
Cash and cash equivalents at beginning of period ............ -- 2,905 3,574
--------- -------- --------
Cash and cash equivalents at end of period .................. $ 5,979 $ 5,253 $ 2,905
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ...................................... $ 1,504 $ 60 $ 144
========= ======== ========
Cash paid for income taxes .................................. $ -- $ 106 $ 13
========= ======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
o Issuance of equity securities, including deferred equity security issuance
and assumption of debt in connection with certain acquisitions (see Note 1).
o Agreements to pay future cash consideration in connection with certain
acquisitions (see Note 1).
o The balance sheet includes certain assets and liabilities which have been
contributed by SFX Broadcasting to the Company in connection with the
Spin-Off.
See accompanying notes.
F-24
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 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" or the "Predecessor") in January 1997, and
Delsener/Slater is considered the Company's predecessor for financial reporting
purposes.
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.
The Company may assume the obligation to exercise an option held by SFX
Broadcasting to repurchase 250,838 shares of SFX Broadcasting's Class A Common
Stock for an aggregate purchase price of $8.3 million (the "Meadows
Repurchase"). This option was granted in connection with the acquisition of the
Meadows Music Theater. If the option were exercised by SFX Broadcasting, the
exercise would result in a reduction of Working Capital as defined in the
Spin-Off (see below) by approximately $8.3 million. If the option were not
exercised, Working Capital would decrease by approximately $10.5 million.
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 "Completed Acquisitions." The cash
portion of the Completed Acquisitions were financed
F-25
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
through capital contributions from SFX Broadcasting and were accounted for
under the purchase method of accounting. The purchase prices have been
preliminarily allocated to the assets acquired and are subject to change.
The accompanying consolidated financial statements as of December 31, 1997
include the accounts of Delsener/Slater, Sunshine Promotions, the Meadows, and
certain assets and liabilities which have been contributed by SFX Broadcasting
to the Company in connection with the Spin-Off (as defined herein) under the
terms of the Broadcasting Merger (as defined herein) Agreement. Operating
results for the Completed Acquisitions are included herein from their
respective acquisition dates. Operating results associated with the assets and
liabilities to be contributed 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 among these companies have been
eliminated in consolidation.
The following unaudited pro forma summary represents the consolidated
results for the years ended December 31, 1997 and 1996 as if the Completed
Acquisitions had occurred at the beginning of such year after giving effect to
certain adjustments, including amortization of goodwill 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 acquisition been made as of that date or of results which
may occur in the future (in thousands).
<TABLE>
<CAPTION>
PRO FORMA
(UNAUDITED)
----------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- ------------------
<S> <C> <C>
Revenues ................ $110,387 $104,784
Net income .............. $ 734 $ 2,668
</TABLE>
Spin-Off
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 its concert and other live entertainment assets along with an
allocation of working capital in an amount estimated by management of SFX
Broadcasting to be consistent with the proper operation of SFX Broadcasting,
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. As of December 31, 1997, SFX Broadcasting had advanced
approximately $11,539,000 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 with the
proceeds from the Senior Subordinated Notes and the Credit Agreement (see Note
2). SFX Broadcasting advanced additional amounts to the Company prior to the
consummation of the Spin-Off which were reimbursed in April 1998.
F-26
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SFX Broadcasting and the Company entered into a tax sharing agreement.
Under the tax sharing agreement, the Company will agree to pay to SFX
Broadcasting the amount of the tax liability of SFX Broadcasting and the
Company combined, to the extent properly attributable to the Company for the
period up to and including the Spin-Off, and will indemnify SFX Broadcasting
for any tax adjustment made in subsequent years that relates to taxes properly
attributable to the Company during the period prior to and including the
Spin-Off. SFX Broadcasting, in turn, will indemnify the Company for any tax
adjustment made in years subsequent to the Spin-Off that relates to taxes
properly attributable to the SFX Broadcasting during the period prior to and
including the Spin-Off. The Company also will be responsible for any taxes of
SFX Broadcasting resulting from the Spin-Off, including any income taxes but
only to the extent that the income taxes result from the gain on the
distribution that exceeds the net operating losses of SFX Broadcasting and the
Company available to offset such gain including net operating losses generated
in the current year prior to the Spin-Off.
The actual amount of the gain will be based on the excess of the value of
the Company's Common Stock on the date of the Spin-Off over the tax basis of
that stock. The Company believes that the value of the Company's Common Stock
for tax purposes will be determined by no later than the first trading day
following the date on which the Company's Common Stock is distributed in the
Spin-Off. Increases or decreases in the value of the Company's Common Stock
subsequent to such date will not effect the tax liability. The Company expects
that such indemnity payment will be due on or about June 15, 1998.
2. RECENT ACQUISITIONS AND FINANCING
On February 11, 1998, SFX completed the private placement of $350.0
million of 9 1/8% Senior Subordinated Notes (the "Notes") 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. Together with the proceeds
from the Notes, the proceeds from the Term Loan were used to finance the Recent
Acquisitions (as defined below.)
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 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.
F-27
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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). Under the terms of the agreement,
additional cash consideration would be required if the deemed value of the
Company's common stock was less than $13.33 per share as a result of changes in
the consummation of acquisitions. 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 to be 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.
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 upon the Spin-Off of 1,402,850 shares of common stock of the Company
valued by the parties at $18,700,000. (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.
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
F-28
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
upon the Spin-Off of 750,188 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.
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 "Recent Acquisitions."
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Cash and Cash Equivalents
The Company considers all investments purchased with a maturity of three
months or less to be cash equivalents. Included in cash and cash equivalents at
December 31, 1997 is $1,235,000 of cash which has been deposited in a separate
account and will be used to fund committed capital expenditures at PNC Bank
Arts Center.
PROPERTY AND EQUIPMENT
Land, buildings and improvements and furniture and equipment are stated at
cost. Depreciation is provided on a straight-line basis over the estimated
useful lives of the assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements ......... 7-40 years
Furniture and equipment ............ 5-7 years
</TABLE>
Leasehold improvements represent the capitalized costs to renovate the
Jones Beach Theatre. The costs to renovate the theatre included permanent
seats, a new stage and lavatory facilities. These costs are being amortized
over the term of the lease.
Goodwill
Goodwill represents the excess of the purchase price over the fair market
value of the assets purchased in the Completed Acquisitions and is net of
accumulated amortization of $2,745,000. Goodwill is being amortized using the
straight-line method over 15 years. Management reviews the carrying value of
goodwill against anticipated cash flows on a non-discounted basis to determine
whether the carrying amount will be recoverable.
Other Assets
Other assets includes $4,928,000 of costs associated with acquiring the
right to receive fees from Triathlon Broadcasting Company ("Triathlon"), an
affiliate, for certain financial consulting, marketing and administrative
services provided by the Company to Triathlon. Under the terms of the
agreement, the Company has agreed to provide consulting and marketing services
to Triathlon for an annual fee of
F-29
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$500,000, together with a refundable advance of $500,000 per year against fees
to be earned in respect of transactional investment banking services. These
fees, which are recorded as a reduction of corporate, general and
administrative expenses, will fluctuate based upon the level of acquisition and
financing activity of Triathlon. The cost of acquiring the fees is being
amortized over the term of the agreement which expires on June 1, 2005.
Triathlon has announced its intention to enhance shareholder value through a
sale. The Company's management believes that the capitalized cost of acquiring
the right to receive fees from Triathlon is recoverable.
Revenue Recognition
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.
Revenue from ticket sales is recognized upon occurrence of the event.
Advance ticket sales are recorded as deferred revenue until the event occurs.
Risks and Uncertainties
Accounts receivable are due principally from ticket companies and venue
box offices. These amounts are typically collected within 20 days of a
performance. Generally, management considers these accounts receivable to be
fully collectible; accordingly, no allowance for doubtful accounts is required.
Certain other accounts receivable, arising from the normal course of business,
are reviewed for collectibility and allowances for doubtful accounts are
recorded as required. Management believes that no allowance for doubtful
accounts is required at December 31, 1996 or 1997.
The agreement governing the partnership through which PACE holds its
interest in the Lakewood Amphitheater in Atlanta, Georgia contains a provision
that purports to restrict PACE and its affiliates from directly or indirectly
owning or operating another amphitheater in Atlanta. In management's view, this
provision will not materially affect the business or prospects of the Company.
However, the Company acquired an interest in the Chastain Park Amphitheater,
also in Atlanta, in the Concert/Southern acquisition. The Company intends to
seek a waiver.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Advertising Costs
Advertising costs are expensed as incurred and approximated $7,109,000,
$4,896,000 and $2,687,000 in 1997, 1996, and 1995, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". This
statement requires a company to recognize deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
a company's financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statement carrying amounts and the tax bases of assets and
liabilities.
F-30
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company calculates its tax provision on a separate company basis.
Reclassification
Certain amounts in 1995 and 1996 have been reclassified to conform to the
1997 presentation.
4. CONNECTICUT DEVELOPMENT AUTHORITY ASSISTANCE AGREEMENT
On September 12, 1994, the Connecticut Development Authority ("CDA")
entered into a non-recourse assistance agreement with the Meadows whereby the
CDA provided grant funds for the construction and development of the Meadows
through the issuance of State of Connecticut General Fund Obligation Bonds
("GFO Bonds"). The Meadows received bond proceeds of $8,863,000. Pursuant to
such agreement, the annual tax revenues derived from the operation of the
amphitheater are utilized to satisfy the annual service requirements under the
GFO Bonds. In the event that annual tax revenues derived from the operation of
the amphitheater do not equal annual service requirements under the GFO Bonds,
the Company must deposit the lesser of the operating shortfall, as defined, or
10% of the annual service under the GFO Bonds. An operating shortfall has not
existed since the inception of the CDA. The GFO Bonds mature on October 15,
2024 and have an average coupon rate of 6.33%. Annual service requirements,
including interest, on the GFO Bonds for each of the next five years and
thereafter are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 ............... $ 739
1999 ............... 737
2000 ............... 739
2001 ............... 740
2002 ............... 741
Thereafter ......... 16,399
-------
$20,095
=======
</TABLE>
The assistance agreement requires an annual Meadows attendance of at least
400,000 for each of the first three years of operations. It will not be
considered an event of default if the annual Meadows attendance is less than
400,000 provided that no operating shortfall exists for that year or if an
operating shortfall exists such amount has been deposited by the Company. If
there is an event of default, the CDA may foreclose on the construction
mortgage loan (see Note 5). If the amphitheater's operations are relocated
outside of Connecticut during the ten year period subsequent to the beginning
of the assistance agreement or during the period of the construction mortgage
loan, the full amount of the grant funds plus a penalty of 5% must be repaid to
the State of Connecticut.
F-31
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
The Predecessor did not have any long-term debt as of December 31, 1996.
As of December 31, 1997, the company's long-term debt, which is recorded at
present value, consisted of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Meadows CDA Mortgage Loan .................. $ 7,411
Meadows Concession Agreement Loans ......... 5,872
Meadows CDA Construction Loan .............. 700
Murat notes payable ........................ 790
Meadows note payable ....................... 694
Polaris note payable ....................... 221
Capital lease obligations .................. 490
-------
16,178
Less current portion ....................... 923
-------
$15,255
=======
</TABLE>
Meadows CDA Mortgage Loan
On September 12, 1994, the CDA entered into a construction mortgage loan
agreement for $7,685,000 with the Meadows. The purpose of the loan was to
finance a portion of the construction and development of the Meadows. The loan
agreement contains substantially the same covenants as the CDA assistance
agreement (see Note 4). The mortgage loan bears interest at 8.73% and is
payable in monthly installments of principal and interest. The mortgage loan
matures on October 15, 2019.
The loan is collateralized by a lien on the Meadows' assets. The loan is
secured by an irrevocable standby letter of credit issued by the Company in the
amount of $785,000.
Meadows Concession Agreement Loans
In connection with the Meadows' concession agreement, the concessionaire
loaned the Meadows $4,500,000 in 1995 to facilitate the construction of the
amphitheater. Principal and interest at the rate of 7.5% per annum on the note
is payable via withholdings of the first $31,299 from each monthly concession
commission payment. As of December 31, 1997, the outstanding balance was
$4,343,000.
During 1995, the concessionaire loaned the Meadows an additional
$1,000,000. This loan bears interest at a rate of 9.75% per annum and is
payable via withholdings of an additional $11,900 of principal, plus interest,
from each monthly concession commission payment through December 20, 2002. As
of December 31, 1997, the outstanding balance was $679,000.
The concession agreement also required the Company to supply certain
equipment to the concessionaire at the Company's expense. The cost of the
equipment purchased by the concessionaire was converted to a note payable for
$884,000. The note bears interest at the rate of 9.25% per annum and provides
for monthly principal and interest payments of $10,185. However, the Company is
not required to make any principal or interest payments to the extent that 5%
of receipts, as defined, in any month are less than the amount of the payment
due. As of December 31, 1997, the outstanding balance was $850,000.
Meadows CDA Construction Loan
In March 1997, the Meadows entered into a $1,500,000 loan agreement with
the CDA of which $1,000,000 was funded in March 1997. Principal payments of
$150,000 are due on July 1 and October 1 of each year commencing July 1, 1997
through October 1, 2001. The note bears interest at the rate of 8.9% per annum
through February 1, 1998, and thereafter at the index rate, as defined, plus
2.5%. In addition,
F-32
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Meadows is required to make principal payments in an amount equal to 10% of
the annual gross revenue, as defined, in excess of $13,000,000 on or before the
March 1 following each calendar year commencing March 1, 1998. In 1997, gross
revenues did not exceed the defined threshold and thus no principal payment was
made on March 1, 1998.
Murat Notes Payable
The Company has two loans payable to the Massachusetts Avenue Community
Development Corporation (MAC), an $800,000 non-interest bearing note and a
$1,000,000 note. Principal payments on the non-interest bearing note are the
lesser of $0.15 per Murat ticket sold during fiscal year or remaining net cash
flow, as defined. Interest on the other note is calculated annually and is
equal to the lesser of (1) $0.10 per Murat ticket sold during the fiscal year,
(2) prime plus 1% or (3) remaining net cash flow, as defined. Interest and
principal on the $1,000,000 note is payable at the lesser of $0.10 per Murat
ticket sold during fiscal year or remaining net cash flow, as defined.
Provisions of the $800,000 note payable requires the Murat to continue
making payments after the principal has been paid down equal to the lesser of
$0.15 per Murat ticket sold during the fiscal year or remaining cash flow.
These payments are to be made to a not-for-profit foundation and will be
designated for remodeling and upkeep of the theatre.
Meadows Note Payable
Under the terms of a Meadows ticket and sales agreement, a vendor loaned
the Company $824,500 and pays the Company an annual fee of $140,000 for nine
years commencing in March 1996. Proceeds from the annual fee are used by the
Company to make the annual principal and interest payments.
Polaris Note Payable
In 1994, a concessionaire advanced Sunshine Promotions $500,000 to be used
in the construction of the Polaris Amphitheater. The advance is interest free
and is payable in annual installments of $25,000 beginning in 1994 for a period
of 20 years.
Capital Lease Obligations
The Company has entered into various equipment leases. Interest on the
leases range from 6.5% to 18.67%.
Principal maturities of the long-term debt, notes payable and capital
lease obligations over the next five years as of December 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
LONG-TERM DEBT AND CAPITAL LEASE
NOTES PAYABLE OBLIGATIONS
-------------------- --------------
<S> <C> <C>
1998 ................. $756 $167
1999 ................. 782 157
2000 ................. 611 113
2001 ................. 541 53
2002 ................. $537 --
</TABLE>
F-33
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY AND EQUIPMENT
The Company's property and equipment as of December 31, 1997 and 1996
consisted of the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
1997 1996
----------- ------------
<S> <C> <C>
Land .............................. $ 8,752 --
Building and improvements ......... 44,364 --
Furniture and equipment ........... 6,503 $ 131
Leasehold improvements ............ 2,676 6,726
-------- --------
62,295 6,857
Accumulated depreciation .......... (2,610) (4,626)
-------- --------
$ 59,685 $ 2,231
======== ========
</TABLE>
7. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
The Company is a 49% partner in a general partnership which subleases a
theater located in New York City. Income associated with the promotion of
concerts at this theater is recorded as concert revenue. Any such promotion
revenue recognized reduces the Company's share of the partnership's profits.
The Company is also a one-third partner in GSAC Partners, a general partnership
through which it shares in the income or loss of the PNC Bank Arts Center at
varying percentages based on the partnership agreement. The Company records
these investments on the equity method. In connection with the PACE
Acquisition, the Company agreed to purchase the interest in GSAC Partners that
it did not already own and in 1998 completed the purchase. Thus, the financial
position and operations of GSAC Partners will be consolidated into those of the
Company beginning in 1998.
The following is a summary of the unaudited financial position and results
of operations of the Company's equity investees (GSAC Partners in 1997 and 1996
only) as of and for the years ended December 31, 1997, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR
1997 1996 1995
--------- ------------- ------------
<S> <C> <C> <C>
Current assets .................................. $ 2,818 $ 756 $ 214
Property, plant and equipment ................... 1,427 239 122
Other assets .................................... 239 819 --
------- ------- ------
Total assets .................................... $ 4,484 $ 1,814 $ 336
======= ======= ======
Current liabilities ............................. $ 1,621 $ 1,534 $ 264
Partners' capital ............................... 2,863 280 72
------- ------- ------
Total liabilities and partners' capital ......... $ 4,484 $ 1,814 $ 336
======= ======= ======
Revenue ......................................... $20,047 $16,037 $4,058
Expenses ........................................ 17,074 14,624 2,954
------- ------- ------
Net income ...................................... $ 2,973 1,413 $1,104
======= ======= ======
</TABLE>
The equity income recognized by the Company represents the appropriate
percentage of investment income less amounts reported in concert revenues for
shows promoted by the Company at these theaters. Such concert revenues of
unconsolidated subsidiaries was approximately $97,000, $205,000 and $110,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
F-34
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The provisions for income taxes for the years ended December 31, 1997,
1996 and 1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR
1997 1996 1995
------ ------------- ------------
<S> <C> <C> <C>
CURRENT:
Federal .............. -- -- --
State ................ $420 $106 $13
DEFERRED:
Federal .............. -- -- --
State ................ 70 -- --
---- ---- ---
Total ................ $490 $106 $13
==== ==== ===
</TABLE>
No Federal income taxes were provided in 1997 as a result of the Company's
inclusion in the consolidated federal income tax return with SFX Broadcasting.
If the Company had filed on a stand alone basis, its federal tax provision
would have been approximately $2,050,000, consisting of $1,760,000 in current
taxes and approximately $290,000 of deferred taxes. The Predecessor had no
Federal tax provision in 1996 or 1995 by virtue of the status of its profitable
included companies as S Corporations. State income taxes were provided to the
extent that S Corporation status was not recognized.
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax asset and liabilities as of December
31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Deferred compensation ........................ $ 783
Deferred tax liabilities:
Depreciable assets ........................... $3,600
------
Net deferred tax liability ................... $2,817
======
</TABLE>
The Predecessor had no deferred tax liabilities as of December 31, 1996.
The acquisition of the Meadows resulted in the recognition of deferred tax
liabilities of approximately $3,200,000 under the purchase method of
accounting. These amounts were based upon the excess of the financial statement
basis over the tax basis in assets, principally fixed assets. The acquisition
of Delsener/Slater resulted in the recognition of deferred tax assets of
approximately $1,200,000 under the purchase method of accounting. These amounts
were based upon the excess of the financial statements basis over the tax basis
in assets, principally deferred compensation.
F-35
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997, 1996, and 1995 the effective rate varies from the
statutory Federal income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
---------------------
1997 1996 1995
----------- ---------- --------
<S> <C> <C> <C>
Income taxes at the statutory rate ........................ $ 1,463 $ (139) $ 54
Effect of Subchapter S status ............................. -- 139 (54)
Nondeductible amortization ................................ 800 -- --
Travel and entertainment .................................. 20 -- --
Effect of consolidated return loss ........................ (2,283) -- --
State and local income taxes (net of Federal benefit) ..... 490 106 13
-------- ------ -----
Total provision ........................................... $ 490 $ 106 $ 13
======== ====== =====
</TABLE>
9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Pursuant to the terms of the Spin-Off, upon the consummation of the
Broadcasting Merger, the Company will assume all obligations under any
employment agreements or arrangements between SFX Broadcasting and any employee
of the Company.
While the Company is involved in several suits and claims 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.
The Company's operating leases includes primarily leases with respect to
venues, office space and land. Total rent expense was $2,753,000 , $875,000 and
$835,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The lease terms range from 3 to 37 years. Prior to the Spin-Off, the Company
will enter into contracts with certain officers and other key employees. No
such contracts existed in 1997. The future minimum payments for all
noncancelable operating leases and employee agreements with initial terms of
one year or more are as follows (in thousands):
<TABLE>
<CAPTION>
EMPLOYMENT
OPERATING LEASES AGREEMENTS
------------------ -----------
<S> <C> <C>
1998 ................................ $ 3,366 $1,900
1999 ................................ 3,823 1,864
2000 ................................ 1,648 1,624
2001 ................................ 1,666 1,534
2002 ................................ 1,678 300
2003 and thereafter ................. 14,117 --
------- ------
$26,298 $7,222
======= ======
</TABLE>
The Company has committed to expansion projects at the Jones Beach Theater
and PNC Bank Arts Center and, in connection with the BGP Acquisition, for the
construction of a new amphitheater in the Seattle, Washington market. The Jones
Beach Theater and PNC Bank Arts Center expansions are expected to be completed
in June 1998 and to cost approximately $15,000,000 and $10,500,000,
respectively. As of December 31, 1997, approximately $1,018,000 and $1,500,000,
respectively, of these costs have been incurred. The new amphitheater in
Seattle is expected to cost $10,000,000 and is expected to be completed in the
spring of 1999.
As of December 31, 1997 and 1996, outstanding letters of credit for
$1,110,000 and $400,000, respectively, were issued by banks on behalf of the
Company as security for loans and the rental of theaters.
In connection with the acquisition of Delsener/Slater, SFX Broadcasting
entered into an employment agreement with each of Ron Delsener and Mitch Slater
pursuant to which each of Messrs. Delsener and Slater serve as Co-President and
Co-Chief Executive Officer of Delsener/Slater. Each of the employment
agreements continues until December 31, 2001 unless terminated earlier by the
Company for cause or voluntarily by Mr. Delsener or Mr. Slater.
F-36
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In certain cases, Messrs. Delsener and Slater have rights to purchase the
outstanding capital stock of Delsener/Slater for fair market value as defined
in their employment agreements.
Additionally, in the case of a return event, as defined, which may be
deemed to include the Spin-Off, the Broadcasting Merger and related
transactions, Messrs. Delsener and Slater have the right to receive a portion
of the excess of the proceeds of the return event over a fixed amount
determined in reference to the original purchase price for Delsener/Slater, all
as calculated pursuant to the Delsener and Slater employment agreements.
Management believes that, with respect to the Spin-Off, the Broadcasting Merger
and related transactions, no payment will accrue to Mr. Delsener or Mr. Slater
pursuant to their employment agreements.
The employment agreements further provide that Messrs. Delsener and Slater
shall be paid annual bonuses determined with reference to Delsener/Slater
profits, as defined, for the immediately preceding year. Management believes
that no such bonus was earned for the year ended December 31, 1997.
Messrs. Delsener and Slater and the Company are in the process of
negotiating amendments to their employment agreements to reflect, among other
things, the changes to the business of the Company as a result of the Recent
Acquisitions and the Spin-Off, and each of Messrs. Delsener and Slater have
agreed in principle to waive any rights which may accrue in connection with the
Broadcasting Merger or the Spin-Off. The Company also expects, in connection
with the foregoing, to negotiate mutually satisfactory amendments to certain of
Messrs. Delsener's and Slater's compensation arrangements, including bonus and
profit sharing provisions.
10. RELATED PARTY TRANSACTIONS
The Company's Executive Vice President, General Counsel and Director is Of
Counsel to the law firm of Baker & McKenzie. Baker & McKenzie serves as counsel
to the Company in certain matters. Baker & McKenzie compensates the executive
based, in part, on the fees it receives from providing legal services to the
Company and other clients originated by the executive. In 1997, the Company
incurred fees of approximately $2,948,000 for legal services related to the
Recent Acquisitions. Such fees were funded by SFX Broadcasting on behalf of the
Company. In February 1998, the Company reimbursed SFX Broadcasting for these
fees.
Due to stockholder represents the balance due to Mr. Delsener on his
advances to renovate the Jones Beach Theatre (the "Jones Beach Loan") and the
PNC Bank Arts Center (the "PNC Loan"). Delsener /Slater paid interest at 8% per
annum on the Jones Beach Loan, which was repaid in May 1996. The PNC Loan,
which was originated in 1996 was repaid in connection with the acquisition of
Delsener/Slater by SFX Broadcasting in 1997 (See Note 1).
11. 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 of Class A Common
Stock 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 the Company's Class A Common Stock are entitled to one vote and
holders of the Company's Class B Common Stock are entitled to ten votes on all
matters submitted to a vote of shareholders except for (a) the election of
directors, (b) with respect to any "going private" transaction involving the
Chairman and (c) as otherwise provided by law.
F-37
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Board of Directors has the authority to issue preferred stock and will
assign the designations and rights at the time of issuance.
12. DEFINED CONTRIBUTION PLAN
The Company sponsors a 401(k) defined contribution plan in which most
full-time employees are eligible to participate. The Plan presently provides
for discretionary employer contributions. There were no contributions in 1997.
13. SUBSEQUENT EVENTS (UNAUDITED)
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.
During January 1998, in connection with 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 90,000
shares of the Company's Class A Common Stock to certain executive officers for
a purchase price of $2.00 per share. Such shares will be issued on or about the
effective date of the Spin-Off. A substantial non-cash charge to earnings will
be recorded by the Company at the time of the Spin-Off based on then fair value
of such 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, 252,500 will vest over
three years and will have an exercise price of $5.50 per share, and the
remainder will vest over five years and will have an exercise price of $30.50.
The Company will record non-cash compensation charges over the three-year
period with respect to the 252,000 options to be issued to the extent that the
fair value of the Company's Class A Common Stock exceeds the exercise price of
such options.
Further, the Board of Directors has 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.
In January 1998, Mr. Sillerman committed to finance the $8.3 million
exercise price of the Meadows Repurchase in order to avoid the $10.5 million
reduction to Working Capital. In consideration for such commitment, the board
of directors of SFX Broadcasting agreed that Mr. Sillerman would receive the
Company Class A Common Stock to be issued in the Spin-Off with respect to the
Meadows Shares. 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. In the event the Meadows Shares are
tendered in the SFX Merger, the third party has agreed to pay $10.5 million to
the Company, which is an amount equal to the Meadows Reduction. 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 Company Class A Common Stock
to be issued in the Spin-Off with respect to the Meadows Shares.
F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Connecticut Performing Arts, Inc. and
the Partners of Connecticut Performing Arts Partners:
We have audited the accompanying combined balance sheets of Connecticut
Performing Arts, Inc. and Connecticut Performing Arts Partners (collectively,
the Company) as of December 31, 1995 and 1996, and the related combined
statements of operations, shareholders' and partners' equity (deficit) and cash
flows for the years then ended. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1995 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 21, 1997
F-39
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------
1995 1996
--------------- ---------------
<S> <C> <C>
ASSETS:
Current assets:
Cash ................................................................ $ 63,061 $ 6,778
Accounts receivable ................................................. 192,382 152,205
Accounts receivable -- related party ................................ 124,700 226,265
Prepaid interest .................................................... 54,982 54,279
Prepaid insurance ................................................... 69,797 87,869
Other current assets ................................................ 21,156 60,784
Deposit ............................................................. -- 110,000
Subscription receivable ............................................. 100 100
----------- ------------
Total current assets ............................................. 526,178 698,280
----------- ------------
Plant and equipment:
Building and building improvements .................................. 14,127,632 14,208,153
Furniture, fixtures and equipment ................................... 1,899,041 1,973,911
Leasehold improvements .............................................. 1,221,069 1,224,071
----------- ------------
17,247,742 17,406,135
Less: Accumulated depreciation and amortization ..................... (408,897) (1,620,297)
----------- ------------
16,838,845 15,785,838
----------- ------------
Other assets:
Deferred costs, net of accumulated amortization of $165,300 and
$503,766 in 1995 and 1996, respectively ............................ 2,453,553 2,115,087
Deposit ............................................................. 110,000 --
Other ............................................................... -- 2,332
----------- ------------
Total other assets ............................................... 2,563,553 2,117,419
----------- ------------
$19,928,576 $ 18,601,537
=========== ============
LIABILITIES AND SHAREHOLDERS' AND PARTNERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable .................................................... $ 915,280 $ 908,986
Accrued expenses .................................................... 1,356,132 655,207
Deferred income ..................................................... 679,476 737,440
Notes payable ....................................................... 1,100,000 1,450,000
Current portion of long-term debt and capital lease obligations ..... 493,362 824,800
----------- ------------
Total current liabilities ........................................ 4,544,250 4,576,433
----------- ------------
Long-term debt and capital lease obligations,
less current portion ............................................... 13,398,700 13,982,196
----------- ------------
COMMITMENTS AND CONTINGENCIES
(Notes 2, 4, 5, 6, 9 and 10)
Shareholders' and Partners' Equity (Deficit):
Shareholders' equity--
Common stock ....................................................... 1,000 1,000
Series A Preferred Stock ........................................... 1,346,341 1,372,174
Series B Preferred Stock ........................................... 1,250,000 1,250,000
Accumulated deficit ................................................ (273,114) (1,999,823)
Partners' equity (deficit) .......................................... (338,601) (580,443)
----------- ------------
Total shareholders' and partners' equity (deficit) ............... 1,985,626 42,908
----------- ------------
$19,928,576 $ 18,601,537
=========== ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-40
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996
---------------- ----------------
<S> <C> <C>
Operating revenues:
Concert revenue ....................... $ 6,830,681 $ 8,122,797
Cost of concerts ...................... (5,524,043) (6,191,777)
------------ ------------
1,306,638 1,931,020
Ancillary income ...................... 1,431,577 2,052,592
------------ ------------
2,738,215 3,983,612
------------ ------------
Operating expenses:
General and administrative ............ 3,068,162 3,080,914
Depreciation and amortization ......... 574,197 1,549,894
Other ................................. 20,046 33,577
------------ ------------
3,662,405 4,664,385
------------ ------------
Loss from operations ............... (924,190) (680,773)
Other income (expense):
Interest income ....................... 428,869 30,015
Interest expense ...................... (509,225) (1,274,660)
------------ ------------
Loss before income taxes ........... (1,004,546) (1,925,418)
Provision for income taxes ............ 10,796 17,300
------------ ------------
Net loss ........................... $ (1,015,342) $ (1,942,718)
============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-41
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED STATEMENTS OF SHAREHOLDERS'
AND PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
------------------------------------------- PARTNERS'
COMMON PREFERRED ACCUMULATED EQUITY
STOCK STOCK DEFICIT (DEFICIT)
--------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 .................... $1,000 $2,500,000 $ (32) $ 500,000
Accretion of Series A Preferred Stock ......... -- 96,341 (96,341) --
Net loss ...................................... -- -- (176,741) (838,601)
------ ---------- ------------ ----------
Balance, December 31, 1995 .................... 1,000 2,596,341 (273,114) (338,601)
Accretion of Series A Preferred Stock ......... -- 25,833 (25,833) --
Net loss ...................................... -- -- (1,700,876) (241,842)
------ ---------- ------------ ----------
Balance, December 31, 1996 .................... $1,000 $2,622,174 $ (1,999,823) $ (580,443)
====== ========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-42
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ....................................................... $ (1,015,342) $ (1,942,718)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................. 574,197 1,549,894
Loss on disposal of equipment ................................. -- 1,031
Changes in operating assets and liabilities:
Accounts receivable ........................................... (192,382) 40,177
Accounts receivable -- related party .......................... -- (101,565)
Prepaid expenses and other assets ............................. (143,703) (59,329)
Accounts payable .............................................. -- (6,294)
Accrued expenses .............................................. 505,199 150,008
Deferred income ............................................... 679,476 57,964
------------- -------------
Net cash provided by (used in) operating activities ......... 407,445 (310,832)
------------- -------------
Cash flows from investing activities:
Purchases of plant and equipment .............................. (23,242,858) (159,452)
Grant proceeds ................................................ 7,680,161 --
Deferred start-up costs ....................................... (264,975) --
Accounts receivable -- related party .......................... 827,170 --
Accounts payable .............................................. (438,350) --
------------- -------------
Net cash used in investing activities ...................... (15,438,852) (159,452)
------------- -------------
Cash flows from financing activities:
Proceeds from borrowings on notes payable and long-term
debt ........................................................ 13,943,316 1,278,068
Repayments of notes payable, long-term debt and capital
lease obligations ........................................... (176,917) (864,067)
Proceeds from sales of common and preferred stock ............. 900 --
------------- -------------
Net cash provided by financing activities ................... 13,767,299 414,001
------------- -------------
Net decrease in cash ........................................... (1,264,108) (56,283)
Cash, beginning of year ........................................ 1,327,169 63,061
------------- -------------
Cash, end of year .............................................. $ 63,061 $ 6,778
============= =============
Supplemental Disclosures:
Cash Paid For--
Interest ...................................................... $ 554,342 $ 1,108,291
============= =============
Income taxes .................................................. $ 10,796 $ 17,300
============= =============
Noncash Transactions--
Capital lease obligations ..................................... $ 59,479 $ --
============= =============
Series A Preferred Stock accretion ............................ $ 96,341 $ 25,833
============= =============
Conversion of accrued expense for equipment purchase to
note payable ................................................ $ -- $ 850,933
============= =============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-43
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Operations --
Connecticut Performing Arts, Inc. (the Company) and Connecticut Performing
Arts Partners (the Partnership) were incorporated and formed, respectively, in
1993 pursuant to the laws of the State of Connecticut. The Company's
shareholders and the Partnership's partners are Nederlander of Connecticut,
Inc. and Connecticut Amphitheater Development Corporation. The Company's
shareholders and the Partnership's partners changed in March 1997 (see Note
10). The Company and Partnership are engaged in the ownership and operation of
an amphitheater in Hartford, Connecticut. The construction of the amphitheater
commenced in December 1994 and amphitheater operations commenced in July 1995.
Principles of combination --
The combined financial statements include the accounts of the Company and
the Partnership after elimination of intercompany accounts and transactions.
Use of estimates in the preparation of financial statements --
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Plant and equipment --
Plant and equipment is carried at cost. Major additions and betterments
are capitalized, while replacements, maintenance and repairs which do not
extend the lives of the assets are charged to operations as incurred. Upon the
disposition of plant and equipment, any resulting gain or loss is recognized in
the statement of operations as a component of income.
The Company received grant funds from the City of Hartford and Connecticut
Development Authority related to the construction of the amphitheater (see Note
4). Such amounts have been accounted for as a reduction in the cost of the
amphitheater.
Depreciation of plant and equipment is provided for, commencing when such
assets become operational, using straight-line and accelerated methods over the
following estimated useful lives:
<TABLE>
<CAPTION>
USEFUL LIVES
-------------------
<S> <C>
Building and building improvements .......... 39 years
Furniture, fixtures and equipment ........... 4-7 years
Leasehold improvements ...................... Shorter of asset
life or lease term
</TABLE>
Effective January 1, 1996, the Company and Partnership adopted Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which had no
effect upon adoption. This statement requires that long-lived assets and
certain identifiable intangible assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
F-44
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Deferred costs --
Deferred costs consist of start-up costs being amortized over a period of
5 years and deferred financing costs being amortized over the term of the
related debt (24 years and 4 months). As of December 31, 1995 and 1996 deferred
costs were as follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Deferred start-up ....................... $1,452,669 $1,452,669
Deferred financing ...................... 1,166,184 1,166,184
---------- ----------
2,618,853 2,618,853
Less: Accumulated amortization .......... (165,300) (503,766)
---------- ----------
$2,453,553 $2,115,087
========== ==========
</TABLE>
Deposit --
The deposit represents a deposit held by the City of Hartford related to
an employment agreement between the Partnership and the City of Hartford for
priority hiring of Hartford residents and utilization of minority business
enterprise or women business enterprise contractors and vendors in the future
operation of the amphitheater. The deposit will be returned to the Partnership
in December 1997 if the Partnership is in compliance with the employment
agreement. As of December 31, 1996, the Partnership has compensated the City of
Hartford for noncompliance with the terms of the agreement in connection with
the construction of the facility and the hiring of contractors and the City of
Hartford has agreed to make no additional claims with respect to this matter.
Income taxes --
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". This
statement requires a company to recognize deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
a company's financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statement carrying amounts and the tax bases of assets and
liabilities and net operating loss carryforwards available for tax reporting
purposes, using the applicable tax rates for the years in which the differences
are expected to reverse. A valuation allowance is recorded on deferred tax
assets unless realization is more likely than not.
The income tax effects of the operations of the Partnership accrue to the
partners in accordance with the terms of the Partnership agreement and are not
reflected in the accompanying combined financial statements.
Revenue recognition --
Revenue from ticket sales is recognized upon occurrence of the event.
Advance ticket sales are recorded as deferred income until the event occurs.
Ticket revenue is recorded net of payments in lieu of taxes under the terms of
the City of Hartford lease (see Note 6) and admission taxes.
Advertising --
The Company expenses the cost of advertising when the specific event takes
place. Advertising expense was $639,424 and $689,160 for the years ended
December 31, 1996 and 1995, respectively.
F-45
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SHAREHOLDERS' EQUITY:
Common stock --
The Company is authorized to issue 5,000 shares of common stock with no
par value. The subscription receivable of $100 as of December 31, 1996
represents the amount due from shareholders for 100 shares of common stock at
$10 per share, of which $900 was received in February 1995.
Preferred stock --
The Company is authorized to issue 295,000 shares of preferred stock at no
par value. As of December 31, 1996 and 1995, 125,000 of such shares have been
designated as Series A Preferred Stock and 125,000 of such shares have been
designated as Series B Preferred Stock. Series A and Series B Preferred Stock
are not entitled to dividends and have liquidation rights of $10 per share.
Series A Preferred Stock is mandatorily redeemable at the rate of 20,835
shares commencing December 31, 1995 (the Initial Redemption Date) and an
aggregate of 20,833 shares on each six month anniversary of the Initial
Redemption Date until all 125,000 shares of the Series A Preferred Stock have
been redeemed, at $11.445 per share. As of December 31, 1996, no shares of
Series A Preferred Stock had been redeemed. The Company is accreting the
difference between the redemption price and the proceeds per share over the
period from the issuance date to the respective scheduled redemption dates.
Series B Preferred Stock is mandatorily redeemable at a per share price of
$10 in whole or in part at the option of the Company at any such time as
legally available funds, as defined in the resolution establishing and
designating the preferred stock, are available. On the tenth anniversary of the
completion date of the amphitheater any Series B Preferred Stock outstanding
shall be redeemed by the Company at a per share price of $10.
The Series A and Series B Preferred Stock will not be redeemed if such
redemption would result in a violation of the provisions of the Connecticut
Development Authority assistance agreement (see Note 4) or the mortgage loan
agreement (see Note 5).
3. PARTNERS' EQUITY:
In 1993, Nederlander of Connecticut, Inc. and Connecticut Amphitheater
Development Corporation each made an initial capital contribution of $250,000.
4. GRANT FUNDS:
Connecticut Development Authority (CDA) Assistance Agreement --
On September 12, 1994, the CDA entered into a non-recourse assistance
agreement with the Company whereby the CDA provided grant funds for the
construction and development of an amphitheater in the City of Hartford (the
Project) through the issuance of State of Connecticut General Fund Obligation
Bonds (GFO Bonds). The Company received bond proceeds of $8,863,000, which
amount is net of CDA bond issuance costs of $593,000 and withholdings of
$429,000 by the CDA to cover the expected operating shortfall, as discussed
below, through December 31, 1995. Commencing January 1, 1996, the annual tax
revenues derived from the operation of the amphitheater are utilized to satisfy
the annual debt service requirements under the GFO Bonds. In the event that
annual tax revenues derived from the operation of the amphitheater do not equal
annual debt service requirements under the GFO Bonds, the Company must deposit
the lesser of the operating shortfall, as defined, or 10% of the annual debt
service under the GFO Bonds. An operating shortfall did not exist for the year
ended December 31, 1996. The GFO Bonds mature on October 15, 2024 and have an
average coupon rate of 6.33%. Annual debt service requirements on the GFO Bonds
for each of the next five years and thereafter are as follows:
F-46
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. GRANT FUNDS: (CONTINUED)
<TABLE>
<CAPTION>
YEAR AMOUNT
- ----------------------- -------------
<S> <C>
1997 ............... $ 740,556
1998 ............... 738,906
1999 ............... 736,656
2000 ............... 738,856
2001 ............... 740,293
Thereafter ......... 17,140,363
-----------
$20,835,630
===========
</TABLE>
The assistance agreement requires an annual attendance of at least 400,000
for each of the first three years of operations. It will not be considered an
event of default if the annual attendance is less than 400,000 provided that no
operating shortfall exists for that year or if an operating shortfall exists
such amount has been deposited by the Company. If there is an event of default,
the CDA may foreclose on the construction mortgage loan (see Note 5). If the
amphitheater's operations are relocated outside of Connecticut during the ten
year period subsequent to the assistance agreement or during the period of the
construction mortgage loan, the full amount of the grant funds plus a penalty
of 5% must be repaid to the State of Connecticut.
City of Hartford Grant Funds --
On February 15, 1995 the Company entered into an agreement with the City
of Hartford whereby the City of Hartford provided grant funds of $2,050,000 for
the remediation and closure of a solid waste disposal area near the
amphitheater. As of December 31, 1995 all funds had been received by the
Company.
5. NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable --
In October 1995, the Company entered into two notes payable with related
parties for an aggregate of $2,000,000. As of December 31, 1996 and 1995,
$1,450,000 and $1,100,000, respectively was outstanding on these notes. The
notes bear interest at 6.6% per annum and are payable upon demand.
CDA mortgage loan --
On September 12, 1994, CDA entered into a construction mortgage loan
agreement for $7,685,000 with the Company. The purpose of the loan was to
finance a portion of the construction and development of the amphitheater. The
loan agreement contains substantially the same covenants as the CDA assistance
agreement (see Note 4). As of December 31, 1995, proceeds of $6,519,000, which
amount is net of deferred financing costs of approximately $1,166,000, had been
received by the Company.
F-47
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE AND LONG-TERM DEBT: (CONTINUED)
The mortgage loan bears interest at 8.73% and is payable in monthly
installments of principal and interest. The mortgage loan matures on October
15, 2019. As of December 31, 1996, future principal payments are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------ -------------
<S> <C>
1997 ................ $ 111,667
1998 ................ 121,667
1999 ................ 131,667
2000 ................ 141,667
2001 ................ 152,500
Thereafter .......... 6,854,498
----------
$7,513,666
==========
</TABLE>
The loan is guaranteed by the Company's shareholders and is collateralized
by a lien on the Company's assets. As of December 31, 1996, the loan was
secured by an irrevocable standby letter of credit issued by a shareholder of
the Company in the amount of $785,000. The letter of credit was replaced in
March 1997 by a letter of credit issued by a new shareholder (see Note 10).
Ogden Entertainment, Inc. (OE) Concession Agreement --
In October 1994, the Partnership entered into a concession agreement with
OE which provides for the payment of concession commissions to the Partnership.
In connection with the concession agreement, OE loaned the Partnership
$4,500,000 in 1995 to facilitate the construction of the amphitheater. On
December 30, 1996, the concession agreement was amended and restated
retroactively to October 18, 1994. In accordance with the terms of the amended
agreement, which expires on July 7, 2025, interest only, at the 6-month LIBOR
rate, through July 7, 1995 and principal and interest, at the rate of 7.5% per
annum, were due on the note payable via withholdings of the first $41,716 from
each monthly commission payment commencing July 20, 1995 through December 20,
1995. Effective January 2, 1996, and through the term of the amended concession
agreement, principal and interest, at the rate of 7.5% per annum on the note is
payable via withholdings of the first $31,299 from each monthly commission
payment.
OE loaned the Partnership an additional $1,000,000 during 1995. This loan
bears interest at a rate of 9.75% per annum and is payable via withholdings of
an additional $11,900 of principal, plus interest, from each monthly commission
payment through December 20, 2002. As of December 31, 1996, aggregate future
principal payments to OE are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------ -------------
<S> <C>
1997 ................ $ 190,722
1998 ................ 194,442
1999 ................ 198,451
2000 ................ 202,772
2001 ................ 207,427
Thereafter .......... 4,218,234
----------
$5,212,048
==========
</TABLE>
The concession agreement provided for the Partnership to supply certain
equipment to OE at the Partnership's expense. This equipment was installed
prior to the opening of the amphitheater (the Initial
F-48
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE AND LONG-TERM DEBT: (CONTINUED)
Equipment). The Initial Equipment was purchased by OE at a cost of $850,933 and
the Partnership was obligated to reimburse OE for the cost of the equipment.
Accordingly, this amount was reflected as an accrued expense in the
accompanying combined balance sheet as of December 31, 1995. In 1996, in
connection with the amended concession agreement, the $850,933, and an
additional $33,067 related to 1996 equipment purchases, was converted to a note
payable for $884,000. The note bears interest at the rate of 9.25% per annum
and provides for monthly principal and interest payments of $10,185 to OE,
however, the Partnership is not required to make any principal or interest
payments to the extent that 5% of receipts, as defined, in any month are less
than the amount of the payment due. As of December 31, 1996, future principal
payments to OE by the Partnership are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------ ----------
<S> <C>
1997 ................ $ 42,210
1998 ................ 46,284
1999 ................ 50,751
2000 ................ 55,650
2001 ................ 61,022
Thereafter .......... 628,083
--------
$884,000
========
</TABLE>
Conn Ticketing Company (CTC) Promissory Note Payable --
On April 1, 1995, CTC (a company related to the Company and the
Partnership via common ownership) entered into a promissory note agreement with
ProTix Connecticut General Partnership (PTCGP). Under the terms of the
agreement, CTC borrowed $825,000 at 9.375% per annum from PTCGP. Principal and
interest are repayable by CTC in nine annual installments of $139,714 which
commenced March 31, 1996. In May 1995, CTC loaned $824,500 to the Company which
is also repayable in nine annual installments of principal and interest of
$139,714. The PTCGP loan to CTC is secured by CTC's receivable from the
Company. As of December 31, 1996, future principal payments to CTC by the
Company are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------ ----------
<S> <C>
1997 ................ $ 68,217
1998 ................ 74,613
1999 ................ 81,608
2000 ................ 89,259
2001 ................ 97,627
Thereafter .......... 351,306
--------
$762,630
========
</TABLE>
In January 1995, the Partnership entered into a ticket and sales agreement
with PTCGP through December 31, 2004. Under the terms of the agreement, PTCGP
pays the Partnership an annual fee of $140,000 commencing in March 1996.
Proceeds from the annual fee for the first nine years will be used by the
Partnership to make the annual principal and interest payment to CTC.
Line of credit --
The Partnership has a line of credit in the amount of $2,000,000, which
bears interest at 8.25% per annum, with a bank. As of December 31, 1996,
$395,000 was outstanding on the line of credit.
F-49
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE AND LONG-TERM DEBT: (CONTINUED)
Capital lease obligations --
The Partnership entered into capital leases for certain office equipment.
The leases expire in 1998 and 2000. As of December 31, 1996 future principal
payments are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------ ----------
<S> <C>
1997 .......... $16,984
1998 .......... 13,905
1999 .......... 4,550
2000 .......... 4,213
-------
$39,652
=======
</TABLE>
6. LAND AND BUILDING LEASES:
Land lease agreement between the City of Hartford and the Partnership --
The Partnership entered into a 40 year lease agreement for certain land
with the City of Hartford, Connecticut on September 14, 1994. The lease
agreement provides for two successive options to extend the term of the lease
for a period of ten years each. The Partnership pays an annual basic rent of
$50,000 commencing July 1, 1995; and additional rent payments in lieu of real
estate taxes (PILOT) in an amount equal to 2% of all admission receipts, food
and beverage revenue, merchandise revenue and parking receipts that exceed 10%
of the total admission receipts, which amount is to be net of any surcharges
and sales or like taxes levied by governmental authorities on the price of such
items.
Assignment of lease by the Partnership to the Company --
The above lease was subsequently assigned by the Partnership to the
Company on September 22, 1994 for consideration of $1.
Lease and sublease agreement between the Company and the Partnership --
On October 19, 1994, the Company subleased the land and buildings and
improvements thereon to the Partnership for a period of 40 years commencing
upon substantial completion of the amphitheater. The sublease agreement
provides for two successive options to extend the term of the lease for a
period of ten years each. The sublease agreement provides for the Partnership
to pay rent to the Company in amounts ranging from $804,000 to $831,100 per
annum for the first 25 years and $100,000 per annum thereafter including the
option periods. Additional rent of six semi-annual installments of $238,452 is
also payable by the Partnership commencing six months after the start of
operations. Subsequent to the six semi-annual installments an aggregate of
$1,250,000 will be payable in semi-annual installments based on available cash
flow of the Partnership, as defined. Additionally, the Partnership is also
required to pay the annual basic rent ($50,000) and any additional payments in
lieu of taxes under the terms of the lease agreement between the City of
Hartford and the Partnership described above. The Partnership will also pay
additional rent equal to principal and interest payable by the Company to the
concession company for a previously arranged concessionaire arrangement (see
Note 5). The accompanying combined statement of operations for the year ended
December 31, 1996 includes rent expense of $50,000 which represents the
aggregate amount due to the City of Hartford under the terms of the above
agreements.
7. INCOME TAXES:
The provision for income taxes for the year ended December 31, 1996
represents minimum state income taxes for the Company. As of December 31, 1996,
the Company has a net deferred tax asset of
F-50
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES: (CONTINUED)
approximately $750,000 primarily as a result of aggregate net operating losses
since inception. Usage of the net operating loss carryforwards is restricted in
the event of certain ownership changes. A valuation allowance has been recorded
for the same amount due to the uncertainty related to the realization of this
asset.
8. RELATED PARTY TRANSACTIONS:
Accounts receivable -- related party as of December 31, 1996, includes net
amounts due from a shareholder of $121,265 and receivables from another related
party of $105,000.
9. CONTINGENCIES:
The Company and the Partnership are party to certain litigation arising in
the normal course of business. Management, after consultation with legal
counsel, believes the disposition of these matters will not have a material
adverse effect on the combined results of operations or financial condition.
10. SUBSEQUENT EVENTS:
Effective March 5, 1997, the Partnership and Company entered into a
$1,500,000 loan agreement with the CDA of which $1 million was funded in March
1997. Principal payments of $150,000 are due on July 1 and October 1 of each
year commencing July 1, 1997 through October 1, 2001. The note bears interest
at the rate of 8.9% per annum through February 1, 1998, and thereafter at the
index rate, as defined, plus 2.5%. In addition, the Partnership and Company are
required to make principal payments in an amount equal to 10% of the annual
gross revenue, as defined, in excess of $13 million on or before March 1 of
each calendar year commencing March 1, 1998.
In March 1997, three subsidiaries of SFX Broadcasting, Inc.
(Broadcasting), which were created for such purpose, were merged into
Nederlander of Connecticut, Inc., Connecticut Amphitheater Development
Corporation and QN Corp., a newly formed entity. In connection with the merger,
the name of Nederlander of Connecticut, Inc., was changed to NOC, Inc. (NOC)
and the directors of NOC, Inc., Connecticut Amphitheater Development
Corporation (CADCO) and QN Corp. (QN) were replaced with directors of the
Broadcasting acquisition subsidiaries. Each outstanding share of stock of NOC,
CADCO and QN was canceled and exchanged for an aggregate of $1 million cash and
shares of Broadcasting Class A Common Stock valued at $9 million, subject to
certain adjustments. The shares are subject to a put provision between the
second and seventh anniversary of the closing whereby the holder can put each
share back to Broadcasting for the per share value of Broadcasting stock as of
the merger closing date, as defined, less 10%. Additionally, the shares may be
called by Broadcasting during the same period for an amount equal to the per
share value of the Broadcasting stock as of the merger closing date, as
defined, plus 10%. As consideration for approval of the transaction, the CDA
received shares of Broadcasting stock valued at approximately $361,000.
F-51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of SFX Broadcasting, Inc.:
We have audited the accompanying combined balance sheets of DEER CREEK
PARTNERS, L.P. (formerly Sand Creek Partners, L.P.) and MURAT CENTRE, L.P., as
of December 31, 1996 and 1995, and the related combined statements of
operations and partners' equity (deficit) and cash flows for the years ended
December 31, 1996 and 1995. These financial statements are the responsibility
of the Partnerships' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Deer Creek
Partners, L.P. and Murat Centre, L.P. as of December 31, 1996 and 1995, and the
combined results of their operations and their cash flows for the years ended
December 31, 1996 and 1995 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana
September 29, 1997.
F-52
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................... $ 1,894,533 $ 876,776
Accounts receivable ................................. 138,548 155,929
Prepaid show expense ................................ -- 42,114
Prepaid expenses .................................... 91,919 118,152
----------- -----------
Total current assets ............................. 2,125,000 1,192,971
----------- -----------
Property and equipment:
Land ................................................ 2,428,770 2,428,770
Buildings ........................................... 6,155,979 6,155,979
Site improvements ................................... 2,328,369 2,230,594
Leasehold improvements .............................. 5,270,038 9,663,357
Furniture and equipment ............................. 1,070,547 1,722,874
----------- -----------
17,253,703 22,201,574
Less: Accumulated depreciation ...................... 2,167,567 2,850,077
----------- -----------
Total property and equipment ..................... 15,086,136 19,351,497
----------- -----------
Other Assets:
Cash surrender value--life insurance policy ......... 62,819 71,815
Unamortized loan acquisition costs .................. 93,439 350,055
----------- -----------
Total other assets ............................... 156,258 421,870
----------- -----------
TOTAL ASSETS ..................................... $17,367,394 $20,966,338
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-53
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
<S> <C> <C>
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities:
Current portion of notes and capital lease obligation ......... $ 796,391 $ 611,127
Current portion of deferred ticket revenue .................... 542,420 841,476
Accounts payable .............................................. 472,365 520,663
Accrued interest .............................................. 663,391 299,600
Accrued property taxes ........................................ 125,524 280,734
Current portion of loan payable ............................... -- 34,200
Construction payable and other accrued liabilities ............ 3,341,284 50,641
------------ ------------
Total current liabilities .................................. 5,941,375 2,638,441
------------ ------------
Long-term Liabilities:
Notes payable and capital lease obligation,
net of current portion ....................................... 12,998,738 17,266,768
Loan, net of current portion (Note 5) ......................... -- 99,200
Deferred ticket revenue, net of current portion ............... -- 168,833
------------ ------------
Total long-term liabilities ................................ 12,998,738 17,534,801
------------ ------------
Partners' equity (deficit):
Contributed capital ........................................... -- 2,200,000
Undistributed earnings (loss) ................................. (1,572,719) (1,406,904)
------------ ------------
(1,572,719) 793,096
------------ ------------
TOTAL LIABILITIES AND PARTNERS' EQUITY ..................... $ 17,367,394 $ 20,966,338
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-54
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
COMBINED STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------
<S> <C> <C>
Operating revenues:
Concert revenue ......................................... $ 11,073,491 $ 14,194,502
Cost of concerts ........................................ 8,939,022 10,724,059
------------ ------------
2,134,469 3,470,443
Ancillary income:
Royalty commissions ..................................... 1,706,458 1,799,950
Corporate sponsorships .................................. 959,518 1,056,161
Other ancillary income .................................. 789,433 1,375,528
------------ ------------
5,589,878 7,702,082
Operating expenses:
General & administrative ................................ 2,419,679 3,452,990
Depreciation & amortization ............................. 343,567 783,167
Other operating expenses ................................ 249,812 471,126
------------ ------------
3,013,058 4,707,283
Income from operations .................................. 2,576,820 2,994,799
Other income (expense):
Interest income ......................................... 86,034 84,123
Interest expense ........................................ (2,203,690) (1,549,579)
------------ ------------
Net Income (Loss) .................................... $ 459,164 $ 1,529,343
Partners' Equity (Deficit) at beginning of year ......... $ (1,857,603) $ (1,572,719)
Contributions ........................................... -- 2,200,000
Distributions ........................................... (174,280) (1,363,528)
------------ ------------
Partners' Equity (Deficit) at end of year ............... $ (1,572,719) $ 793,096
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-55
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
<S> <C> <C>
Operating Activities:
Net income ............................................................... $ 459,164 $ 1,529,343
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................................... 461,678 783,167
Decrease (increase) in certain assets:
Accounts receivable ..................................................... (45,317) (17,381)
Prepaid show expenses ................................................... -- (42,114)
Prepaid expenses and other .............................................. 746,307 (33,381)
Increase (decrease) in certain liabilities:
Accounts payable, construction payable and other accrued
liabilities ........................................................... 3,424,461 (3,087,135)
Deferred ticket revenue ................................................. (1,266,654) 467,889
Accrued interest ........................................................ 389,251 (363,791)
Other ................................................................... (75,407) 44,852
------------ ------------
Net cash provided by (used in) operating activities ................... 4,093,483 (718,551)
------------ ------------
Investing Activities:
Capital expenditures .................................................... (6,713,889) (5,197,260)
------------ ------------
Net cash used by investing activities ................................... (6,713,889) (5,197,260)
------------ ------------
Financing Activities:
Net proceeds from borrowings ............................................ 3,060,087 5,057,249
Capital contributions ................................................... -- 2,200,000
Department of Metropolitan Development Grant ............................ 761,014 338,986
Principal payments on notes and loan payable and capital leases ......... (20,308) (1,334,653)
Distributions to partners ............................................... (174,280) (1,363,528)
------------ ------------
Net cash provided by financing activities ............................. 3,626,513 4,898,054
------------ ------------
Net increase (decrease) in cash and cash equivalents ..................... 1,006,107 (1,017,757)
Cash and cash equivalents:
Beginning of period ..................................................... 888,426 1,894,533
------------ ------------
End of period ........................................................... $ 1,894,533 $ 876,776
============ ============
Supplemental disclosures:
Cash paid for interest .................................................. $ 1,148,049 $ 1,912,494
Equipment acquired under capital leases ................................. -- 139,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
Prior to 1997 (See Note 10) Deer Creek Partners, L.P. (the Deer Creek
Partnership) owned and operated Deer Creek Music Center (Deer Creek), a concert
amphitheater located in Hamilton County, near Indianapolis, Indiana which
commenced operations in 1989. Sand Creek Partners, L.P. (the general partner)
was a 50% general partner and is responsible for the management of the Deer
Creek Partnership. Conseco, Inc. (Conseco) was a 50% limited partner of the
Deer Creek Partnership. All distributable cash, as defined by the Deer Creek
partnership agreement, is to be distributed equally between the Partners.
The Deer Creek Partnership was formed on January 5, 1996 as a result of
Conseco exercising its option to become a 50% owner of Deer Creek. Deer Creek
was previously 100% owned by Sand Creek Partners, L.P. This change in ownership
has been accounted for as a reorganization, and thus the carrying value of the
assets and liabilities related to Deer Creek remain unchanged as a result of
the reorganization.
Murat Centre, L.P. (Murat Partnership), formed on August 1, 1995, leases
and operates the Murat Theatre (Theatre), a renovated concert and entertainment
venue located in downtown Indianapolis, Indiana. The Theatre's grand reopening
was in March, 1996. The Theatre is currently owned by and was previously
operated by the Murat Temple Association, Inc. Murat Centre, Inc. is the
general partner and is responsible for management of the Theatre. Profits and
losses of the Murat Partnership are allocated 1% to the general partner and 99%
to the limited partners. Distributions to partners are generally limited to the
income taxes payable by the partners as a result of taxable income generated by
the Murat Partnership. To the extent that cash flow for the applicable year
exceeds all payment requirements as discussed in Note 3, the excess shall be
distributed to the partners.
In connection with reopening the Theatre, the Murat Partnership expended
approximately $11.7 million for renovations which began in 1995. Start-up and
organizational costs of approximately $85,000 in 1995 and $90,000 in 1996 were
expensed as incurred and have been included in general and administrative
expenses in the combined statement of operations for the years ended December
31, 1996 and 1995. The building is leased under a 50 year operating lease with
options for 5 additional consecutive 10 year periods under the same terms and
conditions as the initial 50 year lease.
b. Basis of Accounting
The financial statements have been prepared in accordance with generally
accepted accounting principles. Such principles require management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosures of contingent assets and liabilities at the date of
financial statements and the amounts of income and expenses during the
reporting period. Actual results could differ from those estimated.
c. Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Buildings are depreciated over forty years,
leasehold improvements over thirty years, site improvements over twenty years,
and furniture and equipment over five to seven years.
d. Loan Acquisition Costs
Loan acquisition costs represent agency and commitment fees paid to the
lenders, closing costs and legal fees incurred in connection with the notes
payable (see Note 2). These fees are being amortized on a straight-line basis
over a fifteen year period, which represented the approximate term of the
related debt.
F-57
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
e. Deferred Revenue
Deferred revenue includes individual show ticket revenue, season ticket
revenue, and corporate box seat revenue received in advance of events or the
next concert season and will be recognized over the period in which the shows
are held. A portion of the deferred revenue was derived from the bartering of
tickets for goods and services related to the Murat renovation. Barter
transactions are recorded at the estimated fair value of the materials or
service received.
f. Income Taxes
No provision for Federal or state income taxes is required because the
partners are taxed directly on their distributable shares of the Partnerships'
income or loss.
g. Cash Equivalents
The Partnerships consider all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
h. Advertising and Promotion
Advertising and promotion costs are expensed at the time the related
promotional event is held. The costs were approximately $930,000 in 1996 and
$595,000 in 1995.
2. NOTES PAYABLE
Notes payable and capital lease obligations as of December 31, 1995 and
1996 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- -------------
<S> <C> <C>
MURAT PARTNERSHIP
Note payable to bank with 9.25% interest rate subject to
adjustment in 2001 and 2006; payable in monthly installments
of $30,876, including interest, in addition to annual contingent
principal payments based upon remaining net cash flow as
defined in Note 3; secured by assets of the Murat Partnership
and guaranteed by two of the limited partners for $375,000
each; balance due no later than April 1, 2011. ................. $ -- $2,928,053
Note payable with 9% non-compounding interest rate through
November 14, 1996, 12% non-compounding interest rate from
November 15, 1996 through November 14, 1998, 18%
non-compounding interest rate thereafter; all interest is
cumulative; principal and interest payments are based upon
remaining net cash flow as defined in Note 3; subordinate to
above bank note payable. ....................................... 2,647,165 3,000,000
Note payable with 0% interest rate; principal payments the lesser
of $.15 per ticket sold during fiscal year or remaining net cash
flow as defined in Note 3; subordinate to above bank note
payable. ....................................................... -- 800,000
</TABLE>
F-58
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- -------------
<S> <C> <C>
Note payable with interest calculated annually and is equal to the
lesser of (1) $.10 per ticket sold during fiscal year, (2) prime
plus 1% or (3) remaining net cash flow as defined in Note 3;
interest and principal is paid at the lesser of $.10 per ticket sold
during fiscal year or remaining net cash flow as defined in Note
3; principal is also required to be paid down upon sale of
certain Partnership assets or the refinancing of certain
Partnership loans; subordinate to above bank note payable .......... $ -- $ 1,000,000
Other .............................................................. 90,940 --
DEER CREEK PARTNERSHIP
Note payable with interest calculated annually at 9.5%; payable in
quarterly installments of approximately $353,000, including
interest, through the year 2010; secured by substantially all of
the assets of the partnership and is guaranteed up to 50%,
jointly and severally, by two officers of Sunshine Promotions,
Inc. (Sunshine), and by Sunshine (See Note 6.) ..................... -- 10,019,361
Note payable with interest at 11.18% payable in monthly
installments and contingent interest based upon net cash flow;
secured by substantially all of the assets of the Partnership;
principal due 1999 with the option for the holder to accelerate
the maturity date to 1996. ......................................... 11,041,024 --
Capital leases ...................................................... 16,000 130,481
----------- -----------
Total notes payable and capital lease obligations ................. 13,795,129 17,877,894
Less -- Current portion ........................................... 796,391 611,127
----------- -----------
$12,998,738 $17,266,768
=========== ===========
</TABLE>
Principal payments made on the Murat Partnership bank term note during
1996 totaled $71,947. The Murat Partnership's 1996 net cash flow (see Note 3)
did not require additional principal payments to be made on its notes payable.
The bank term note contains cash flow and leverage ratio covenants. The Murat
Partnership was not in compliance with the cash flow covenant as of December
31, 1996, but received a waiver dated March 31, 1997 for the December 31, 1996
calculation. Provisions of the $800,000 note payable require the Murat
Partnership to continue making payments after the principal has been paid down
equal to the lesser of $.15 per ticket sold during the fiscal year or remaining
cash flow, as defined in Note 3. These payments are to be made to a
not-for-profit foundation and will be designated for remodeling and upkeep of
the Theatre.
Under the terms of the note payable in 1995, the Deer Creek Partnership
incurred contingent interest, which was based on cash flow, of $885,000. During
1995, Deer Creek Partnership's current lender (a related party) purchased the
note payable and entered into an amended and restated loan agreement with the
partnership on January 5, 1996. For each year until the Deer Creek loan is
repaid, net cash flow (as defined) in excess of $400,000 shall be paid as a
principal payment on the loan, not to exceed $400,000. In 1995 and 1996, the
Deer Creek Partnership's net cash flow was such that the maximum principal
payment of $400,000 was required for each year. In addition, the promotional
management fee paid to Sunshine (see Note 6) is subordinate to the quarterly
loan payments.
F-59
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Principal maturities of notes payable for the next 5 years, excluding
principal paydowns resulting from excess cash flow:
<TABLE>
<CAPTION>
<S> <C>
1997 .............. $578,895
1998 .............. 635,682
1999 .............. 698,041
2000 .............. 766,518
2001 .............. 841,712
</TABLE>
Future capital lease payments of principal and interest are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 .............. $50,800
1998 .............. 46,250
1999 .............. 37,000
2000 .............. 36,000
2001 .............. 4,000
</TABLE>
3. MURAT CASH FLOW PAYMENTS
Each of the Murat Partnership's debt agreements require certain principal
and interest to be paid in April of each year based upon the Murat
Partnership's net cash flow for the preceding year. The Murat Partnership's
building lease agreement provides for lease payments to be made based upon the
same net cash flow calculation. Net cash flow, as defined in each agreement,
approximates net income, plus depreciation and amortization, less capital
expenditures and partnership distributions necessary to pay applicable income
taxes. Net cash flow in each year will be used by the Murat Partnership to pay
principal, interest and lease payments in the following order of priority:
1. Payment of interest on $1,000,000 note equal to the lesser of (a) $.10 per
ticket sold, (b) prime plus 1% or (c) remaining net cash flow;
2. Additional principal payments on bank note so that the total principal paid
each month (including mandatory term payments discussed in Note 2) equals
up to, but not exceeding, $16,667. If cash flow in any fiscal year is not
sufficient to meet these additional principal payments, the obligation
carries forward to the subsequent year;
3. For 1997 and beyond, building operating lease payments not to exceed $50,000
per year, non-cumulative;
4. Interest related to the $3 million note (including previous years'
cumulative amounts not paid);
5. Principal payment on the $3 million note until paid in full;
6. Principal payment on $800,000 note equal to lesser of $.15 per ticket sold
during fiscal year or remaining net cash flow;
If cash flow is such that only a portion is paid on the obligation in 2.
above, Sunshine, Inc.'s management fee (see Note 6.) could be reduced by the
amount paid in 1. in order to maximize the amount available to fully pay the
obligation in 2.
4. DMD GRANT
As part of the original financing for renovation of the Theatre, the
Department of Metropolitan Development (DMD) contributed approximately $760,000
in 1995 and $340,000 in 1996 to the Murat Partnership. The DMD stipulated that
the grant was to be used for leasehold improvements on the Theatre. As such,
the grant has been recorded on the balance sheet as a reduction of leasehold
improvements and is being amortized over 30 years.
F-60
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. AGREEMENTS WITH OUTSIDE VENDORS
Effective February 1996, the Murat Partnership entered into a ten year
agreement with a caterer to provide exclusive catering services at the Theatre.
The Murat Partnership is entitled to a commission based upon a percentage of
the caterer's net sales. As part of the agreement the caterer loaned the Murat
Partnership $165,000, at a nominal interest rate, for leasehold improvements
necessary to provide catering services. In February 1996 the Murat Partnership
began repaying the loan ratably over 5 years.
Effective February 1996, the Murat Partnership entered into a ten year
agreement with a concessionaire for the exclusive license to sell concession
food and beverages at Theatre events. The Murat Partnership is entitled to
royalty commissions based upon a percentage of the concessionaire's gross
receipts. The concessionaire has paid the Murat Partnership $50,000 to be used
for leasehold improvements (which are being depreciated over 30 years) which
will be used by the concessionaire. This payment has been recorded as deferred
income and is being amortized over the term of the agreement. On March 28, 1997
the rights to the concession agreement were acquired by the caterer under the
same terms as the original concession agreement.
Effective March 1996, the Murat Partnership entered into a five year
agreement with a stagehand union allowing the union to provide services at all
ticketed shows held in the main theater other than the broadway series. The
agreement, among other items, sets minimum hours per show and hourly wages to
be paid to union members. It also sets forth duties which must be performed
solely by union members. A separate agreement between the stagehand union and
Pace Theatrical Group, Inc. (see Note 7) governs the use of union stagehands
for the broadway series.
Effective February 1996, the Murat Partnership entered into a one year
agreement granting another party the right to manage and operate the Theatre
parking lot.
In July 1988, the Deer Creek Partnership entered into a ten-year agreement
with a concessionaire for the exclusive license to sell food and beverages at
Deer Creek events. The Deer Creek Partnership is entitled to royalty
commissions based upon a percentage of the concessionaire's gross receipts.
The Deer Creek Partnership has an agreement with another concessionaire
for an exclusive license to sell consigned nonconsumable novelties and programs
at Deer Creek events. The agreement expires on October 31, 2001. The Deer Creek
Partnership is entitled to royalty commissions based on the concessionaire's
gross receipts.
Total revenues related to the Deer Creek and Murat Center Partnership's
vendor agreements were approximately $1.8 million and $1.7 million in 1996 and
1995, respectively.
6. MANAGEMENT AGREEMENTS
The Deer Creek Partnership and Murat Partnership have entered into
agreements which expire in 2009 and 2015, respectively, with Sunshine whose
stockholders are also the limited partners of the general partner. Sunshine
provides the overall promotional management and booking of the entertainment
events held at respective venues, along with other general management
responsibilities. As compensation for Sunshine's services, the Deer Creek
Partnership pays Sunshine 4 percent of gross ticket sales, royalty income and
various other revenues. Total fees to Sunshine for these services were
approximately $581,000 in 1995 and $560,000 in 1996. The Murat pays Sunshine an
annual management fee of $300,000, adjusted annually each January 1 by the
greater of 4% or the annual increase in the consumer price index. In 1996 no
such fee was recognized by the Murat Partnership as Sunshine permanently waived
the $300,000 management fee due for 1996.
In June 1988, the Deer Creek Partnership entered into a ten-year agreement
with an unrelated management company to provide the on-site operations
management for Deer Creek. At the end of 1995, this agreement was terminated by
mutual consent of both parties. The Deer Creek Partnership entered
F-61
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
into a new agreement with the former management company whereby it agreed to
pay $75,000 in 1996, 1997 and 1998 and also to provide to the former management
company selected season tickets at Deer Creek in 1997 and 1998. In return, for
1996, 1997 and 1998, the Deer Creek Partnership is to receive advertising and
promotion.
7. BROADWAY SERIES PARTNERSHIP
In 1996 the Murat Partnership entered into a 5 year partnership agreement
with Pace Theatrical Group, Inc. (Pace) and Broadway Series Management (BSMG)
to co-present a subscription series of touring Broadway type shows in
Indianapolis. This agreement calls for net profits and losses derived from the
series to be split, after the allocation of certain revenues to the Murat
Partnership and Pace, as follows: 45% Murat Partnership, 45% Pace, and 10%
BSMG. No capital was invested by any of the parties and all income has been
distributed to the parties. The Murat Partnership is responsible for the local
marketing and management of the series, while Pace is responsible for booking,
series management, and season ticket sales for the series. The Murat
Partnership recognized earnings related to this partnership of $270,000 in
1996.
8. RELATED PARTIES
In addition to the management agreement with Sunshine discussed in Note 6,
the Deer Creek Partnership and Murat Partnership have conducted business with
certain related parties in which the limited partners of the general partner
have significant interests. Fees paid to all other related parties for
catering, uniforms and marketing services totaled $249,000 in 1995 and $65,000
in 1996 from the Deer Creek Partnership and $46,000 in 1996 from the Murat
Partnership.
9. SALE OF MURAT PARTNERSHIP AND DEER CREEK PARTNERSHIP
In June 1997, the partners of the Murat Partnership and the Deer Creek
Partnership agreed to sell all of the assets of the Murat Partnership and Deer
Creek Partnership to SFX Broadcasting, Inc. (Broadcasting). The total sales
price to Broadcasting of the combined partnership assets was approximately $33
million. As a part of the sale, Broadcasting assumed or retired virtually all
liabilities and acquired all assets of the Murat Partnership and the Deer Creek
Partnership.
F-62
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PACE Entertainment Corporation:
We have audited the accompanying consolidated balance sheet of PACE
Entertainment Corporation (a Texas Corporation) and subsidiaries as of
September 30, 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PACE Entertainment
Corporation and subsidiaries as of September 30, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 15, 1997 (except with respect
to the matters discussed in
Note 12, as to which the date
is December 22, 1997)
F-63
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
PACE Entertainment Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of PACE
Entertainment Corporation and subsidiaries as of September 30, 1996, and the
related consolidated statements of operations, cash flows, and shareholders'
equity for each of the two years in the period ended September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PACE
Entertainment Corporation and subsidiaries at September 30, 1996, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended September 30, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 13, 1996
F-64
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
--------------------- ------------
1996 1997 1997
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................... $23,165 $23,784 $27,702
Trade receivables, net ...................................... 4,097 4,562 6,741
Accounts receivable, related parties ........................ 1,010 1,007 1,096
Notes receivable ............................................ 3,040 386 81
Prepaid expenses ............................................ 6,106 9,967 10,586
Investments in theatrical productions ....................... 2,489 4,402 3,958
Deferred tax asset .......................................... 1,872 979 943
------- ------- -------
Total current assets ...................................... 41,779 45,087 51,107
INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS ................... 8,816 13,899 15,613
NOTES RECEIVABLE, related parties ............................ 6,958 8,024 7,766
INTANGIBLE ASSETS, net ....................................... 17,244 17,894 17,633
OTHER ASSETS, net ............................................ 4,484 4,933 6,047
------- ------- -------
Total assets .............................................. $79,281 $89,837 $98,166
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .................... $10,285 $11,078 9,277
Deferred revenue ............................................ 26,909 32,093 33,208
Current maturities of long-term debt ........................ 2,576 2,394 2,688
------- ------- -------
Total current liabilities ................................. 39,770 45,565 45,173
LONG-TERM DEBT ............................................... 21,863 23,129 31,543
OTHER NONCURRENT LIABILITIES ................................. 2,496 1,607 2,080
REDEEMABLE COMMON STOCK ...................................... 3,264 2,456 2,983
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 500,000 shares authorized,
2,579 shares issued as of September 30, 1996 and 1997 ..... 3 3 3
Additional paid-in capital .................................. 1,910 1,942 2,097
Retained earnings ........................................... 10,115 15,275 14,427
Treasury stock, at cost, 544 shares ......................... (140) (140) (140)
------- ------- -------
Total shareholders' equity ................................ 11,888 17,080 16,387
------- ------- -------
Total liabilities and shareholders' equity ................ $79,281 $89,837 $98,166
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-65
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30 DECEMBER 31
------------------------------------------- ----------------------------
1995 1996 1997 1996 1997
------------- ------------- ------------- -------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
GROSS REVENUES ........................... $ 150,385 $ 156,325 $ 176,046 $ 38,430 $ 38,552
COST OF SALES ............................ (131,364) (135,925) (148,503) (34,221) (33,687)
EQUITY IN EARNINGS (LOSS) OF
UNCONSOLIDATED PARTNERSHIPS
AND THEATRICAL PRODUCTIONS .............. 2,183 3,048 6,838 (111) 1,185
---------- ---------- ---------- -------- ---------
Gross profit ........................... 21,204 23,448 34,381 4,098 6,050
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ................. (13,351) (15,951) (21,260) (4,072) (5,018)
STOCK COMPENSATION ....................... (25) (3,675) (456) (6) (683)
LITIGATION SETTLEMENT .................... -- (3,657) -- -- --
DEPRECIATION AND AMORTIZATION ............ (1,223) (1,737) (1,896) (434) (523)
---------- ---------- ---------- ---------- ---------
Operating profit (loss) ................ 6,605 (1,572) 10,769 (414) (174)
INTEREST INCOME, related parties ......... 305 329 403 75 178
INTEREST INCOME, other ................... 147 176 60 35 6
INTEREST EXPENSE ......................... (655) (1,206) (1,997) (480) (867)
---------- ---------- ---------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST ................... 6,402 (2,273) 9,235 (784) (857)
INCOME TAX (PROVISION) BENEFIT ........... (2,575) 714 (3,529) 222 182
MINORITY INTEREST ........................ (485) (446) (546) (130) (173)
---------- ---------- ---------- ---------- ---------
NET INCOME (LOSS) ........................ $ 3,342 $ (2,005) $ 5,160 $ (692) $ (848)
========== ========== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-66
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
-------- ------------ ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1994 ................ $ 3 $1,465 $ 8,778 $ (140) $ 10,106
Amortization of deferred stock compensation -- 25 -- -- 25
Net income .................................. -- -- 3,342 -- 3,342
--- ------ -------- ------ --------
BALANCE AT SEPTEMBER 30, 1995 ................ 3 1,490 12,120 (140) 13,473
Issuance of restricted stock and amortization
of deferred stock compensation ............ -- 420 -- -- 420
Net loss .................................... -- -- (2,005) -- (2,005)
--- ------ -------- ------ --------
BALANCE AT SEPTEMBER 30, 1996 ................ 3 1,910 10,115 (140) 11,888
Issuance of restricted stock and amortization
of deferred stock compensation ............ -- 32 -- -- 32
Net income .................................. -- -- 5,160 -- 5,160
--- ------ -------- ------ --------
BALANCE AT SEPTEMBER 30, 1997 ................ 3 1,942 15,275 (140) 17,080
Issuance of restricted stock and amortization
of deferred stock compensation
(unaudited) ............................... -- 155 -- -- 155
Net loss (unaudited) ........................ -- -- (848) -- (848)
--- ------ -------- ------ --------
BALANCE AT DECEMBER 31, 1997
(unaudited) ................................. $ 3 $2,097 $ 14,427 $ (140) $ 16,387
=== ====== ======== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-67
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30 DECEMBER 31
-------------------------------------- ---------------------
1995 1996 1997 1996 1997
------------- ------------ ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................ $ 3,342 $ (2,005) $ 5,160 $ (692) $ (848)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization .......................... 1,223 1,737 1,896 434 522
Equity in (earnings) loss of unconsolidated
partnerships .......................................... (1,624) (486) (4,912) 607 (1,150)
Distributions from unconsolidated partnerships ......... 1,297 1,090 2,354 1,073 411
Restricted stock compensation .......................... 25 3,675 456 6 683
Deferred income tax expense (benefit) .................. 848 (4,541) 2,037 36 (574)
Changes in operating assets and liabilities- ...........
Trade receivables ..................................... 447 (826) (465) 383 (2,179)
Notes receivable ...................................... (1,813) (1,227) 2,654 1,140 305
Prepaid expenses ...................................... (221) 1,466 (3,861) (2,099) (619)
Investments in theatrical productions ................. 305 (335) (1,913) (1,658) 444
Other assets .......................................... (37) (1,130) (421) (39) (469)
Accounts payable and accrued liabilities .............. 947 (1,142) (920) (264) (2,626)
Deferred revenue ...................................... (1,082) (1,008) 5,184 (7,004) 1,115
Other liabilities ..................................... 171 1,601 (34) 130 3,083
-------- --------- --------- -------- --------
Net cash provided by (used in) operating
activities ......................................... 3,828 (3,131) 7,215 (7,947) (1,902)
-------- --------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired ....................... -- (13,233) (2,215) -- (178)
Capital expenditures ..................................... (728) (827) (1,008) (407) (900)
Loans and advances to related parties .................... (2,301) (535) (2,295) 2 169
Contributions to unconsolidated partnerships ............. (1,212) (1,806) (2,162) (618) (1,980)
-------- --------- --------- -------- --------
Net cash used in investing activities ............... (4,241) (16,401) (7,680) (1,023) (2,889)
-------- --------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt additions ............................. 8,927 24,043 24,287 557 14,593
Payments on debt ......................................... (8,928) (6,512) (23,203) (873) (5,884)
-------- --------- --------- -------- --------
Net cash provided by (used in) financing
activities ......................................... (1) 17,531 1,084 (316) 8,709
---------- --------- --------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ......................................... (414) (2,001) 619 (9,286) 3,918
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ......................................... 25,580 25,166 23,165 23,165 23,784
--------- --------- --------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
YEAR ..................................................... $25,166 $ 23,165 $ 23,784 $ 13,879 $ 27,702
========= ========= ========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid ............................................ $ 620 $ 1,117 $ 1,900 $ 180 $ 644
Income taxes paid ........................................ 2,276 2,804 2,103 565 93
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-68
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION:
Description of Business
PACE Entertainment Corporation (referred to herein as PACE or the
Company), a Texas corporation, is a diversified live entertainment company
operating principally in the United States. The Company presents and produces
theatrical shows, musical concerts and specialized motor sports events. Through
certain unconsolidated partnerships, the Company also owns interests in and
operates amphitheaters, which are used primarily for the presentation of live
performances by musical artists.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
PACE and its majority-owned subsidiaries. The Company accounts for its
investments in 50 percent or less owned entities, including theatrical
production partnerships, using the equity method. Intercompany balances are
eliminated.
The Company has various agreements related to the presentation of events
with other live entertainment organizations whereby the Company retains 50
percent to 80 percent of the profits from such events. The Company consolidates
the revenues and related costs from these events and records the amounts paid
to the other parties in cost of sales.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. At September 30,
1997, the Company had restricted cash and cash equivalents of $2,950,000, which
secured letters of credit totaling $3,750,000.
Trade Receivables
Trade receivables are shown net of allowance for doubtful accounts of
$120,000 and $134,000 at September 30, 1996 and 1997, respectively.
Prepaid Expenses
Prepaid expenses include show advances and deposits, event advertising
costs and other costs directly related to future events. Such costs are charged
to operations upon completion of the related events.
As of September 30, 1996 and 1997, prepaid expenses included event
advertising costs of $1,337,000 and $1,498,000, respectively. The Company
recognized event advertising expenses of $13,818,000, $14,861,000 and
$13,802,000 in cost of sales for the years ended September 30, 1995, 1996 and
1997, respectively.
Investments in Theatrical Productions
Theatrical production partnerships are typically formed to invest in a
single theatrical production and, therefore, have limited lives which are
generally less than one year. Accordingly, the Company's investments in such
partnerships are generally shown as current assets. The partnerships amortize
production costs over the estimated life of each production based on the
percentage of revenues earned in relation to projected total revenues.
F-69
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangible Assets
Intangible assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Goodwill ............................................ $ 16,599 $ 17,851
Noncompete agreements and other intangibles ......... 3,940 3,857
-------- --------
20,539 21,708
Accumulated amortization ............................ (3,295) (3,814)
-------- --------
$ 17,244 $ 17,894
======== ========
</TABLE>
Goodwill, which represents the excess of costs of business acquisitions
over the fair value of net assets acquired, is being amortized on a
straight-line basis over periods not exceeding 40 years. The noncompete
agreements and other intangibles are being amortized on a straight-line basis
over periods generally not exceeding five years. The Company evaluates on an
ongoing basis whether events and circumstances indicate that the amortization
periods of intangibles warrant revision. Additionally, the Company periodically
assesses whether the carrying amounts of intangibles exceed their expected
future benefits and value, in which case an impairment loss would be
recognized. Such assessments are based on various analyses, including cash flow
and profitability projections.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------
1996 1997
--------- ---------
<S> <C> <C>
Accounts payable .................. $ 1,192 $ 1,866
Accrued payroll ................... 2,384 2,936
Other accrued liabilities ......... 6,709 6,276
------- -------
$10,285 $11,078
======= =======
</TABLE>
Revenue Recognition
Revenues from the presentation and production of an event, including
interest on advance ticket sales, are recognized upon completion of the event.
Deferred revenue relates primarily to advance ticket sales.
The Company barters event tickets and sponsorship rights for products and
services, including event advertising. These barter transactions are not
recognized in the accompanying consolidated financial statements and are not
material to the Company's financial position or results of operations.
Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," during the year ended September
30, 1997, and implemented its disclosure provisions. While SFAS No. 123
encourages companies to recognize expense for stock options at estimated fair
value based on an option-pricing model, the Company has elected to continue to
follow Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its
employee stock options.
F-70
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Instruments
The carrying amounts of cash equivalents approximate fair value because of
the short maturities of these investments. The carrying amount of long-term
debt approximates fair value as borrowings bear interest at current market
rates.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain 1995 and 1996 amounts have been reclassified to conform with the
1997 presentation.
Interim Financial Information
The interim financial data as of December 31, 1997 and for the three-month
periods ended December 31, 1996 and 1997 is unaudited and certain information
and disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted.
However, in the opinion of management, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the interim periods. The results of
operations for the interim periods are not necessarily indicative of the
results to be expected for the entire year.
2. ACQUISITIONS:
On March 13, 1996, the Company acquired substantially all the assets of
SRO Motorsports (SRO), a division of Madison Square Garden, L.P., under an
asset purchase agreement for an aggregate initial purchase price of
approximately $13,300,000 in cash and $3,800,000 in assumed liabilities. The
agreement also provides for a contingent deferred purchase price not to exceed
$1,000,000, payable if annual earnings before interest, taxes, depreciation and
amortization of the Company's motor sports operations, as defined, exceed
$8,000,000 for any fiscal year through September 30, 2001. No deferred purchase
price costs had been incurred through September 30, 1997.
The acquisition of SRO was accounted for under the purchase method and the
assets acquired and liabilities assumed were recorded at fair value, resulting
in the recognition of $14,250,000 of goodwill and $400,000 of other
intangibles. The results of operations of SRO since March 13, 1996, have been
included in the accompanying consolidated financial statements.
The following unaudited pro forma information assumes that the Company had
acquired SRO as of October 1, 1994. The pro forma information includes
adjustments for interest expense that would have been incurred to finance the
acquisition, amortization of goodwill and other intangibles, the income tax
effects of the operations of SRO, and the elimination of certain intercompany
balances. The unaudited pro forma information, which is not necessarily
indicative of what actual results would have been, is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30
-------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Gross revenues ............ $167,422 $172,952
Net income (loss) ......... 3,742 (257)
</TABLE>
F-71
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS AND THEATRICAL
PRODUCTIONS:
Investments in unconsolidated partnerships and theatrical productions
consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------
1996 1997
--------- ---------
<S> <C> <C>
Investment in--
Pavilion Partners ................................. $ 3,131 $ 4,810
Universal/PACE Amphitheaters Group, L.P. .......... 3,380 3,991
Other ............................................. 2,305 5,098
------- -------
Investments in unconsolidated partnerships ......... 8,816 13,899
Investments in theatrical productions .............. 2,489 4,402
------- -------
$11,305 $18,301
======= =======
</TABLE>
The Company's share of earnings and the distributions received from these
investments were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Equity in earnings (losses) of--
Pavilion Partners ................. $1,872 $ 103 $2,803
Universal/PACE Amphitheaters
Group, L.P. ..................... 551 871 645
Other ............................. (799) (488) 1,464
------ ------ ------
Equity in earnings of unconsolidated
partnerships ...................... 1,624 486 4,912
Equity in earnings of theatrical
productions ....................... 559 2,562 1,926
------ ------ ------
$2,183 $3,048 $6,838
====== ====== ======
Distributions received from--
Pavilion Partners ................. $ 992 $1,002 $1,124
Universal/PACE Amphitheaters
Group, L.P. ..................... 166 78 34
Other ............................. 139 10 1,196
------ ------ ------
Distributions from unconsolidated
partnerships ...................... 1,297 1,090 2,354
Distributions from theatrical
productions ....................... 4,240 5,836 6,803
------ ------ ------
$5,537 $6,926 $9,157
====== ====== ======
</TABLE>
F-72
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pavilion Partners
Pavilion Partners is a Delaware general partnership between the Company
and Amphitheater Entertainment Partnership (AEP). AEP is a partnership between
Sony Music Entertainment Inc. (Sony) and Blockbuster Entertainment Corporation
(Blockbuster). Pavilion Partners owns and operates amphitheaters, which are
used primarily for the presentation of live performances by musical artists.
Pavilion Partners had interests in 10 and 11 amphitheaters at September 30,
1996 and 1997, respectively. The Company owns a 33-1/3 percent interest in, and
is the managing partner of, Pavilion Partners.
In general, all of Pavilion Partners' income is allocated to the partners
in proportion to their respective ownership interests. The partnership
agreement generally restricts cash distributions to 35 percent of cash flow
after scheduled debt service. Additionally, PACE has been entitled to certain
priority allocations of net income based, in part, on the cash flow from one of
the amphitheaters it contributed to Pavilion Partners. During the periods ended
September 30, 1995, 1996 and 1997, the priority allocations of net income
included in the Company's equity in earnings of Pavilion Partners were
$771,000, $725,000 and $119,000, respectively. The cumulative amount of the
priority allocations of net income was limited; PACE is not entitled to any
future priority allocations. AEP is entitled to receive priority allocations of
net income once a loan related to an amphitheater contributed by Blockbuster is
repaid. The cumulative priority allocations of net income to AEP is limited to
$7,000,000. The loan is scheduled to mature in 2004 and no such allocation has
yet been made.
PACE also received booking fees of $323,000, $235,000 and $395,000 from
Pavilion Partners for the years ended September 30, 1995, 1996 and 1997,
respectively. In addition, the Company is reimbursed for certain costs of
providing management services to Pavilion Partners. These reimbursements
totaled $1,629,000, $1,824,000 and $1,968,000 during the periods ended
September 30, 1995, 1996 and 1997, respectively, and offset general and
administrative expenses.
Summarized financial information as of and for the years ended September
30, 1995, 1996 and 1997, for Pavilion Partners follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current assets ................................ $15,787 $20,700 $ 30,178
Noncurrent assets ............................. 64,619 72,793 72,598
------- ------- --------
Total assets ................................. $80,406 $93,493 $102,776
======= ======= ========
Current liabilities ........................... $ 9,467 $17,194 $ 19,748
Noncurrent liabilities ........................ 51,578 58,695 59,166
Partners' capital ............................. 19,361 17,604 23,862
------- ------- --------
Total liabilities and partners' capital ...... $80,406 $93,493 $102,776
======= ======= ========
Gross revenues ................................ $69,372 $89,223 $100,209
======= ======= ========
Gross profit .................................. $19,440 $27,993 $ 36,157
======= ======= ========
Net income (loss) ............................. $ 3,104 $ (839) $ 6,986
======= ======= ========
</TABLE>
F-73
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Universal/PACE
The Company owns a 32.5 percent interest in Universal/PACE Amphitheaters
Group, L.P. (Universal/PACE), a limited partnership between the Company and
Universal Concerts, Inc., which controls two amphitheaters. PACE earned
management fees of $167,000, $79,000 and $34,000 from Universal/PACE for the
years ended September 30, 1995, 1996 and 1997, respectively. Summarized
financial information as of and for the years ended September 30, 1995, 1996
and 1997, for Universal/ PACE follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current assets ................................ $ 4,085 $ 3,420 $ 6,659
Noncurrent assets ............................. 14,654 14,185 14,156
------- ------- -------
Total assets ................................. $18,739 $17,605 $20,815
======= ======= =======
Current liabilities ........................... $ 6,599 $ 3,876 $10,221
Noncurrent liabilities ........................ 6,467 5,618 602
Partners' capital ............................. 5,673 8,111 9,992
------- ------- -------
Total liabilities and partners' capital ...... $18,739 $17,605 $20,815
======= ======= =======
Gross revenues ................................ $24,070 $20,336 $25,299
======= ======= =======
Gross profit .................................. $ 5,968 $ 6,361 $ 5,817
======= ======= =======
Net income .................................... $ 1,183 $ 2,438 $ 1,880
======= ======= =======
</TABLE>
Other
The Company also has investments in numerous theatrical production and
other unconsolidated partnerships. Summarized financial information as of and
for the years ended September 30, 1995, 1996 and 1997, for these partnerships,
excluding Pavilion Partners and Universal/PACE, follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
Current assets ................................ $ 10,410 $ 12,433 $ 35,743
Noncurrent assets ............................. 5,668 7,267 14,050
-------- -------- --------
Total assets ................................. $ 16,078 $ 19,700 $ 49,793
======== ======== ========
Current liabilities ........................... $ 7,539 $ 6,566 $ 19,134
Noncurrent liabilities ........................ 2,315 2,250 2,957
Partners' capital ............................. 6,224 10,884 27,702
-------- -------- --------
Total liabilities and partners' capital ...... $ 16,078 $ 19,700 $ 49,793
======== ======== ========
Gross revenues ................................ $113,854 $111,715 $249,707
======== ======== ========
Gross profit .................................. $ 221 $ 10,440 $ 34,454
======== ======== ========
Net income (loss) ............................. $ (1,863) $ 9,823 $ 32,164
======== ======== ========
</TABLE>
F-74
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT:
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Term loan ........................ $ 14,464 $ 12,322
Revolving line of credit ......... 9,250 12,950
Other notes payable .............. 725 251
-------- --------
24,439 25,523
Less- Current portion ............ (2,576) (2,394)
-------- --------
$ 21,863 $ 23,129
======== ========
</TABLE>
In March 1996, the Company entered into a new credit agreement with
certain financial institutions. The credit agreement provides for a term loan
and a revolving line of credit, both of which bear interest at either LIBOR
plus 2 percent or prime, at the option of the Company. At September 30, 1997,
the weighted average interest rate was 7.8 percent. The term loan is scheduled
to mature in March 2001 and is payable in quarterly installments of $536,000
plus interest, with a balloon payment at maturity. The Company may borrow
$27,000,000 under the revolving line of credit until February 1998;
subsequently, borrowings are limited to $13,000,000 until March 2001, when the
revolving line of credit expires. The Company must pay a quarterly commitment
fee equal to 0.375 percent per annum on the average daily unused portion of the
revolving line of credit. The term loan and the revolving line of credit are
secured by substantially all of the Company's assets, including pledges of the
capital stock of its subsidiaries. The credit agreement contains various
restrictions and requirements relating to, among other things, mergers, sales
of assets, investments and maintenance of certain financial ratios.
At September 30, 1997, scheduled maturities of long-term debt were as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
For the year ending September 30--
1998 ............................ $ 2,394
1999 ............................ 2,143
2000 ............................ 2,143
2001 ............................ 18,843
-------
$25,523
=======
</TABLE>
F-75
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES:
Deferred taxes reflect the tax effects of temporary differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities. Significant components of the Company's deferred tax assets and
liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------
1996 1997
-------- ----------
<S> <C> <C>
Deferred tax assets--
Investments in unconsolidated partnerships and
theatrical productions ......................... $ 286 $ 237
Accounts payable and accrued liabilities ......... 1,014 1,480
Restricted stock compensation .................... 1,387 409
Other noncurrent liabilities ..................... 1,717 --
Other ............................................ 107 281
------ ------
Total deferred tax assets ...................... 4,511 2,407
------ ------
Deferred tax liabilities--
Investments in unconsolidated partnerships and
theatrical productions ......................... 1,522 1,099
Prepaid expenses ................................. 907 1,237
Intangibles ...................................... 646 672
------ ------
Total deferred tax liabilities ................. 3,075 3,008
------ ------
$1,436 $ (601)
====== ======
</TABLE>
Deferred taxes are included in the consolidated balance sheets as follows
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-----------------------
1996 1997
--------- -----------
<S> <C> <C>
Current deferred tax assets .......... $1,872 $ 979
Other noncurrent liabilities ......... (436) (1,580)
------ --------
$1,436 $ (601)
====== ========
</TABLE>
The income tax (provision) benefit consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current--
Federal .............................. $ (1,251) $ (2,817) $ (1,319)
State ................................ (476) (1,010) (173)
Deferred--
Federal .............................. (692) 3,705 (1,777)
State ................................ (156) 836 (260)
-------- -------- --------
Total tax (provision) benefit ......... $ (2,575) $ 714 $ (3,529)
======== ======== ========
Effective tax rate .................... 44% 26% 41%
======== ======== ========
</TABLE>
F-76
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory
rates to the income tax (provision) benefit is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
---------------------------------------
1995 1996 1997
------------ --------- ------------
<S> <C> <C> <C>
Tax at the federal statutory rate ......... $ (2,012) $ 924 $ (2,954)
Increases resulting from--
State income taxes, net of federal tax
effect ................................. (417) (112) (286)
Nondeductible expenses ................... (60) (98) (185)
Other .................................... (86) -- (104)
-------- ------ --------
Total income tax (provision) benefit ..... $ (2,575) $ 714 $ (3,529)
======== ====== ========
</TABLE>
6. REDEEMABLE COMMON STOCK:
At September 30, 1997, the Company had outstanding 155 shares of common
stock that are redeemable under conditions that are not solely within the
control of the Company. The Company granted this redeemable stock to certain
executives during the years ended September 30, 1996 and 1997. To the extent
that the grants related to prior service, the Company recognized compensation
costs on the grant date. Additionally, the Company recognizes compensation
costs for the change in value of certain shares that, as discussed below, the
Company may be required to purchase from the executives at fair market value.
Restricted stock compensation related to these grants totaled $3,260,000 and
$425,000 during the years ended September 30, 1996 and 1997, respectively. The
Company has the right of first refusal to purchase the redeemable common stock
at fair market value.
Agreements with one executive who received 140 shares of redeemable stock
provide that the Company will have call options to purchase these shares from
the executive for a total of $3,420,000. These agreements also provide that the
executive will have put options to sell such shares to the Company for
$3,420,000. The put and call options are only exercisable if the executive's
employment is terminated before an initial public offering of the Company's
common stock.
Of the redeemable stock granted to this executive, 123 shares were granted
during the year ended September 30, 1996, and vested during the year ended
September 30, 1997. Since the grant related to prior service, the Company
recognized compensation costs on the grant date. During the year ended
September 30, 1997, the Company executed a promissory note in the amount of
$1,232,000 with this executive. This note bears interest at 5.45 percent, is
secured by 140 shares of the Company's common stock, and is scheduled to mature
in October 2001. The proceeds of the note were used to pay the executive's tax
liability related to the 123 shares that vested during the year ended September
30, 1997. Accordingly, the value of redeemable stock outstanding has been
reduced by this note receivable.
The remaining 17 shares of redeemable stock received by this executive
were granted during the year ended September 30, 1997, and vest ratably during
the years ending September 30, 1999 and 2000. To fund the executive's tax
liability related to these 17 shares, the Company may be required to purchase
up to 41 percent of the shares at fair market value when the shares vest. The
Company has similar agreements with the other executives who received the
remaining 15 shares of redeemable stock, which were granted during the year
ended September 30, 1996. In order to fund the executives' tax liabilities
related to these grants and related restricted common stock grants, these 15
shares of redeemable stock must be purchased at fair market value when the
shares vest during the years ended September 30, 1998 and 1999. Although all 32
shares that the Company may be required to purchase in order to satisfy
executives' tax liabilities have future vesting requirements, the Company
recognized compensation costs on the grant dates to the extent the grants
related to prior service. The difference between such expense recognition and
recognition over the vesting periods is not material to the Company's results
of operations and financial position.
F-77
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SHAREHOLDER'S EQUITY:
The Company granted 23 shares of restricted common stock to certain
executives during the year ended September 30, 1996. These shares vest ratably
during the years ended September 30, 1998 and 1999. Although the shares have
future vesting requirements, the Company recognized compensation costs on the
grant dates to the extent the grants related to prior service. The difference
between such expense recognition, which totaled $390,000 and $6,000 during the
years ended September 30, 1996 and 1997, respectively, and recognition over the
vesting periods is not material to the Company's results of operations and
financial position. The Company has the right of first refusal to purchase at
fair market value all of the shares granted during the year ended September 30,
1996. Additionally, if the executives' employment is terminated before an
initial public offering of the Company's common stock, the Company has a call
option to purchase the vested shares at fair market value.
Effective October 15, 1993, the Company and one of its officers entered
into an employment agreement which provided for the granting of 45 shares of
the Company's common stock. The shares vested over a five-year period and the
Company recorded related compensation expense of $25,000 for each of the years
ended September 30, 1995, 1996 and 1997.
8. STOCK OPTIONS:
The Company adopted the 1996 Stock Incentive Compensation Plan during the
year ended September 30, 1996. Under the plan, the Company may grant awards
based on its common stock to employees and directors. Such awards may include,
but are not limited to, restricted stock, stock options, stock appreciation
rights and convertible debentures. Up to 325 shares of common stock may be
issued under the plan. During the year ended September 30, 1996, the Company
granted options to purchase 117 shares of common stock at a weighted average
exercise price of $18,989 per share, which approximated fair value on the date
of grant. Such options vest and are generally exercisable ratably over a
four-year period. The options expire in 10 years.
An option to purchase 22 shares of common stock at $10,000 per share was
granted to an executive during the year ended September 30, 1994. This option
was canceled subsequent to September 30, 1997.
Because the exercise prices of the Company's employee stock options
equaled the fair market value of the underlying stock on the date of grant, no
compensation expense was recognized in accordance with APB Opinion No. 25. Had
compensation cost for the options been determined based on the fair value at
the grant date pursuant to SFAS No. 123, the Company's net income would have
decreased by $49,000 and $148,000 for the years ended September 30, 1996 and
1997, respectively. For this purpose, the fair value of the options was
estimated using the minimum value method assuming that the risk-free interest
rate was 6.7 percent and that no dividends will be paid.
9. RELATED-PARTY TRANSACTIONS:
The Company contracts with certain theatrical partnerships of which it is
a minority partner to obtain the rights to present theatrical productions in
the Company's markets. Approximately $20,000,000, $33,400,000 and $31,200,000
of expenses were incurred for such rights and included in cost of sales during
the years ended September 30, 1995, 1996 and 1997, respectively.
The Company contracts with certain unconsolidated partnerships to sell the
rights to present musical concerts. Approximately $2,446,000 of revenues was
earned from the sale of such rights during the year ended September 30, 1997.
No such rights were sold during the years ended September 30, 1995 and 1996.
As of September 30, 1997, notes receivable, related parties included
$6,453,000 due from executives and $1,571,000 due from other related parties.
Two of the notes receivable from executives are promissory notes from the
Company's principal shareholder. As of September 30, 1997, these two notes
totaled
F-78
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$5,961,000, including accrued interest of $550,000. One note, in the original
principal amount of $2,911,000, bears interest at 5.83 percent, is secured by
254 shares of PACE common stock and matures on March 28, 1999. The other note
is for $2,500,000, bears interest at 6.34 percent, is secured by 246 shares of
PACE common stock and was scheduled to mature on November 3, 1997. This note
has been extended to mature on November 4, 2000. Interest income on these two
notes was approximately $300,000 for each of the years ended September 30,
1995, 1996 and 1997. At September 30, 1997, the Company also had a $583,000
receivable from its principal shareholder. The principal shareholder has
represented his intention to pay the outstanding loans and receivable balance
from personal assets or if necessary, the liquidation of certain ownership
interests in the Company.
At September 30, 1997, notes receivable from other related parties
included $945,000 due from a joint venture partner. The terms of the related
joint venture agreement provide for the Company to loan to the joint venture
partner any required capital contributions, to be repaid on a priority basis
from the profits allocated to the joint venture partner. The advances accrue
interest at the prime rate plus 4 percent (12.5 percent at September 30, 1997)
and are secured by the joint venture partner's 50 percent interest in the joint
venture.
10. LITIGATION SETTLEMENT:
The Company was previously named as a defendant in a case filed in Wake
County, North Carolina (Promotion Litigation). There were several other
defendants named in the litigation, including Pavilion Partners, with various
causes of action asserted against one or more of each of the defendants,
including (a) breach of alleged contract, partnership, joint venture and
fiduciary duties between certain of the defendants and Pro Motion Concerts, (b)
constructive fraud, (c) interference with prospective advantage, (d) unfair
trade practices, (e) constructive trust and (f) unjust enrichment. The essence
of the plaintiffs' claims was that certain of the defendants agreed to enter
into a partnership with plaintiffs for the development and operation of an
amphitheater.
On May 1, 1997, the Promotion Litigation was settled. All defendants were
fully and finally released with prejudice from any and all claims and causes of
action. The defendants did not acknowledge or admit any liability. The
settlement called for payments from defendants totaling $4,500,000. The Company
was obligated to pay $1,500,000 immediately after the settlement and is
obligated to pay an additional $2,000,000 on or before May 1, 1998. To
guarantee payment of this $2,000,000 obligation, the Company had a standby
letter of credit outstanding at September 30, 1997. The remaining $1,000,000 of
the settlement was paid by Pavilion Partners during the year ended September
30, 1997. This expense and related legal expenses were charged to operations
for the year ended September 30, 1996.
F-79
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office facilities under noncancelable operating leases
with future minimum rent payments as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
For the year ending September 30--
1998 ............................ $1,006
1999 ............................ 417
2000 ............................ 215
2001 ............................ 193
2002 ............................ 195
Thereafter ....................... 33
------
Total ........................... $2,059
======
</TABLE>
Rent expense was $676,000, $765,000 and $1,084,000 for the years ended
September 30, 1995, 1996 and 1997, respectively.
Change in Control Provisions
The Company and its unconsolidated partnerships, including Pavilion
Partners, have entered into numerous leases and other contracts in the ordinary
course of business. Certain of these agreements either contain restrictions on
their assignability or would require third-party approval of a change in
control of the Company.
Employment Agreements
The Company has employment agreements with certain key employees. Such
agreements generally provide for minimum salary levels, guaranteed bonuses and
incentive bonuses which are payable if specified financial goals are attained.
As of September 30, 1997, the Company's minimum commitment under these
agreements were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
For the year ending September 30--
1998 ............................ $4,463
1999 ............................ 3,825
2000 ............................ 2,789
2001 ............................ 1,430
2002 ............................ 743
</TABLE>
The Company is currently negotiating certain other employment agreements
that may result in additional future commitments.
Insurance
The Company carries a broad range of insurance coverage, including general
liability, workers' compensation, stop-loss coverage for its employee health
plan and umbrella policies. The Company carries deductibles of up to $10,000
per occurrence for general liability claims and is self-insured for annual
healthcare costs of up to $25,000 per covered employee and family. The Company
has accrued for estimated potential claim costs in satisfying the deductible
and self-insurance provisions of the insurance policies for claims occurring
through September 30, 1997. The accrual is based on known facts and historical
trends, and management believes such accrual to be adequate.
F-80
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Legal Proceedings
Various legal actions and claims are pending against the Company, most of
which are covered by insurance. In the opinion of management, the ultimate
liability, if any, which may result from these actions and claims will not
materially affect the financial position or results of operations of the
Company.
Guarantees
The Company has guaranteed a $2,438,000 debt of a partnership in which
Pavilion Partners holds a 50 percent interest. PACE has agreements with its
partners whereby they would assume approximately 50 percent of any liability
arising from this guarantee. The debt matures June 1, 2003. Management does not
believe that the guarantee will result in a material liability to the Company.
Income Taxes
The Internal Revenue Service is examining several years of returns of a
majority-owned subsidiary. Management is currently discussing a possible
settlement of approximately $600,000, which has been accrued in the Company's
financial statements.
Subscription Agreement
During April 1995, the Company acquired an interest in a company
incorporated in the United Kingdom. Pursuant to a subscription agreement, the
Company made payments totaling $1,355,000 prior to September 30, 1997. The
Company has agreed to pay an additional \P239,000 in April 1998.
Construction Commitments
An unconsolidated partnership has committed to certain renovation work at
its amphitheater. The Company may be obligated to fund up to approximately $7.3
million of these renovations. Through its investment in another unconsolidated
partnership, the Company has an interest in a performance hall being
constructed for musical and theatrical presentations. The Company had funded
$0.4 million of the performance hall construction costs through September 30,
1997; the Company's estimated additional funding commitments are approximately
$2.0 million. In addition, the Company and several third parties are currently
negotiating definitive agreements to develop a theatrical venue. The Company
may be obligated to fund approximately $3.0 million of the costs of this
development over an undetermined period of time.
Put Option Agreement
The Company has entered into put option agreements with two banks whereby
the Company may be required to repurchase a total of 1,000 shares of the
Company's common stock held by an affiliate that collateralizes the personal
loans of the Company's principal shareholder at a per share price of $1,500.
The put options are effective only in the event of a loan default of the
shareholder prior to July 31, 1999. At September 30, 1997, the loans were not
in default.
12. SUBSEQUENT EVENTS:
Subsequent to September 30, 1997, the Company entered into certain
agreements with an executive who previously had been granted an option to
purchase 22 shares of common stock at $10,000 per share. Pursuant to the new
agreements, the option was canceled and the executive was granted 22 shares of
restricted common stock.
In December 1997, the Company and its shareholders entered into an
agreement with SFX Entertainment, Inc. (SFX), whereby the shareholders would
sell their interests in the Company to SFX (SFX Transaction). The purchase
price of $109 million in cash and 1,500,000 shares of SFX Class A Common Stock
is subject to adjustment prior to closing. Closing is subject to certain
conditions, including
F-81
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
approval of certain third parties. Concurrent with closing, the agreement
requires, among other things, the repayment of all outstanding loans and
receivables due from the Company's principal shareholder (see Note 9) and the
repayment of the promissory note received from an executive in connection with
a stock grant (see Note 6). Additionally, the agreement provides for the
settlement of all restricted and redeemable stock, as well as all outstanding
stock options. This settlement is expected to result in a one-time charge by
the Company of approximately $4.7 million, net of related tax effects. The
agreement also requires SFX to provide the Company with a $25 million line of
credit (Acquisition Facility) to be used for certain acquisitions being
contemplated by the Company. If the acquisition of the Company is not
consummated, this line of credit will be converted to a term loan in the amount
of advances then outstanding or, under certain circumstances, will become
immediately due and payable. This bridge financing is secured by the assets
acquired and an option to purchase the Company's interest in Pavilion Partners.
In December 1997, the Company entered into agreements to effectively
purchase substantially all of the assets of United Sports of America (USA
Transaction), a producer and presenter of demolition derbies, thrill shows, air
shows, monster truck shows, tractor pull events, motorcycle racing and bull
riding in the United States and Canada. Pursuant to the agreements, the total
purchase price is $6,000,000 in cash of which an option amount of $500,000 was
paid upon the execution of the agreement and closing is subject to the
satisfactory completion of due diligence by the Company. Management does not
expect this transaction to close until May 1998. In the event the transaction
does not close, the option amount will be forfeited if certain conditions are
not met.
In December 1997, the Company entered into an agreement to purchase
Blockbuster's 33 1/3 percent interest in Pavilion Partners (Blockbuster
Transaction) for $4,171,000 in cash, $2,940,000 in assumed liabilities and the
assumption of certain indemnification obligations of Blockbuster under the
Pavilion Partners Partnership Agreement. In addition, the Company has agreed to
purchase a note with a balance of $9,507,000, including accrued interest of
$1,601,000, at September 30, 1997. The transaction is contingent on, among
other things, obtaining acceptable financing including the release of
Blockbuster from certain debt obligations and the approval of Sony. (Note 3)
On December 22, 1997, the Company entered into an agreement to purchase
Sony's 33 1/3 percent interest in Pavilion Partners (Sony Transaction) for
$27,500,000 in cash. The transaction is contingent on, among other things,
government approval and obtaining acceptable financing including the release of
Sony from certain debt obligations. (see Note 3)
13. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
Effective February 25, 1998, the SFX Transaction, Blockbuster Transaction
and Sony Transaction closed. In conjunction with the closing, SFX retired the
Company's outstanding term loan and revolving line of credit and purchased or
retired a substantial portion of the indebtedness of Pavilion Partners,
including debt which was previously guaranteed by PACE. No borrowings had been
made under the Acquisition Facility, which expired with the closing of the SFX
Transaction. Additionally, all put option agreements related to the Company's
common stock were terminated.
During February 1998, the Company granted 40 shares of restricted common
stock to an executive. This grant combined with the settlement of all
restricted and redeemable stock, all outstanding stock options and certain
bonuses paid in conjunction with the SFX Transaction resulted in a one-time
charge during February 1998 of approximately $6.4 million, net of related tax
effects.
The USA Transaction closed on March 25, 1998. To effect the USA
Transaction, PACE contributed $4,000,000 to a newly formed partnership and that
partnership acquired a 67% interest in certain assets and liabilities of United
Sports of America from third parties. The remaining 33% interest in those
assets and liabilities was contributed to the partnership by a subsidiary of
SFX.
F-82
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Pavilion Partners:
We have audited the accompanying consolidated balance sheet of Pavilion
Partners, a Delaware general partnership, as of September 30, 1997, and the
related consolidated statements of income, partners' capital and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the partnership's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pavilion Partners
as of September 30, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 15, 1997 (except with
respect to the matters discussed
in Note 11, as to which the date
is December 22, 1997)
F-83
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Pavilion Partners
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of partners' capital and of cash
flows present fairly, in all material respects, the financial position of
Pavilion Partners and its subsidiaries (the Partnership) at September 30, 1996
and the results of their operations and their cash flows for the year ended
October 31, 1995 and the eleven months ended September 30, 1996, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
December 12, 1996
F-84
<PAGE>
PAVILION PARTNERS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
---------------------- 1997
1996 1997 (UNAUDITED)
--------- ---------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 8,554 $ 17,898 $15,464
Accounts receivable .................................... 7,842 6,167 2,067
Accounts receivable, related parties ................... 1,878 3,878 1,687
Notes receivable, related parties ...................... 1,218 1,218 1,218
Prepaid expenses and other current assets .............. 1,208 1,017 622
------- -------- -------
Total current assets .............................. 20,700 30,178 21,058
Prepaid rent ........................................... 7,075 6,938 6,898
Property and equipment, net ............................ 61,292 59,938 59,291
Other assets ........................................... 4,426 5,722 5,777
------- -------- -------
Total assets ...................................... $93,493 $102,776 $93,024
======= ======== =======
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable ....................................... $ 1,404 $ 1,193 $ 260
Accounts payable, related parties ...................... 1,866 3,948 2,193
Accrued liabilities .................................... 8,112 7,032 5,614
Deferred revenue ....................................... 3,602 5,081 3,067
Current portion of notes payable and capital lease
obligation ........................................... 1,573 1,614 1,639
Current portion of note payable, related party ......... 637 880 945
------- -------- -------
Total current liabilities ......................... 17,194 19,748 13,718
Notes payable .......................................... 43,680 42,192 41,879
Note payable, related party ............................ 7,268 7,025 6,961
Capital lease obligation ............................... 6,130 5,989 5,952
Other liabilities and minority interests in consolidated
subsidiaries ......................................... 1,617 3,960 2,911
------- -------- -------
Total liabilities ................................. 75,889 78,914 71,421
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL ....................................... 17,604 23,862 21,603
------- -------- -------
Total liabilities and partners' capital ........... $93,493 $102,776 $93,024
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-85
<PAGE>
PAVILION PARTNERS
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS THREE MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30, -------------------------
1995 1996 1997 1996 1997
------------- --------------- -------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
TICKET REVENUES .................... $43,266 $50,151 $ 58,479 $ 4,186 $ 4,554
OTHER OPERATING REVENUES 28,109 33,942 41,730 3,254 3,141
------- ------- -------- -------- --------
Total revenues .................. 71,375 84,093 100,209 7,440 7,695
COST OF SALES ...................... 49,226 57,723 64,052 4,862 5,229
------- ------- -------- -------- --------
Gross profit .................... 22,149 26,370 36,157 2,578 2,466
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 8,329 9,774 10,858 2,299 1,987
DEPRECIATION AND
AMORTIZATION ...................... 2,461 3,346 3,975 961 1,031
OTHER OPERATING COSTS .............. 5,345 7,390 8,531 961 723
LITIGATION EXPENSES AND
SETTLEMENT ........................ -- 2,380 -- -- --
------- ------- -------- -------- --------
Operating profit (loss) ......... 6,014 3,480 12,793 (1,643) (1,275)
INTEREST INCOME .................... 504 391 532 74 167
INTEREST EXPENSE ................... 2,793 3,855 4,413 1,127 1,102
------- ------- -------- -------- --------
INCOME (LOSS) BEFORE
MINORITY INTEREST ................. 3,725 16 8,912 (2,696) (2,210)
MINORITY INTEREST .................. 276 308 1,926 (63) (59)
------- ------- -------- -------- --------
NET INCOME (LOSS) .................. $ 3,449 $ (292) $ 6,986 $ (2,633) $ (2,151)
======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-86
<PAGE>
PAVILION PARTNERS
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMPHITHEATER
ENTERTAINMENT
PARTNERSHIP SM/PACE, INC. TOTAL
-------------- --------------- ----------
<S> <C> <C> <C>
BALANCE, October 31, 1994 ...................... $ 13,108 $2,805 $ 15,913
Net income .................................... 1,788 1,661 3,449
Distributions ................................. -- (699) (699)
-------- ------ --------
BALANCE, October 31, 1995 ...................... 14,896 3,767 18,663
Net income (loss) ............................. (330) 38 (292)
Distributions ................................. -- (767) (767)
-------- ------ --------
BALANCE, September 30, 1996 .................... 14,566 3,038 17,604
Net income .................................... 4,578 2,408 6,986
Distributions ................................. -- (728) (728)
-------- ------ --------
BALANCE, September 30, 1997 .................... $ 19,144 $4,718 $ 23,862
Net loss (unaudited) .......................... (1,435) (716) (2,151)
Distributions (unaudited) ..................... -- (108) (108)
-------- ------ --------
BALANCE, December 31, 1997 (unaudited) ......... $ 17,709 $3,894 $ 21,603
======== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-87
<PAGE>
PAVILION PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE ELEVEN MONTHS FOR THE THREE MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30, ---------------------------
1995 1996 1997 1996 1997
------------- --------------- -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss) ....................... $ 3,449 $ (292) $ 6,986 $ (2,633) $ (2,151)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities--
Depreciation and amortization ......... 2,461 3,346 3,975 961 1,031
Minority interest ..................... 276 308 1,926 (63) (59)
Changes in assets and
liabilities--
Accounts receivable .................. (1,455) (3,647) 1,669 5,124 4,100
Accounts receivable and
payable, related parties ........... 32 (756) 82 (299) 436
Prepaid expenses and other
current assets ..................... 191 (296) 266 774 435
Accounts payable and accrued
liabilities ........................ (512) 1,695 (2,184) (1,925) (2,350)
Deferred revenue and other
liabilities ........................ 1,304 2,110 2,284 (2,082) (2,092)
Other, net ........................... (785) (1,259) (1,548) (141) (1,210)
--------- -------- -------- -------- --------
Net cash provided by (used
in) operating activities .......... 4,961 1,209 13,456 (284) (1,860)
--------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Payments of preoperating costs .......... (1,318) (1,114) (59) (271) --
Capital expenditures .................... (25,856) (7,483) (1,879) (15) (178)
--------- -------- -------- -------- --------
Net cash used in investing
activities ........................ (27,174) (8,597) (1,938) (286) (178)
--------- -------- -------- -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Funding of capital commitments by
partners .............................. 4,046 -- -- -- --
Distributions to partner ................ (699) (767) (728) (728) (108)
Proceeds from borrowings ................ 24,322 8,323 -- -- --
Repayments of borrowings ................ (639) (1,072) (1,446) (375) (288)
--------- -------- -------- -------- --------
Net cash provided by (used
in) financing activities .......... 27,030 6,484 (2,174) (1,103) (396)
--------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS ............................. 4,817 (904) 9,344 (1,673) (2,434)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD ..................... 4,641 9,458 8,554 8,554 17,898
--------- -------- -------- -------- --------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD .................................. $ 9,458 $ 8,554 $ 17,898 $ 6,881 $ 15,464
========= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-88
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
Pavilion Partners (the Partnership) is a Delaware general partnership
between SM/PACE, Inc. (PACE), which is a wholly owned subsidiary of PACE
Entertainment Corporation, and Amphitheater Entertainment Partnership (AEP).
AEP is a partnership between a wholly owned subsidiary of Sony Music
Entertainment Inc. (Sony) and two wholly owned subsidiaries of Blockbuster
Entertainment Corporation (Blockbuster). PACE is the managing partner of the
Partnership. AEP owns a 66 2/3 percent interest in the Partnership, and PACE
owns a 33 1/3 percent interest in the Partnership.
In April 1990, Sony and PACE formed YM/PACE Partnership which changed its
name to the Sony Music/PACE Partnership. Effective April 1, 1994, the partners
entered into an agreement whereby Blockbuster obtained an indirect 33 1/3
percent interest in Sony Music/PACE Partnership, which was renamed Pavilion
Partners. In accordance with the agreement, Sony contributed an
interest-bearing note in the amount of $4,250,000 and its existing interest in
Sony Music/PACE Partnership to AEP. Concurrently, Blockbuster contributed an
interest-bearing note in the amount of $4,250,000 and its interest in three
existing amphitheaters to AEP. AEP in turn contributed these assets to the
Partnership. At the same time, PACE Entertainment Corporation contributed its
interest in two existing amphitheaters to the Partnership. Upon completion of
these contributions to the Partnership, AEP owned a 66 2/3 percent interest in
the Partnership and PACE owned a 33 1/3 percent interest in the Partnership.
The Partnership owns and operates amphitheaters, which are primarily used
for the presentation of live performances by musical artists. As of September
30, 1997, the Partnership owned interests in or leased 10 amphitheaters and had
a long-term management contract to operate an additional amphitheater. All of
the amphitheaters owned or operated by the Partnership are located in the
United States.
In April 1997, the Partnership entered into a new partnership agreement
with a third party to be known as Western Amphitheater Partners (WAP). The
Partnership contributed or licensed the assets and liabilities of the Glen
Helen Amphitheatre, and the other partner contributed or licensed the assets
and liabilities of the Irvine Meadows Amphitheatre. Each partner has a 50
percent interest in WAP. Under the terms of the Partnership agreement, the
partners are required to make an additional capital contribution of
approximately $850,000 each in WAP which was accrued by the Partnership at
September 30, 1997. The fiscal year-end for the WAP partnership will be
December 31.
During 1996, the Partnership changed its fiscal year-end from October 31
to September 30.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements of the Partnership include all of
its wholly owned subsidiaries and other partnerships in which Pavilion Partners
holds a controlling interest. All partnerships in which Pavilion Partners holds
less than a controlling interest are reported on the equity method of
accounting. All significant intercompany transactions have been eliminated in
consolidation.
Basis of Contributed Assets
All assets contributed to the Partnership by the partners were recorded at
the carrying values of the contributing entities.
Revenue Recognition
The Partnership records revenues from the presentation of events at the
completion of the related event. Advance ticket sales are classified as
deferred revenue until the event has occurred. Sponsorship and other revenues
that are not related to any single event are classified as deferred revenue and
amortized over each of the amphitheaters' various shows during the operating
season.
F-89
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Partnership barters event tickets and sponsorship rights for products
and services, including event advertising. These barter transactions are not
recognized in the accompanying consolidated financial statements and are not
material to the Partnership's financial position or results of operations.
Income Taxes
No provision for federal or state income taxes is necessary in the
financial statements of the Partnership because, as a partnership, it is not
subject to federal or state income taxes and the tax effect of its activities
accrues to the partners.
Prepaid Expenses
Prepaid expenses include show advances and deposits, event advertising
costs and other costs directly related to future events. Such costs are charged
to operations upon completion of the related events.
As of September 30, 1996 and 1997, prepaid expenses included event
advertising costs of $160,000 and $137,000, respectively. The Partnership
recognized event advertising expenses of $5,815,000, $6,439,000 and $6,569,000
in cost of sales for the year ended October 31, 1995, the eleven months ended
September 30, 1996, and the year ended September 30, 1997, respectively.
Other Assets
The Partnership incurs certain costs in identifying and selecting
potential sites for amphitheater development. All costs incurred by the
Partnership during the initial site selection phase are expensed as incurred.
Certain incremental start-up costs that are incurred after a decision has been
made to develop a site are capitalized as preoperating costs. After an
amphitheater is fully developed, these preoperating costs are amortized on a
straight-line basis over a five-year period.
Contract acquisition costs include fees associated with securing a
contract with a booking agent for one of the Partnership's amphitheaters. These
costs are amortized on a straight-line basis over the life of the contract
which is 10 years.
Property and Equipment
Property and equipment is stated at cost. Repair and maintenance costs are
expensed as incurred. Interest incurred in connection with the construction of
an amphitheater is capitalized as part of the cost of the amphitheater. During
1995 and 1996, the Partnership capitalized interest in connection with the
construction of amphitheaters of $645,000 and $161,000, respectively. No
interest was capitalized in 1997.
Leasehold improvements are amortized on a straight-line basis over the
shorter of their estimated useful lives or the term of the lease. Other
property and equipment is depreciated on a straight-line basis over the
estimated useful lives of the assets. A summary of the principal ranges of
useful lives used in computing the annual provision for depreciation and
amortization is as follows:
<TABLE>
<CAPTION>
RANGE OF YEARS
---------------
<S> <C>
Buildings ....................... 27-31.5
Leasehold improvements .......... 5-31.5
Equipment ....................... 3-7
Furniture and fixtures .......... 5-10
</TABLE>
The Partnership evaluates on an ongoing basis whether events and
circumstances indicate that the estimated useful lives of property and
equipment warrant revision. The Partnership adopted Statement of Financial
Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in 1997. The
adoption of SFAS No. 121 did not have a material effect on the Partnership's
financial position or results of operations.
F-90
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value of Financial Instruments
The carrying amounts of the Partnership's financial instruments
approximate their fair value at September 30, 1996 and 1997.
Statement of Cash Flows
The Partnership considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Interest paid was
$2,319,000, $3,652,000 and $3,917,000 for 1995, 1996 and 1997, respectively.
During the year ended October 31, 1995, the Partnership issued a note payable
with a fair value of $1,300,000 to a vendor in exchange for certain equipment
with a fair value which approximated the amount of the note. During 1997, the
Partnership contributed or licensed the assets and liabilities of the Glen
Helen Amphitheatre into the new WAP Partnership in which it holds a 50 percent
interest. The net book value of the investment made in the WAP Partnership was
$54,000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Partnership to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 1995 and 1996 consolidated financial statements
have been reclassified to conform to the 1997 presentation.
Interim Financial Information
The interim financial data as of December 31, 1997 and for the three-month
periods ended December 31, 1996 and 1997 is unaudited and certain information
and disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted.
However, in the opinion of management, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the interim periods. The results of
operations for the interim periods are not necessarily indicative of the
results to be expected for the entire year.
3. PARTNERSHIP AGREEMENT:
The Partnership agreement provides, among other things, for the following:
Contributions and Project Loans
In addition to the initial contributions as discussed in Note 1, the
partners are obligated to contribute, in proportion to their respective
Partnership interests, any deficiency in the funding for the construction of
each approved amphitheater development or any operational shortfall, as defined
in the Partnership agreement. No such funding was required in 1995, 1996 or
1997.
In addition, AEP is responsible for providing project financing, as
defined, for each approved amphitheater development. To the extent AEP does not
fulfill this responsibility, AEP must indemnify, defend and hold harmless the
Partnership from all claims, demands, liabilities or other losses (including
the loss of any earnest money deposits and any reasonable attorneys' fees)
which might result from AEP's failure to provide such project loan.
Income Allocation
In general, all of the Partnership's income is allocated to the partners
in proportion to their respective Partnership interests. However, PACE receives
a priority allocation of net income, as defined in the Partnership agreement,
until the cumulative amount of such allocations is equal to $2,000,000
increased
F-91
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
by 7 percent of the unpaid allocation on the last day of each fiscal year. Any
such allocation of net income to PACE is distributed in the following year. The
priority allocation of net income to PACE for 1995, 1996 and 1997 was
approximately $767,000, $716,000 and $119,000, respectively. This allocation
obligation was fully satisfied with the distribution of the fiscal 1997 income
allocation amount during October 1997.
AEP is entitled to receive a priority allocation of net income once a loan
related to an amphitheater contributed by Blockbuster is repaid. At September
30, 1997, the loan balance is $7,905,000 and is payable in quarterly
installments with a balloon payment due at its maturity on April 1, 2004. The
priority allocation of net income is equal to 65 percent of the cash flow
attributable to the amphitheater, as defined in the Partnership agreement. The
cumulative priority allocation of net income to AEP is limited to $7,000,000.
No such allocation was made in 1995, 1996 or 1997.
On November 1 of each calendar year, the executive committee of the
Partnership determines if any excess cash exists in the Partnership's accounts
above what is necessary to fund future operations and obligations. Any such
excess cash may be distributed to the partners in proportion to their
respective interests in the Partnership. No distributions of excess cash flow
have been made.
4. PROPERTY AND EQUIPMENT:
The components of the Partnership's property and equipment are as follows
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------
1996 1997
--------- ---------
<S> <C> <C>
Property ................................................ $ 695 $ 695
Buildings ............................................... 10,817 10,817
Leasehold improvements .................................. 53,148 53,826
Equipment ............................................... 5,007 4,488
Furniture and fixtures .................................. 705 722
Construction in progress ................................ -- 786
------- -------
70,372 71,334
Less--Accumulated depreciation and amortization ......... 9,080 11,396
------- -------
$61,292 $59,938
======= =======
</TABLE>
Depreciation and amortization expense associated with property and
equipment for 1995, 1996 and 1997 was $1,905,000, $2,693,000 and $3,179,000,
respectively.
Assets under capital lease included above are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Building ............................... $5,333 $5,333
Furniture and equipment ................ 841 841
------ ------
6,174 6,174
Less--Accumulated depreciation ......... 2,068 2,237
------ ------
$4,106 $3,937
====== ======
</TABLE>
Amortization expense associated with assets under capital lease for 1995,
1996 and 1997 was $169,000, $156,000 and $169,000, respectively.
F-92
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER ASSETS:
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Preoperating costs, net of accumulated amortization of $2,092,000 and
$1,094,000, respectively.................................................. $2,153 $1,709
Investment in unconsolidated partnerships .................................. 1,302 2,797
Contract acquisition costs, net of accumulated amortization of $45,000 and
$129,000, respectively ................................................... 624 815
Other ...................................................................... 347 402
------ ------
$4,426 $5,723
====== ======
</TABLE>
During 1995, 1996 and 1997, the Partnership recognized equity in earnings
of unconsolidated partnerships of $263,000, $129,000 and $1,592,000,
respectively, which is included in other operating revenues.
6. ACCRUED LIABILITIES:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1996 1997
-------- ---------
<S> <C> <C>
Interest ................................... $ 544 $ 522
Rent ....................................... 638 580
Taxes ...................................... 748 613
Litigation expenses and settlement ......... 1,873 --
Insurance .................................. 1,216 1,656
Other ...................................... 3,093 3,660
------ ------
$8,112 $7,031
====== ======
</TABLE>
Accrued liabilities do not include accrued interest on the notes payable
to Blockbuster (see Note 7). Such accrued interest, which is included in
accounts payable, related parties, was $1,082,000 and $1,601,000 as of
September 30, 1996 and 1997, respectively.
F-93
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE:
Notes payable to third parties consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Note payable to a bank, interest at LIBOR plus 0.18% (6% at
September 30, 1996 and 1997), payments due semiannually
with a balloon payment due on maturity in July 2005,
guaranteed by Sony ........................................... $13,122 $12,573
Note payable to a bank, interest at 8.35% through July 2002 and
LIBOR plus 0.18% thereafter, due in July 2005, guaranteed by
Sony ......................................................... 10,000 10,000
Note payable to a bank, interest at LIBOR plus 0.85% (6.78% at
September 30, 1996 and 1997), payments due annually with a
balloon payment due on maturity in December 2005,
guaranteed by Blockbuster and Sony ........................... 7,732 7,575
Note payable to a bank, interest at prime minus 105 basis points
(7.2% and 7.45% at September 30, 1996 and 1997,
respectively), payments due quarterly with a balloon payment
due on maturity in April 2000, guaranteed by Sony ............ 6,449 6,356
Note payable to a bank, interest at 9.46%, payments due
quarterly with a balloon payment due on maturity in
December 1999, guaranteed by Sony ............................ 3,958 3,914
Note payable to a vendor, interest imputed at 8.98%, payments
due weekly through May 2005 .................................. 1,826 1,671
Other notes payable to vendors, interest at fixed rates ranging
from 8.2% to 10.72%, due in equal installments with final
maturities ranging from December 1996 through
February 2006 ................................................ 2,040 1,591
------- -------
Total ........................................................ 45,127 43,680
Less--Current maturities ....................................... 1,447 1,488
------- -------
Noncurrent portion ........................................... $43,680 $42,192
======= =======
Note payable to a related party consist of the following (in
thousands):
SEPTEMBER 30
---------------------
1996 1997
-------- --------
Note payable to Blockbuster, interest at 7%, payments due
quarterly with a balloon payment due on maturity in
April 2004, secured by property and equipment with a net
book value of $6,212 ......................................... $ 7,905 $ 7,905
Less--Current maturities ....................................... 637 880
-------- --------
Noncurrent portion ........................................... $ 7,268 $ 7,025
======== ========
</TABLE>
The terms of contracts with concessionaires such as food and beverage
vendors generally require the vendors to make a significant initial payment to
the Partnership at the time of the construction of an amphitheater. These
advances are repayable in periodic installments from amounts otherwise due to
the Partnership under the concession contracts. As of September 30, 1997, the
notes payable to vendors under
F-94
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
such arrangements had a weighted-average effective interest rate of 9.15
percent. The Partnership's weighted-average interest rate on notes payable to
banks was 7.3 percent on September 30, 1997.
Interest expense on the note payable to a related party was $547,000,
$489,000 and $519,000 for 1995, 1996 and 1997, respectively. Principal and
interest on the note payable to a related party have not been paid as accounts
receivable, related parties from Blockbuster remain outstanding.
As of September 30, 1997, scheduled maturities of notes payable were as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 ............... $ 2,368
1999 ............... 1,841
2000 ............... 11,560
2001 ............... 1,751
2002 ............... 1,811
Thereafter ......... 32,254
-------
$51,585
=======
</TABLE>
8. LEASE COMMITMENTS:
The Partnership leases various amphitheaters under operating and capital
leases. Initial lease terms are 25 to 60 years with varying renewal periods at
the Partnership's option on most leases. A number of the amphitheater leases
provide for escalating rent over the lease term. Rental expense on operating
leases is recognized on a straight-line basis over the life of such leases. The
majority of the amphitheater leases provide for contingent rentals, generally
based upon a percentage of gross revenues, as defined in the respective lease
agreements. Minimum rental expense associated with operating leases for 1995,
1996 and 1997 was $648,000, $2,353,000 and $2,612,000, respectively. Contingent
rental expense associated with operating leases for 1995, 1996 and 1997 was
$2,407,000, $2,515,000 and $2,571,000, respectively. Contingent rental expense
associated with capital leases for 1995, 1996 and 1997 was $144,000, $155,000
and $149,000, respectively.
Minimum rental commitments on long-term capital and operating leases at
September 30, 1997, were as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
Year ending September 30--
1998 ............................................ $ 757 $ 2,902
1999 ............................................ 757 3,056
2000 ............................................ 756 3,148
2001 ............................................ 757 3,248
2002 ............................................ 757 3,297
Thereafter ...................................... 9,714 54,693
------- -------
13,498 $70,344
=======
Less--Amount representing interest ............... 7,383
-------
Present value of minimum rental payments ......... 6,115
Less--Current portion ............................ 126
-------
Noncurrent portion ............................... $ 5,989
=======
</TABLE>
9. RELATED PARTIES:
The responsibility for the day-to-day business and affairs of the
Partnership has been delegated by the partners to a managing director and
support staff employed by PACE Entertainment Corporation and
F-95
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
its subsidiaries. PACE Entertainment Corporation and its subsidiaries provide
the Partnership with management and consulting services in connection with the
development, construction, maintenance and operation of amphitheaters owned or
leased by the Partnership. The Partnership paid $1,650,000, $1,687,000 and
$1,968,000 during 1995, 1996 and 1997, respectively, to PACE Entertainment
Corporation as reimbursement for the costs of these services.
The Partnership paid PACE Music Group (PMG), a subsidiary of PACE
Entertainment Corporation, $289,000, $225,000 and $395,000 during 1995, 1996
and 1997, respectively, for services provided by PMG as a local presenter at
one of the Partnership's amphitheaters.
Accounts receivable from and accounts payable to related parties at
September 30, 1997, of $3,878,000 and $3,948,000, respectively, relate to
amounts owed to and due from the partners arising from the formation of the
Partnership and general and administrative expenses paid by or on behalf of the
Partnership.
Notes receivable, related parties consist of two notes due from AEP which
bear interest at 5.62 percent per annum and matured April 1, 1997. Principal
payments on the notes are due upon request by the Partnership in order to fund
the construction of proposed amphitheaters. Interest on the partners' notes
amounted to $192,000, $63,000 and $68,000 for 1995, 1996 and 1997,
respectively.
10. COMMITMENTS AND CONTINGENCIES:
Commitments
The Partnership guarantees 50 percent of a $2,305,000 promissory note
issued by its 50 percent equity partner in the Starwood Amphitheater. The note
matures on June 1, 2003.
The Partnership has committed to fund certain renovation work at one of
its amphitheaters in proportion to its 66 2/3 percent partnership interest in
that amphitheater. The renovations are to include increasing seating capacity
and upgrading the amphitheater's concession plazas and parking facilities. The
total budget for these renovations is approximately $11.0 million of which $5.0
million will be funded by the minority partner and a note payable to vendor,
therefore the Partnership's funding commitment is approximately $6.0 million.
The Partnership maintains cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Partnership has not experienced any
losses in such accounts. Management performs periodic evaluations of the
relative credit standards of the financial institutions with which it deals.
Additionally, the Partnership's cash management and investment policies
restrict investments to low-risk, highly liquid securities. Accordingly,
management does not believe that the Partnership is currently exposed to any
significant credit risk on cash and cash equivalents.
The Partnership is subject to other claims and litigation arising in the
normal course of its business. The Partnership does not believe that any of
these proceedings will have a material adverse effect on its financial position
or results of operations.
The Partnership was previously named as a defendant in a case filed in
Wake County, North Carolina (Promotion Litigation). There were several
defendants named in the litigation with various causes of action asserted
against one or more of each of the defendants, including (a) breach of alleged
contract, partnership, joint venture and fiduciary duties between certain of
the defendants and Pro Motion Concerts, (b) constructive fraud, (c)
interference with prospective advantage, (d) unfair trade practices, (e)
constructive trust and (f) unjust enrichment. The essence of the plaintiff's
claims was that certain of the defendants agreed to enter into a partnership
with the plaintiffs for the development and operation of an amphitheater. On
May 1, 1997, the Promotion Litigation was settled. All defendants were fully
and finally released with prejudice from any and all claims and causes of
action. Although the defendants believe that they would have prevailed at a
trial of the Promotion Litigation, the defendants chose to
F-96
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
settle rather than risk the uncertainties of a trial. The defendants did not
acknowledge or admit any liability. The settlement called for payments to
plaintiffs totaling $4.5 million, of which $1.0 million was paid by the
Partnership. The Partnership recorded litigation settlement expense of $1.0
million at September 30, 1996. The settlement was paid during May 1997.
Change in Control Provisions
The Partnership has entered into numerous leases and other contracts in
the ordinary course of business. Certain of these agreements either contain
restrictions on their assignability or would require third-party approval of a
change in control of the Partnership.
Employment Agreements
The Partnership has employment agreements with certain key employees. Such
agreements generally provide for minimum salary levels, guaranteed bonuses and
incentive bonuses which are payable if specified financial goals are attained.
As of September 30, 1997, the Company's minimum commitment under these
agreements were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
For the year ending September 30--
1998 ............................. $335
1999 ............................. 177
</TABLE>
Insurance
The Partnership carries a broad range of insurance coverage, including
general liability, workers' compensation, employee health coverage and umbrella
policies. The Partnership carries deductibles of up to $10,000 per occurrence
for general liability claims. The Partnership has accrued for estimated
potential claim costs in satisfying the deductible provisions of the insurance
policies for claims occurring through September 30, 1997. The accrual is based
on known facts and historical trends, and management believes such accrual to
be adequate.
11. SUBSEQUENT EVENTS:
In December 1997, the managing partner and its shareholders entered into
an agreement whereby the shareholders would sell their interests in PACE
Entertainment Corporation to SFX Entertainment, Inc. (SFX Transaction). Closing
is subject to certain conditions, including the approval of third parties.
On December 19, 1997, the PACE Entertainment Corporation entered into an
agreement to purchase Blockbuster's 33 1/3 percent interest in the Partnership
(Blockbuster Transaction) for $4,171,000 in cash, $2,940,000 in assumed
liabilities and the assumption of certain indemnification obligations of
Blockbuster under the Partnership agreement. In addition, PACE Entertainment
Corporation has agreed to purchase the note payable to Blockbuster with a
balance of $9,507,000, including accrued interest of $1,601,000, at September
30, 1997. The transaction is contingent on, among other things, obtaining
acceptable financing including the release of Blockbuster from certain debt
obligations and the approval of Sony.
On December 22, 1997, PACE Entertainment Corporation entered into an
agreement to purchase Sony's 33 1/3 percent interest in the Partnership (Sony
Transaction) for $27,500,000 in cash. The transaction is contingent on, among
other things, government approval and obtaining acceptable financing including
the release of Sony from certain debt obligations (see Note 7).
12. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
Effective February 25, 1998, the SFX Transaction, Blockbuster Transaction
and Sony Transaction closed. In conjunction with the closing, SFX purchased or
retired approximately $38 million of the Partnership's outstanding notes
payable.
F-97
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Boards of Directors
Contemporary Group
We have audited the accompanying combined balance sheets of Contemporary
Group as of December 31, 1997 and 1996 and the related combined statements of
operations, cash flows and stockholders' equity for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Contemporary Group at December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
New York, New York
May 22, 1998
F-98
<PAGE>
CONTEMPORARY GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1996 1997
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash .............................................................. $ 2,972,409 $10,427,805
Accounts receivable ............................................... 4,067,444 7,672,187
Notes receivable - related party .................................. -- 1,000,000
Prepaid expenses and other current assets ......................... 272,105 210,640
------------ -----------
Total current assets ............................................... 7,311,958 19,310,632
Property and equipment, at cost, less accumulated depreciation and
amortization of $2,723,986 in 1996 and $3,264,972 in 1997 ......... 2,438,210 2,813,902
Reimbursable event costs ........................................... 474,469 152,617
Deferred event expenses ............................................ 250,973 402,460
Investment in Riverport ............................................ 4,934,513 5,436,717
Other assets ....................................................... 120,256 199,518
------------ -----------
Total assets ....................................................... $ 15,530,379 $28,315,846
============ ===========
LIABILITIES AND COMBINED STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation and bonuses .................................. $ 2,906,153 $ 6,721,459
Accrued expenses and other current liabilities .................... 1,994,036 6,169,861
Accounts payable .................................................. 1,733,676 1,347,539
Current portion of note payable ................................... 667,138 1,075,000
------------ -----------
Total current liabilities .......................................... 7,301,003 15,313,859
Deferred revenue and other liabilities ............................. 2,586,880 5,570,295
Note payable, less current portion ................................. 1,659,723 739,424
Combined stockholders' equity ...................................... 3,982,773 6,692,268
------------ -----------
Total liabilities and combined stockholders' equity ................ $ 15,530,379 $28,315,846
============ ===========
</TABLE>
See accompanying notes.
F-99
<PAGE>
CONTEMPORARY GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1995 1996 1997
-------------- -------------- ----------------
<S> <C> <C> <C>
Operating revenues:
Event promotion revenue ..................... $39,159,137 $38,023,454 $ 48,057,060
Marketing revenue ........................... 7,670,138 12,969,621 30,195,359
Other event revenue ......................... 8,813,999 8,859,218 10,800,118
----------- ----------- ------------
55,643,274 59,852,293 89,052,537
Cost of revenue .............................. 44,240,953 46,410,935 66,940,088
----------- ----------- ------------
11,402,321 13,441,358 22,112,449
Operating expenses:
Salary and bonus expense .................... 5,944,644 8,010,991 18,992,476
Depreciation and amortization ............... 559,980 566,573 540,986
General and administrative expenses ......... 3,468,742 3,767,111 4,887,615
----------- ----------- ------------
9,973,366 12,344,675 24,421,077
Income (loss) from operations ................ 1,428,955 1,096,683 (2,308,628)
Other income (expense):
Interest income ............................. 226,024 158,512 201,310
Interest expense ............................ (140,773) (213,658) (192,130)
Loss on asset disposal ...................... -- -- (84,261)
Equity in income of Riverport ............... 1,332,898 822,716 1,002,204
----------- ----------- ------------
1,418,149 767,570 927,123
----------- ----------- ------------
Income before income taxes ................... 2,847,104 1,864,253 (1,381,505)
Federal and state taxes ...................... 20,677 35,367 --
----------- ----------- ------------
Net income (loss) ............................ $ 2,826,427 $ 1,828,886 $ (1,381,505)
=========== =========== ============
</TABLE>
See accompanying notes.
F-100
<PAGE>
CONTEMPORARY GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1995 1996 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .................................................. $ 2,826,427 $ 1,828,886 $ (1,381,505)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .............................. 559,980 566,573 540,986
Loss on asset disposal ..................................... -- -- 84,261
Non cash interest expense .................................. 142,068 148,113 154,701
Equity in income of Riverport, net of distributions
received ................................................. (82,897) (222,716) (502,204)
Changes in operating assets and liabilities:
Accounts receivable ...................................... (1,451,090) (659,486) (3,604,743)
Prepaid expenses and other current assets ................ (331,184) 225,754 61,465
Reimbursable event costs ................................. (75,913) (361,599) 321,852
Deferred event expenses .................................. (15,608) (45,150) (151,487)
Other assets ............................................. (1,575) (29,923) (79,262)
Accounts payable ......................................... 398,369 970,553 (386,137)
Accrued compensation and bonuses ......................... 665,488 954,175 3,815,306
Accrued expenses and other current liabilities ........... 907,053 301,652 4,175,825
Deferred revenue ......................................... (1,569,486) 245,216 3,227,827
Other liabilities ........................................ -- 162,860 (244,412)
------------ ------------ ------------
Net cash provided by operating activities ................... 1,971,632 4,084,908 6,032,473
INVESTING ACTIVITIES
Loan to related party ....................................... -- -- (1,000,000)
Purchase of property and equipment .......................... (281,306) (1,159,382) (1,063,848)
Proceeds from sale of property and equipment ................ -- -- 62,909
------------ ------------ ------------
Net cash used in investing activities ....................... (281,306) (1,159,382) (2,000,939)
FINANCING ACTIVITIES
Borrowings .................................................. 226,970 626,970 --
Payments of notes payable ................................... (75,000) (336,802) (667,138)
Proceeds received from capital contributions ................ -- -- 5,000,000
Distributions paid .......................................... (2,578,000) (2,993,000) (909,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities ......... (2,426,030) (2,702,832) 3,423,862
------------ ------------ ------------
Net increase in cash ........................................ (735,704) 222,694 7,455,396
Cash at beginning of period ................................. 3,485,419 2,749,715 2,972,409
------------ ------------ ------------
Cash at end of period ....................................... $ 2,749,715 $ 2,972,409 $ 10,427,805
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ...................................... $ 24,000 $ 143,271 $ 37,421
============ ============ ============
Cash paid for income taxes .................................. $ 45,805 $ 34,550 $ 27,077
============ ============ ============
</TABLE>
See accompanying notes.
F-101
<PAGE>
CONTEMPORARY GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
<S> <C>
Balance, January 1, 1995 ................................. $ 4,898,460
Distributions to stockholders ........................... (2,578,000)
Net income for the year ended December 31, 1995 ......... 2,826,427
------------
Balance, December 31, 1995 ............................... 5,146,887
Distributions to stockholders ........................... (2,993,000)
Net income for the year ended December 31, 1996 ......... 1,828,886
------------
Balance, December 31, 1996 ............................... 3,982,773
Distributions to stockholders ........................... (909,000)
Capital contributions ................................... 5,000,000
Net loss for the year ended December 31, 1997 ........... (1,381,505)
------------
Balance, December 31, 1997 ............................... $ 6,692,268
============
</TABLE>
See accompanying notes.
F-102
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The accompanying combined financial statements include the accounts of
Contemporary International Productions Corporation, Contemporary Productions
Incorporated, Contemporary Marketing, Inc. ("CMI"), Contemporary Sports
Incorporated, Innovative Training and Education Concepts Corporation, n/k/a
Contemporary Group, Inc., Contemporary Investments Corporation ("CIC"),
Contemporary Investments of Kansas, Inc., Continental Entertainment Associates,
Inc., Dialtix, Inc., and Capital Tickets L.P. (collectively, the "Contemporary
Group" or the "Companies"). Intercompany transactions and balances among these
companies have been eliminated in combination. The Companies are subject to
common ownership and to the transaction described in Note 8.
The Contemporary Group is a live entertainment and special events
producer, venue operator and consumer marketer. Income from operations
originates from the operation of the concert division which earns promotion
income in two ways: either a fixed fee for organizing and promoting an event or
an arrangement that entitles it to a profit percentage based on a predetermined
formula. The Companies recognize revenue from the promotion of events when
earned, which is generally upon exhibition. The Companies record commissions on
booking acts as well as sponsorship and concession income as other event
revenues.
CIC is a 50% partner in Riverport Performing Arts Centre Joint Venture
("Riverport"), a Missouri general partnership which operates a 20,000 seat
outdoor amphitheater located in St. Louis, Missouri. The investment in
Riverport is recorded under the equity method of accounting.
Income Taxes
As of December 31, 1997, all of the entities combined are either "S
Corporations" or partnerships and therefore no tax provision has been provided.
In 1996 and 1995, certain of the entities were "C Corporations" for which a tax
provision has been provided.
For the year ended December 31, 1996 and 1995, with respect to the "C
Corporations," the total provision for income taxes is $35,367 and $20,677
respectively.
Certain of the "C Corporations" filed elections to be treated as "S
Corporations" beginning January 1, 1997. Therefore, with respect to such
corporations, no provision for income taxes has been provided for the year
ended December 31, 1997. These Companies have subsequently revoked the election
to be taxed as "S Corporations", effective January 1, 1998.
Accounts Receivable
Accounts receivable consist of amounts due from ticket vendors, venue box
offices and customers of marketing services. Management considers these
accounts receivable as of December 31, 1997, 1996 and 1995 to be collectible;
accordingly, no allowance for doubtful accounts is recorded.
Revenue Recognition
Deferred revenue relates primarily to an advance on future concession
revenues which is evidenced by a noninterest bearing note payable and advances
on marketing services. Payments collected in advance are recognized as income
as events occur or services are provided. Reimbursable event costs represent
amounts paid by the Companies on behalf of co-promoters and other parties with
interests in the events which will be reimbursed by such parties.
Sales under long-term contracts for the Company's marketing division are
recorded under the percentage-of-completion method, wherein revenues and
estimated costs are recorded as the work is performed.
F-103
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Significant Customer
CMI's most significant customer is AT&T, which provided approximately 23%
and 12% of the Companies' combined revenues for the years ended December 31,
1997 and 1996, respectively. In March 1998, AT&T has indicated that it will no
longer be using the services of CMI.
Advertising Costs
Advertising costs are expensed as incurred. For the year ended December
31, 1997, 1996 and 1995, advertising costs were $115,634 and $71,879 and
$44,226, respectively.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed on
either the straight-line method or accelerated methods over the estimated
useful lives of the assets or the term of the related lease as follows:
<TABLE>
<CAPTION>
<S> <C>
Furniture, fixtures and equipment ......... 5-7 years
Land improvements ......................... 15 years
Leasehold improvements .................... 10 years
</TABLE>
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassification
Certain prior year amounts in the financial statements have been
reclassified to conform with the current year's presentation.
2. INVESTMENTS
The following is a summary of the financial position and results of
operations of Riverport as of and for the year ended December 31, 1995, 1996
and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Current assets .................................. $ 350,532 $ 473,275 $ 284,424
Property and equipment .......................... 12,388,989 11,815,552 11,188,826
Other assets .................................... 27,573 16,553 --
----------- ----------- -----------
Total assets .................................... $12,767,094 $12,305,380 $11,473,250
=========== =========== ===========
Current liabilities ............................. $ 1,524,364 $ 1,993,981 $ 318,028
Other liabilities ............................... 1,819,136 442,374 281,789
Partners' capital ............................... 9,423,594 9,869,025 10,873,433
----------- ----------- -----------
Total liabilities and partners' capital ......... $12,767,094 $12,305,380 $11,473,250
=========== =========== ===========
Revenue ......................................... $15,256,314 $11,693,138 $14,247,109
Net operating income ............................ $ 3,200,738 $ 1,970,887 $ 2,616,839
Net income ...................................... $ 2,665,796 $ 1,645,431 $ 2,004,408
</TABLE>
F-104
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
During the years ended December 31, 1997, 1996 and 1995, CIC received a
cash distribution of $500,000, $600,000 and $1,250,000, respectively, from
Riverport.
3. NOTES PAYABLE
In November 1995, the Company obtained a $750,000 unsecured line of credit
with a bank which matured in May 1996. The note bore a rate of interest based
on the prime lending rate (8.75% in 1995). At December 31, 1995, $226,970 was
outstanding under this line of credit.
At December 31, 1997, 1996 and 1995, CIC held a $2,322,500 non
interest-bearing note payable to its partner in Riverport. The carrying value
of the note was $1,814,424, $1,734,723 and $1,661,610 at December 31, 1997,
1996 and 1995, respectively, which includes imputed interest at a rate of
approximately 9%. The note, which was payable in installments through December
1, 2000 and was secured by CIC's investment in Riverport, was repaid in 1998 in
connection with the transaction described in Note 8.
At December 31, 1996, the Companies had a $592,138 bank note payable which
bore interest based on the prime lending rate (8.25% in 1996, 8.5% in 1997) and
was repaid in full during 1997.
4. COMMON STOCK
The Companies' stock and tax status for 1997 are as follows:
<TABLE>
<CAPTION>
TAX SHARES SHARES PAR
STATUS AUTHORIZED ISSUED VALUE
------------- ------------ ---------- ------
<S> <C> <C> <C> <C>
Contemporary International Productions
Corporation ................................. S-Corp. 30,000 10 $ 1
Contemporary Productions Incorporated ......... S-Corp. 30,000 100 $ 1
Contemporary Marketing, Inc. .................. S-Corp. 30,000 100 $ 1
Contemporary Sports, Incorporated ............. S-Corp. 30,000 100 $ 1
Innovative Training and Education
Concepts Corporation n/k/a
Contemporary Group, Inc. .................... S-Corp. 30,000 100 $ 1
Contemporary Investments Corporation .......... S-Corp. 30,000 200 $ 1
Contemporary Investments of Kansas, Inc. S-Corp. 30,000 30,000 $ 1
Continental Entertainment Associates, Inc. C-Corp. 300 6 $100
Dialtix, Inc. ................................. S-Corp. 300 6 $100
Capital Tickets L.P. .......................... Partnership N/A N/A N/A
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Leases
The Companies lease office facilities and concert venues under
noncancellable leases which expire at various dates through 2004. Such leases
contain various operating escalations and renewal options.
Total rent expense for the years ended December 31, 1997, 1996 and 1995
was $705,489, $818,123 and $734,785, respectively.
F-105
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under noncancellable operating leases as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 ......................... $ 858,757
1999 ......................... 863,757
2000 ......................... 440,050
2001 ......................... 264,000
Thereafter ................... 317,000
----------
$2,743,564
==========
</TABLE>
Compensation
During 1996, CMI entered into an employment agreement with one of its
employees which provided her rights to future cash payments based on the fair
value of CMI, as defined. These rights would vest on January 1, 2002 or upon
the occurrence of certain transactions, including a change of control. On
December 31, 1997, in connection with an amendment to her employment agreement,
the rights became fully vested and CMI paid this employee $1,329,284. In
addition, she is entitled to receive as a bonus $2,854,899 under the amendment,
which will be paid in 1998 and is accrued at December 31, 1997.
Litigation
The Companies are party to various legal proceedings generally incidental
to their businesses. Although the ultimate disposition of these proceedings is
not presently determinable, management, after discussions with counsel, does
not expect the outcome of these proceedings to have a material adverse effect
on the financial condition of the Companies.
6. EMPLOYEE RETIREMENT PLAN
In January 1992, the Companies began a retirement plan for their employees
under Section 401(k) of the Internal Revenue Code. All employees are eligible
to participate once they obtain the minimum age requirement of 21 years and
have satisfied the service requirement of one year with the Companies.
Participant contributions are subject to the limitations of Section 402(g) of
the Internal Revenue Code. The Companies contribute to participant employees'
accounts at the rate of 25% of the first 5% of the participating employees'
contributions. During the years ended December 31, 1997, 1996 and 1995, the
Companies contributions totaled approximately $37,769, $25,600 and $18,887,
respectively.
7. RELATED PARTY TRANSACTIONS
During 1997, the Company loaned $1,000,000 to its co-presidents. The loans
which bore a rate of interest of approximately 5.8% were repaid in full in
early 1998.
8. SUBSEQUENT EVENTS
In February 1998, the owners of the Companies sold 100% of the capital
stock of Contemporary International Productions Corporation and the assets of
the remaining companies comprising the Contemporary Group, excluding cash and
1997 receivables, to SFX Entertainment, Inc. for an aggregate consideration of
$62,300,000 in cash and the issuance of preferred stock which was converted
into 1,402,850 shares of SFX Entertainment Class A Common Stock. In connection
with this transaction, SFX Entertainment and its affiliates also acquired the
50% interest of Riverport not owned by CIC for $12,585,000.
F-106
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Riverport Performing Arts Centre, Joint Venture:
We have audited the accompanying balance sheets of Riverport Performing
Arts Centre, Joint Venture (a Missouri General Partnership) as of December 31,
1997 and 1996, and the related statements of income and changes in partners'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Joint Venture's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Riverport Performing Arts
Centre, Joint Venture as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 27, 1998
F-107
<PAGE>
RIVERPORT PERFORMING ARTS CENTRE, JOINT VENTURE
BALANCE SHEETS -- AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 202,251 $ 76,231
Accounts receivable ............................... -- 324,275
Prepaid expenses and other current assets ......... 82,173 72,769
------------ ------------
Total current assets ............................... 284,424 473,275
------------ ------------
FACILITY:
Land and leasehold interest ....................... 5,156,342 5,156,342
Buildings and improvements ........................ 8,516,251 8,449,225
Furniture, fixtures and equipment ................. 2,293,356 2,218,987
Less- Allowance for depreciation .................. (4,777,123) (4,009,002)
------------ ------------
11,188,826 11,815,552
------------ ------------
OTHER ASSETS--Deferred financing fees, net ......... -- 16,553
------------ ------------
$ 11,473,250 $ 12,305,380
============ ============
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt .............. $ 160,585 $ 1,376,762
Accounts payable and accrued expenses ............. 120,043 453,804
Deferred income ................................... 37,400 163,415
------------ ------------
Total current liabilities .......................... 318,028 1,993,981
LONG-TERM DEBT ..................................... 281,789 442,374
------------ ------------
599,817 2,436,355
PARTNERS' EQUITY ................................... 10,873,433 9,869,025
------------ ------------
$ 11,473,250 $ 12,305,380
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-108
<PAGE>
RIVERPORT PERFORMING ARTS CENTRE, JOINT VENTURE
STATEMENTS OF INCOME AND CHANGES IN PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
REVENUES:
Show admission ..................................... $ 9,901,214 $ 8,053,939
Sponsorships and promotions ........................ 1,113,100 914,690
Concession rental .................................. 1,970,742 1,724,060
Parking ............................................ 1,122,979 843,283
Other .............................................. 139,074 157,166
------------ ------------
Operating revenues ............................... 14,247,109 11,693,138
------------ ------------
EXPENSES:
Talent ............................................. 5,825,962 4,382,735
Other show expenses ................................ 1,866,910 1,706,317
Advertising and marketing .......................... 1,037,048 887,673
Producer fees and commissions ...................... 1,187,253 1,071,946
General and administrative ......................... 1,713,097 1,673,580
------------ ------------
Operating expenses ............................... 11,630,270 9,722,251
------------ ------------
Net operating income ............................. 2,616,839 1,970,887
------------ ------------
OTHER EXPENSES (INCOME):
Depreciation and amortization ...................... 779,278 767,258
Interest, net ...................................... 13,167 112,947
Other income ....................................... (180,014) (554,749)
------------ ------------
Other expenses, net .............................. 612,431 325,456
------------ ------------
Net income ....................................... 2,004,408 1,645,431
PARTNERS' EQUITY AT THE BEGINNING OF PERIOD ......... 9,869,025 9,423,594
DISTRIBUTION TO PARTNERS ............................ (1,000,000) (1,200,000)
------------ ------------
PARTNERS' EQUITY AT THE END OF THE PERIOD ........... $ 10,873,433 $ 9,869,025
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-109
<PAGE>
RIVERPORT PERFORMING ARTS CENTRE, JOINT VENTURE
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 2,004,408 $ 1,645,431
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization ............................... 779,278 767,258
Change in accounts receivable ............................... 324,275 (215,712)
Change in prepaid expenses and other current assets ......... (4,008) (3,606)
Change in accounts payable and accrued expenses ............. (333,761) 284,945
Change in deferred income ................................... (126,015) (31,505)
------------ ------------
Net cash provided by operating activities .................. 2,644,177 2,446,811
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Facility additions ............................................ (141,395) (182,801)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt ............................................. (1,376,762) (1,160,585)
Distribution to Partners ...................................... (1,000,000) (1,200,000)
------------ ------------
Net cash used in financing activities ...................... (2,376,762) (2,360,585)
------------ ------------
Change in cash and cash equivalents ........................ 126,020 (96,575)
CASH AND CASH EQUIVALENTS, beginning of year ................... 76,231 172,806
------------ ------------
CASH AND CASH EQUIVALENTS, end of year ......................... $ 202,251 $ 76,231
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-110
<PAGE>
RIVERPORT PERFORMING ARTS CENTRE, JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SIGNIFICANT ACCOUNTING POLICIES:
Organization
The Riverport Performing Arts Centre, Joint Venture (the Joint Venture) is
a Missouri General Partnership between Contemporary Investments Corporation
(Contemporary) and Sverdrup/BRC Joint Venture (formerly Sverdrup/MDRC Joint
Venture). The partners each hold a 50% interest in the equity and operations of
the Joint Venture. The term of the Joint Venture continues until December 31,
2045. The Joint Venture is the developer, owner and operator of a 20,000 seat
outdoor amphitheater located in St. Louis, Missouri. The Joint Venture
contracts with popular musical performing artists for the entertainment of its
guests. Entertainment is provided during the months of April through October to
guests primarily from the St. Louis metropolitan area.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of investments with a maturity of three months or
less when purchased. Cash equivalents are carried at cost, which approximates
market. Interest income of $61,199 and $56,708 for 1997 and 1996, respectively,
is netted against interest expense in the accompanying statements of income.
Depreciation and Amortization
Depreciation is provided using the straight-line method over estimated
useful lives of 5 to 20 years. Deferred financing fees are amortized over the
life of the related debt.
Leasehold Interest
The facility was constructed on land obtained through a leasehold interest
that expires on April 25, 2011. The Sverdrup/BRC Joint Venture sold to
Contemporary an undivided 50% interest in the leasehold interest. Concurrently,
both Sverdrup/BRC Joint Venture and Contemporary contributed their undivided
50% interests in the leasehold interest into the Joint Venture. Ground rent is
$1 per year under the lease with the Joint Venture assigned as landlord.
Deferred Income
Deferred income reflects advance sales of season tickets for the
subsequent operating season and is amortized into show admission revenues as
the subsequent operating season progresses.
Income Taxes
Income taxes have not been provided for in the financial statements since
the Joint Venture is organized as a partnership, and each partner is liable for
its own tax payments.
F-111
<PAGE>
RIVERPORT PERFORMING ARTS CENTRE, JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. LONG-TERM DEBT
Notes payable outstanding at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -------------
<S> <C> <C>
Mortgage note due in installments through 1997, bearing
interest at prime plus 1/2% which averaged 8.875% during
1997 and 1996 .............................................. $ -- $1,216,178
Noninterest-bearing note due in installments through 2000..... 442,374 602,958
-------- ----------
442,374 1,819,136
Less-Current maturities ...................................... 160,585 1,376,762
-------- ----------
$281,789 $ 442,374
======== ==========
</TABLE>
The mortgage note contains covenants that require the Joint Venture to
maintain certain financial ratios and also prohibit certain transactions. The
mortgage note is secured by buildings, improvements, furniture, fixtures and
equipment, limited to the remaining term of the leasehold interest expiring
April 25, 2011. The mortgage note was paid off on September 25, 1997. The
noninterest-bearing note is secured by all concession equipment. Cash paid for
interest totaled $79,391 and $173,172 for 1997 and 1996, respectively.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 ......... $160,585
1999 ......... 160,585
2000 ......... 121,204
--------
$442,374
========
</TABLE>
3. CONCESSION RENTAL:
The Joint Venture rents certain premises at its location for the sale of
concessions under a lease that expires in 2000. Rental income is based on a
percentage of gross receipts for some products sold and gross margin for other
products sold.
4. RELATED-PARTY TRANSACTIONS
Contempro Group, Inc., an affiliate of Contemporary, provides various
services to the Joint Venture. These services include marketing, media
placement, sales and show production. Approximately $2,235,000 and $1,766,000
was paid for these services in 1997 and 1996, respectively.
In addition to the payments described above, the Joint Venture also
compensates Contempro Group, Inc. as an agent for the procurement of these
services.
Sverdrup Investments, Inc., an affiliate of Sverdrup/BRC Joint Venture,
was paid $36,000 for accounting services in 1997 and $147,000 for accounting
and landscaping services in 1996.
Riverport Trust, an affiliate of Sverdrup/BRC Joint Venture, provides
ground maintenance to the tenants of the Riverport complex. The fees charged
for these services is based on the total space occupied by the tenant. The
Joint Venture paid approximately $62,000 and $73,000 for these services in 1997
and 1996, respectively.
The Joint Venture had liabilities for related-party transactions and
pass-through costs to affiliates of Contemporary totaling approximately $56,000
and $416,000 as of December 31, 1997 and 1996, respectively. The Joint Venture
also had receivables for income collected by Contemporary totaling
approximately $273,000 as of December 31, 1996.
F-112
<PAGE>
RIVERPORT PERFORMING ARTS CENTRE, JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CONTINGENCIES:
From time to time, the Joint Venture is a party to certain lawsuits and
other claims related to the normal conduct of its business. Management believes
that liabilities, if any, resulting from the resolution of pending or
threatened proceedings would not materially affect the financial condition or
results of operations of the Joint Venture.
6. SUBSEQUENT EVENT:
On February 27, 1998, Sverdrup/BRC Joint Venture and Contemporary sold
their 50% interests in the equity and operations of the Joint Venture to SFX
Entertainment, Inc. and Contemporary Acquisition Corporation, respectively.
F-113
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Album Network, Inc.
We have audited the accompanying combined balance sheets of The Album
Network, Inc. and Affiliated Companies as of September 30, 1997 and 1996, and
the related combined statements of operations and stockholders' deficit and
cash flows for the years then ended. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of The Album Network,
Inc. and Affiliated Companies at September 30, 1997 and 1996, and the combined
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
November 20, 1997
New York, New York
F-114
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------
1996 1997
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 160,453 $ 272,423
Accounts receivable, less allowance for doubtful
accounts of $153,728 in 1997and $95,450 in 1996 ................... 2,148,159 2,229,237
Officers' loans receivable ......................................... 423,447 390,794
Prepaid expenses and other current assets .......................... 125,558 234,914
------------ ------------
Total current assets ................................................ 2,857,617 3,127,368
Property, plant and equipment, at cost, less accumulated depreciation
of $1,056,689 in 1997 and $ 914,513 in 1996 ........................ 278,898 303,614
Deferred software costs, less accumulated amortization of $106,639 in
1997 and $45,768 in 1996 ........................................... 172,302 262,061
Other noncurrent assets ............................................. 39,477 37,033
------------ ------------
Total assets ........................................................ $ 3,348,294 $ 3,730,076
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accrued officers' bonuses .......................................... $ 1,200,000 $ 1,251,000
Accounts payable and other accrued expenses ........................ 1,081,469 1,208,424
Officers' loans payable ............................................ 650,000 489,085
Unearned subscription income ....................................... 530,255 406,529
Taxes payable and other current liabilities ........................ 339,551 224,011
Current portion of long-term debt .................................. 636,723 506,228
------------ ------------
Total current liabilities ........................................... 4,437,998 4,085,277
Long-term debt ...................................................... 1,294,133 1,051,881
Deferred income taxes ............................................... 279,434 114,178
Combined stockholders' deficit ...................................... (2,663,271) (1,521,260)
------------ ------------
Total liabilities and stockholders' deficit ......................... $ 3,348,294 $ 3,730,076
============ ============
</TABLE>
See accompanying notes.
F-115
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 169,498
Accounts receivable, less allowance for doubtful
accounts of $157,682 ................................................... 2,268,205
Officers' loans receivable .............................................. 406,421
Prepaid expenses and other current assets ............................... 133,293
------------
Total current assets ..................................................... 2,977,417
Property, plant and equipment, at cost, less accumulated depreciation
of $1,098,747 ........................................................... 307,096
Deferred software costs, less accumulated amortization of $127,116 ....... 282,453
Other noncurrent assets .................................................. 9,525
------------
Total assets ............................................................. $ 3,576,491
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and other accrued expenses ............................. $ 1,346,095
Officers' loans payable ................................................. 717,336
Unearned subscription income ............................................ 558,358
Taxes payable and other current liabilities ............................. 749,108
Current portion of long-term debt ....................................... 635,464
------------
Total current liabilities ................................................ 4,006,361
Long-term debt ........................................................... 939,200
Deferred income taxes .................................................... 53,575
Combined stockholders' deficit ........................................... (1,422,645)
------------
Total liabilities and stockholders' deficit .............................. $ 3,576,491
============
</TABLE>
See accompanying notes.
F-116
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS AND
STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1996 1997
---------------- ----------------
<S> <C> <C>
OPERATING REVENUES
Advertising revenue ......................................... $ 7,040,465 $ 7,619,751
Research services revenue ................................... 2,453,026 2,441,703
Direct mail & subscription revenue .......................... 1,791,887 1,837,248
Broadcast revenue ........................................... 2,085,714 2,235,788
Consulting revenue .......................................... 720,000 470,000
Other revenue ............................................... 675,790 1,152,448
------------ ------------
14,766,882 15,756,938
Direct costs of revenue ..................................... 4,408,997 4,107,328
------------ ------------
10,357,885 11,649,610
OPERATING EXPENSES
Officers' salary expense .................................... 3,384,870 3,662,427
Other salary expense ........................................ 3,956,910 3,949,715
Depreciation and amortization ............................... 183,976 203,047
General and administrative expenses ......................... 2,524,704 2,483,197
------------ ------------
10,050,460 10,298,386
------------ ------------
Income from operations ...................................... 307,425 1,351,224
OTHER INCOME (EXPENSE)
Interest income--officers' loans ............................ 35,000 41,600
Interest income--third party ................................ 6,961 1,295
Interest expense--officers' loans ........................... (35,000) (55,940)
Interest expense--third party ............................... (256,164) (175,490)
------------ ------------
Income before income taxes .................................. 58,222 1,162,689
INCOME TAXES
Provision for income taxes .................................. 211,832 20,678
------------ ------------
Net income (loss) ........................................... (153,610) 1,142,011
Combined stockholders' deficit at beginning of year ......... (2,509,661) (2,663,271)
------------ ------------
Combined stockholders' deficit at end of year ............... $ (2,663,271) $ (1,521,260)
============ ============
</TABLE>
See accompanying notes.
F-117
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT OF OPERATIONS AND
STOCKHOLDERS' DEFICIT
THREE MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
OPERATING REVENUES
Advertising revenue ........................................... $ 1,605,422
Research services revenue ..................................... 604,961
Direct mail & subscription revenue ............................ 521,851
Broadcast revenue ............................................. 825,686
Other revenue ................................................. 97,437
------------
3,655,357
Direct costs of revenue ....................................... 1,056,785
------------
2,598,572
OPERATING EXPENSES
Officers' salary expense ...................................... 209,424
Other salary expense .......................................... 1,090,662
Depreciation and amortization ................................. 62,535
General and administrative expenses ........................... 1,034,159
------------
2,396,780
------------
Income from operations ........................................ 201,792
OTHER INCOME (EXPENSE)
Interest income--officers' loans .............................. 4,171
Interest income--third party .................................. 169
Interest expense--officers' loans ............................. (15,596)
Interest expense--third party ................................. (26,921)
------------
Income before income taxes .................................... 163,615
INCOME TAXES
Provision for income taxes .................................... 65,000
------------
Net income (loss) ............................................. 98,615
Combined stockholders' deficit at beginning of period ......... (1,521,260)
------------
Combined stockholders' deficit at end of period ............... $ (1,422,645)
============
</TABLE>
See accompanying notes.
F-118
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1996 1997
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ......................................................... $ (153,610) $1,142,011
Adjustment to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization .................................... 183,976 203,047
Provision for doubtful accounts .................................. 13,584 58,278
Changes in operating assets and liabilities:
Accounts receivable ............................................. (246,873) (139,356)
Prepaid expenses and other current assets ....................... 154,120 (109,356)
Other non current assets ........................................ (3,378) 2,444
Accounts payable and accrued expenses ........................... 69,816 126,955
Unearned subscription income .................................... 101,623 (123,726)
Accrued officers' bonus ......................................... 639,000 51,000
Deferred income taxes ........................................... 39,268 (165,256)
Taxes payable and other current liabilities ..................... 143,423 (115,540)
---------- ----------
Net cash provided by operating activities .......................... 940,949 930,501
---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment ................................. (65,731) (166,892)
Deferred software costs ............................................ (97,463) (150,630)
---------- ----------
Net cash used in investing activities .............................. (163,194) (317,522)
---------- ----------
FINANCING ACTIVITIES
Payments on long term debt ......................................... (860,236) (527,747)
Proceeds from additional debt borrowings ........................... 52,500 155,000
Proceeds from (repayments of) officers' loans, net ................. 61,355 (128,262)
---------- ----------
Net cash used in financing activities .............................. (746,381) (501,009)
---------- ----------
Net increase in cash and cash equivalents .......................... 31,374 111,970
Cash and cash equivalents at beginning of year ..................... 129,079 160,453
---------- ----------
Cash and cash equivalents at end of year ........................... $ 160,453 $ 272,423
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ............................................. $ 304,726 $ 190,168
========== ==========
Cash paid for income taxes ......................................... $ 21,375 $ 26,316
========== ==========
</TABLE>
See accompanying notes.
F-119
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES
Net income ......................................................... $ 98,615
Adjustment to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization .................................... 62,535
Provision for doubtful accounts .................................. 3,954
Changes in operating assets and liabilities:
Accounts receivable ............................................. (42,922)
Prepaid expenses and other current assets ....................... 101,621
Other non current assets ........................................ 27,508
Accounts payable and accrued expenses ........................... 137,671
Unearned subscription income .................................... 151,829
Accrued officers' bonus ......................................... (1,251,000)
Deferred income taxes ........................................... (60,603)
Taxes payable and other current liabilities ..................... 525,097
------------
Net cash used in operating activities .............................. (245,695)
INVESTING ACTIVITIES
Purchase of property and equipment ................................. (45,540)
Deferred software costs ............................................ (40,869)
------------
Net cash used in investing activities .............................. (86,409)
FINANCING ACTIVITIES
Payments on long term debt ......................................... (112,681)
Proceeds from additional debt borrowings ........................... 129,236
Proceeds from officers' loans, net ................................. 212,624
------------
Net cash provided by financing activities .......................... 229,179
------------
Net decrease in cash and cash equivalents .......................... (102,925)
Cash and cash equivalents at beginning of year ..................... 272,423
------------
Cash and cash equivalents at end of year ........................... $ 169,498
============
</TABLE>
See accompanying notes.
F-120
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Combination
The accompanying combined financial statements include the accounts of The
Album Network, Inc., The Network 40, Inc., The Urban Network, Inc. and
In-the-Studio (collectively, the "Companies"). Intercompany transactions and
balances among the Companies have been eliminated in combination.
On August 27, 1997, the board of directors and shareholders of the
Companies approved a plan of agreement and merger which provided that The Urban
Network, Inc. merge into The Album Network, Inc. (the "Company") effective
September 24, 1997. The Companies accounted for the transaction as a merger of
companies under common control.
The Companies publish six music trade magazines, produce rock, urban and
top 40 programming specials and manufacture compact disc samplers. They also
serve as product marketing advisors to contemporary music talent and their
managers in providing creative content and innovative marketing campaigns. In
addition, the Companies provide research services for radio station program
directors and record label executives. The Companies publishes five print
periodicals for rock and top 40 music broadcasters, retailers and music
industry executives. The weekly publications are the "Album Network" and the
"Network 40". The monthly publications are the "Virtually Alternative" and
"Totally Adult" and the quarterly publication is titled "AggroActive."
Additionally, "The Urban Network" trade magazine is published each week.
Revenue Recognition
The Companies' magazines generate revenue from advertising sales,
complemented by subscription sales and incremental direct mail revenue.
Unearned subscription income represents revenues on subscriptions for
which publications have not been delivered to customers as of the balance sheet
date. Unearned subscription income at September 30, 1996 also includes unearned
income on certain advertising and direct mail packages.
Revenue from research services is recognized straight-line over the
license term or upon the sale of computer software developed for licensees and
other customers. Advertising and broadcast revenues are recognized when
advertisements are run or aired.
Furniture and Equipment
Furniture and equipment are valued at cost less accumulated depreciation.
Depreciation is provided on the straight-line and declining balance methods
over the estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Computer hardware ............... 5 years
Software ........................ 5 years
Furniture and equipment ......... 5-7 years
Leasehold improvements .......... 5 years
</TABLE>
Deferred Software Costs
Costs incurred to produce software masters and subsequent enhancements to
such software are capitalized and amortized over the remaining economic life of
the master (generally, five years). Costs of maintenance and customer support
are charged to expense when incurred.
Cash and Cash Equivalents
The Companies consider all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Income Taxes
Each of the affiliated Companies file a separate tax return. The Album
Network, Inc. and the Urban Network, Inc. are "C Corporations." The Network 40,
Inc. has elected to be taxed as an "S Corporation". The "S Corporation"
election is effective for both federal and state tax purposes. Accordingly all
items of income, loss, deduction or credit are reported by the shareholders on
their respective personal income tax returns. The corporate tax rate for S
Corporations in California is one and one-half percent (1.5%).
F-121
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company maintains bank balances with City National Bank in excess of
the federally insured limit of $100,000.
Reclassification
Certain amounts in the financial statements have been reclassified to
conform with the current presentations.
Interim Financial Information
Financial information as of December 31, 1997 and for the three months
ended December 31, 1997 is unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of the results for such period
have been included, all adjustments are of a normal and recurring nature.
Interim results are not necessarily indicative of results for a full year.
2. RELATED PARTY TRANSACTIONS
Officers' Loans
The Companies have several loan agreements outstanding with its officers
in order to satisfy the cash flow needs of operations. The interest rates on
the loans to and from the officers range from approximately 10% to 12%.
At October 1, 1995, the officers owed the Companies $471,918 and the
Companies owed the officers $637,116. During the year ended September 30, 1996,
the officers repaid $48,471 and loaned the Companies an additional $12,884.
At October 1, 1996, the officers owed the Companies $423,447 and the
Companies owed the officers $650,000. During the year ended September 30, 1997,
the officers repaid $32,653 to the Companies and the Companies repaid $160,915
to the officers.
3. LONG-TERM DEBT
A summary of long-term debt as of September 30, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Note payable to City National Bank, collateralized by certain
equipment and personally guaranteed by the stockholders; payable
in monthly installments of $2,917 plus interest at 10.5%; due
May 1999 .......................................................... $ 96,994 $ 62,740
Note payable to City National Bank, personally guaranteed by the
stockholders; payable in monthly installments of $41,233 plus
interest at 8.75% through January 22, 1997 and at 8.25% thereafter;
due December 2000.(A) ............................................. 1,821,862 1,415,369
Other .............................................................. 12,000 80,000
---------- ----------
1,930,856 1,558,109
Less current portion ............................................... 636,723 506,228
---------- ----------
Long-term debt ..................................................... $1,294,133 $1,051,881
========== ==========
</TABLE>
- ----------
(A) In September 1995 The Album Network, Inc., The Network 40, Inc. and The
Urban Network, Inc. entered into a loan agreement with City National Bank
for $2,330,000 in connection with a redemption of common stock. Interest
was set at 8.75% per year and principal and interest were payable in
monthly installments of $57,846 through September 1999. In January 1997,
the loan agreement was revised. Interest was reset at 8.25% and monthly
payments of $41,233 were extended through December 2000. The principal
balance at the date of revision was $1,687,560.
F-122
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. COMMON STOCK
The Companies' stock and tax status at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED
TAX SHARES AND
STATUS AUTHORIZED OUTSTANDING
------------- ------------ ------------
<S> <C> <C> <C>
The Album Network, Inc. ......... C-Corp. 1,000,000 220
The Network 40, Inc. ............ S-Corp. 100,000 825
The Urban Network, Inc. ......... C-Corp. 100,000 825
In-the-Studio ................... Partnership n/a n/a
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Leases
The Companies lease an office facility under noncancellable leases which
expire in February 1998.
Total rent expense for the years ended September 30, 1997 and 1996 under
operating leases was $262,812 and $256,026, respectively.
Future minimum lease payments under noncancellable operating leases as of
September 30, 1997 total $121,155, all of which is payable in 1998.
Other Matters
As of September 30, 1997, approximately $80,000 was drawn on lines of
credit with City National Bank. There were no amounts drawn as of September 30,
1996.
6. INCOME TAXES
The Album Network has received a Statutory Notice of Deficiency from the
Internal Revenue Service ("IRS") for the years ended September 30, 1994, 1995
and 1996 asserting tax deficiencies resulting primarily from an IRS position
that compensation paid to officers was unreasonable and excessive. In total,
approximately $3.5 million of adjustments increasing taxable income have been
proposed. The total additional tax, penalties and interest through September
30, 1997 related to these adjustments would be approximately $1.8 million. The
company has analyzed these matters with tax counsel and believes it has
meritorious defenses to the deficiencies asserted by the IRS. The company has
filed a petition with the United States Tax Court contesting the asserted
liability. While the company believes that a successful defense of this case
may be made, in light of the economic burdens of the defense, the company may
entertain a settlement for up to $291,000. Accordingly, the company has
recorded reserves in such amount, including $23,000, $115,000 and $153,000 for
the years ended September 30, 1997, 1996 and prior periods, respectively.
F-123
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
For the years ended September 30, 1996 and 1997 the provision for income
taxes is as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -------------
<S> <C> <C>
Current:
Federal ................ $129,911 $ 143,056
State .................. 17,710 42,878
-------- ----------
Total ................. 147,621 185,934
-------- ----------
Deferred:
Federal ................ 49,764 (150,383)
State .................. 14,447 (14,873)
-------- ----------
Total ................. 64,211 (165,256)
-------- ----------
Total ................... $211,832 $ 20,678
======== ==========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Companies' deferred tax assets and liabilities as of
September 30, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- ----------
<S> <C> <C>
Deferred tax assets:
Contributions carryforward ............. $ 8,194 $ 10,078
Deferred tax liabilities:
Fixed assets ........................... 12,280 11,830
Intangible assets ...................... 275,346 112,424
-------- --------
Total deferred tax liabilities ......... 287,628 124,254
-------- --------
Net deferred tax liabilities ............ $279,434 $114,176
======== ========
</TABLE>
7. EMPLOYEE RETIREMENT PLAN
In January 1997, the Companies began a retirement plan for their employees
under Section 401(k) of the Internal Revenue Code. All employees are eligible
to participate once they obtain the minimum age requirement of 21 years, and
have satisfied the service requirement of one year with the Companies.
Participant contributions are subject to the limitations of Section 402 (g) of
the Internal Revenue Code. The Companies contribute monthly to participating
employees accounts at the rate of 10% of the participating employees
contributions. During the year ended September 30, 1997, the Companies
contributions totaled approximately $14,000.
8. SUBSEQUENT EVENTS (UNAUDITED)
On February 27, 1998, the Company was acquired by SFX Entertainment Inc.
F-124
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
BG Presents, Inc.
We have audited the accompanying consolidated balance sheets of BG
Presents, Inc. and Subsidiaries as of January 31, 1997 and 1998, and the
related consolidated statements of income, cash flows and stockholders' equity
for each of the three years in the period ended January 31, 1998. These
financial statements are the responsibility of management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BG Presents,
Inc. and subsidiaries at January 31, 1997 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1998, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
New York, New York
March 20, 1998
F-125
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31
------------------------------
1997 1998
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $11,819,831 $ 5,380,984
Accounts receivable--trade ......................................... 3,164,543 5,460,915
Accounts receivable--related parties ............................... 1,347,150 776,174
Investments ........................................................ 370,000 --
Inventories ........................................................ 236,078 227,766
Prepaid assets ..................................................... 450,883 3,001,450
Income tax receivable .............................................. 418,528 --
Deferred income taxes .............................................. 94,000 --
Other current assets ............................................... -- 118,455
----------- -----------
Total current assets ................................................ 17,901,013 14,965,744
Property and equipment, net ......................................... 9,661,910 8,904,509
Goodwill, net of accumulated amortization of $238,400 and
$357,600 at January 31, 1997 and 1998, respectively................. 1,549,600 1,430,400
Other assets (Note 6) ............................................... 167 4,100,011
----------- -----------
Total assets ........................................................ $29,112,690 $29,400,664
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--current portion ..................................... $ 722,966 $ 879,040
Lease commitment--current portion .................................. 35,676 --
Accounts payable ................................................... 3,229,054 1,816,959
Deferred revenue ................................................... 1,362,533 1,480,145
Accrued liabilities and other current liabilities .................. 3,721,749 3,753,613
----------- -----------
Total current liabilities ........................................... 9,071,978 7,929,757
Lease commitment, less current portion .............................. 6,704,719 --
Notes payable, less current portion ................................. 5,233,709 11,134,834
Deferred income taxes ............................................... 2,617,000 2,617,000
Stockholders' equity:
Common stock, no par value; 10,000,000 shares authorized;
1,000,000 shares issued and outstanding in 1997 and 1998 ......... 1,198,947 1,198,947
Retained earnings .................................................. 4,286,337 6,520,126
----------- -----------
Total stockholders' equity .......................................... 5,485,284 7,719,073
----------- -----------
Total liabilities and stockholders' equity .......................... $29,112,690 $29,400,664
=========== ===========
</TABLE>
See accompanying notes.
F-126
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
-------------------------------------------------
1996 1997 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
REVENUES
Concert revenues ................................. $ 62,996,606 $ 74,981,534 $ 75,898,464
Contract management .............................. 7,844,248 10,255,060 23,632,596
Concessions/merchandise .......................... 5,536,287 7,094,593 6,021,845
------------ ------------ ------------
76,377,141 92,331,187 105,552,905
Cost of revenues ................................. 54,383,763 69,916,840 81,092,377
------------ ------------ ------------
21,993,378 22,414,347 24,460,528
EXPENSES
General and administrative ....................... 17,614,296 17,602,501 18,866,259
Depreciation and amortization .................... 1,441,439 1,474,414 1,026,684
------------ ------------ ------------
Income from operations ........................... 2,937,643 3,337,432 4,567,585
OTHER INCOME (EXPENSE)
Interest expense ................................. (1,324,219) (1,257,758) (916,723)
Interest income .................................. 307,756 295,057 294,888
Miscellaneous .................................... 535,191 289,222 (24,300)
------------ ------------ ------------
Income before provision for income taxes ......... 2,456,371 2,663,953 3,921,450
Provision for income taxes ....................... 1,160,718 1,272,190 1,687,661
------------ ------------ ------------
Net income ....................................... $ 1,295,653 $ 1,391,763 $ 2,233,789
============ ============ ============
</TABLE>
See accompanying notes.
F-127
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
---------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................................... $ 1,295,653 $ 1,391,763 $ 2,233,789
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment ................................................. 1,322,239 1,355,214 907,484
Amortization of goodwill .................................... 119,200 119,200 119,200
Loss on sale of property and equipment ...................... 13,603 -- --
Changes in operating assets and liabilities:
Accounts receivable--trade ................................ 524,566 (1,356,263) (2,296,372)
Accounts receivable--related parties ...................... (496,971) (821) 570,976
Inventories ............................................... (228,294) (7,784) 8,312
Prepaid assets and other .................................. (322,524) 478,391 (2,550,567)
Income tax receivable ..................................... (50,888) (328,390) 300,073
Accounts payable and accrued expenses ..................... (491,982) 3,128,476 (1,380,231)
Deferred income taxes ..................................... 1,139,000 45,000 94,000
Deferred revenue .......................................... (67,859) 379,748 117,612
Other ..................................................... 288,367 160 74,347
------------ ------------ ------------
Net cash provided by (used in) operating activities .......... 3,044,110 5,204,694 (1,801,377)
INVESTING ACTIVITIES
Purchase of SAP limited partnership interest ................. (4,250,000) -- --
Proceeds from sale of equipment .............................. 13,150 -- --
Capital expenditures, including White River
Amphitheatre ................................................ (469,447) (367,678) (4,247,528)
Other ........................................................ (644,496) (247,000) 293,254
------------ ------------ ------------
Net cash used in investing activities ........................ (5,350,793) (614,678) (3,954,274)
FINANCING ACTIVITIES
Payments of notes payable .................................... (444,985) (775,756) --
Borrowings on notes payable .................................. -- 1,000,000 6,057,199
Payments of lease commitments ................................ (395,330) (405,275) (6,740,395)
Retirement of stock .......................................... -- (21,053) --
------------ ------------ ------------
Net cash used in financing activities ........................ (840,315) (202,084) (683,196)
Net increase (decrease) in cash and cash equivalents ......... (3,146,998) 4,387,932 (6,438,847)
Cash and cash equivalents at beginning of year ............... 10,578,897 7,431,899 11,819,831
------------ ------------ ------------
Cash and cash equivalents at end of year ..................... $ 7,431,899 $ 11,819,831 $ 5,380,984
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ....................................... $ 1,324,219 $ 1,257,664 $ 1,092,356
Cash paid for income taxes ................................... 888,738 1,280,000 1,325,000
</TABLE>
See accompanying notes.
F-128
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
<TABLE>
<S> <C>
Balance--January 31, 1995 .............................. $2,818,921
Net income for the year ended January 31, 1996 ......... 1,295,653
----------
Balance--January 31, 1996 .............................. 4,114,574
Net income for the year ended January 31, 1997 ......... 1,391,763
Repurchase and retirement of stock ..................... (21,053)
----------
Balance--January 31, 1997 .............................. 5,485,284
Net income for the year ended January 31, 1998 ......... 2,233,789
----------
Balance--January 31, 1998 .............................. $7,719,073
==========
</TABLE>
See accompanying notes.
F-129
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Business and Principles of Consolidation
BG Presents, Inc. ("BGP" or the "Company") is a holding company for
various operating subsidiaries which principally promote and manage musical and
special events in the San Francisco Bay Area. In addition, the Company owns the
Shoreline Amphitheatre in Mountain View, California. Bill Graham Enterprises,
Inc. ("BGE"), Bill Graham Presents, Inc. ("BGPI"), Bill Graham Management, Inc.
("BGM"), AKG, Inc. ("AKG"), Shoreline Amphitheatre, Ltd. ("SAL"), Fillmore
Fingers, Inc. ("FF"), and Shoreline Amphitheatre Partners ("SAP" and,
collectively, the "Companies") are wholly-owned subsidiaries of the Company.
The accompanying consolidated financial statements include the accounts of the
Company and all of its wholly-owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.
BGE and BGPI earn promotion income in two ways: either a fixed fee for
organizing and promoting an event, or an arrangement that entitles them to a
profit percentage based on a predetermined formula. In addition, the Companies
earn revenue from merchandise and concessions sold during events which they
promote. BGM manages the careers of various artists and records a percentage of
the artists' gross sales from publishing rights, record sales, and tours as
contract management revenue.
AKG operates the Fillmore, Warfield, and Punchline theatres located in San
Francisco, which generate revenue from food and beverage sales, sponsorships,
and ticket sales. Bill Graham Special Events, a division of AKG, records
management/contract fees from organizing corporate and other parties at various
venues in the San Francisco Bay Area. FF provides table service (food and
beverage) for two theatres located in Los Angeles owned by third parties.
Revenue Recognition
Revenue from talent management and the sales of tickets is recognized when
earned. Cash received from the sale of tickets for events not yet performed is
deferred. Revenue from the direct sale of compact discs is recognized upon the
date of sale. The Company's revenue included $305,017, $14,562,000 and
$13,483,683 during the fiscal years ended January 31, 1996, 1997 and 1998,
respectively, from various gymnastics tours, ice skating tours and television
specials.
Cash and Cash Equivalents
The Company considers all investments purchased with an original maturity
date of three months or less to be cash equivalents. At January 31, 1996, 1997
and 1998, the Companies had cash balances in excess of the federally insured
limits of $100,000 per institution.
Use of Estimates
Generally accepted accounting principles require management to make
assumptions in estimates that affect the amount reported in the financial
statements for assets, liabilities, revenues, and expenses. In addition,
assumptions and estimates are used to determine disclosure for contingencies,
commitments, and other matters discussed in the notes to the financial
statements. Actual results could differ from those estimates.
Accounts Receivable
The Company's accounts receivable are principally due from ticket service
and merchandising companies in the San Francisco Bay Area. In addition, related
party receivables include amounts due from owners of the Company and from
affiliated companies. Management believes that all accounts receivable as of
January 31, 1996, 1997 and 1998 were fully collectible; therefore, no allowance
for doubtful accounts was recorded.
F-130
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(CONTINUED)
Property and Equipment
Property and equipment are recorded at cost and depreciated over their
estimated useful lives, which range from 3 to 40 years. Leasehold improvements
are amortized on the straight-line basis over the shorter of the lease term or
estimated useful lives of the assets. Maintenance and repairs are charged to
expense as incurred.
Goodwill
The Company amortizes goodwill over a 15 year period.
Income Taxes
The Companies account for income taxes under the liability method, whereby
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Inventories
Inventories, which consist principally of compact discs and beverage
items, are stated at first-in, first-out (FIFO) cost, which is not in excess of
market.
Advertising and Promotion Costs
The Company expenses all advertising and promotion costs as incurred,
except in instances where management believes these costs generate a direct
response from customers. Advertising expenses were $3,408,322, $4,319,291 and
$4,519,049 for the fiscal years ended January 31, 1996, 1997 and 1998,
respectively.
2. INCOME TAXES
The provision for income taxes for the fiscal years ended January 31, 1997
and 1998 is summarized as follows:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Current:
Federal ................... $ 984,500 $1,304,837
State ..................... 285,800 378,824
---------- ----------
1,270,300 1,683,661
Deferred:
Federal ................... 1,500 3,100
State ..................... 400 900
---------- ----------
1,900 4,000
---------- ----------
$1,272,200 $1,687,661
========== ==========
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company's net
deferred tax liabilities as of January 31, 1997 and 1998 are primarily the
result of the difference between the book basis of depreciable assets and the
related tax basis.
The difference between the tax provision at Federal statutory rates and
the effective rate is due to state taxes, amortization of goodwill and other
nondeductible items.
F-131
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment as of January 31, 1997 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1997 1998
---------------- ----------------
<S> <C> <C>
Buildings ....................... $ 8,234,231 $ 8,251,729
Leasehold improvements .......... 10,326,553 10,403,033
Equipment ....................... 2,166,037 2,184,855
Office furniture ................ 693,068 711,235
Computer equipment .............. 330,367 343,493
Vehicle ......................... 61,211 67,205
------------- -------------
21,811,467 21,961,550
Accumulated depreciation and
amortization ........................... (12,783,510) (13,528,140)
------------- -------------
9,027,957 8,443,410
Land ............................ 633,953 633,953
------------- -------------
$ 9,661,910 $ 9,067,363
============= =============
</TABLE>
4. PENSION PLAN
The Company sponsors a 401(k) Tax Advantage Savings Plan that covers
employees who have one year of service, have worked at least 1,000 hours, are
21 years of age or older, and are not covered by a union contract. At its
discretion, the Company may contribute a percentage of gross pay to the plan,
up to a maximum gross pay of $150,000 per participant. In addition, the Company
makes a matching contribution of 25% of each participant's account up to $400
of their salary deferral each year, for a maximum company matching contribution
of $100. Total contributions to the plan were approximately $182,000, $186,000
and $213,049 for the years ended January 31, 1996, 1997 and 1998, respectively.
F-132
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE
Notes payable as of January 31, 1997 and 1998 consists of the following:
<TABLE>
<CAPTION>
1997 1998
------------- ---------------
<S> <C> <C>
Note payable to Midland Loan Services LP; monthly
payments of $16,574, including interest at the bank's
index rate plus 3.5% (8.4% and 8.375% at January 31,
1997 and 1998, respectively; matures May 1, 2004;
secured by deed .......................................... $2,215,001 $ 2,193,732
Note payable to Sanwa Bank; quarterly payments range
from $75,000 to $200,000, interest accrued monthly at
the bank's prime rate plus 0.5% (8.75% and 8.75% at
January 31, 1997 and 1998, respectively); matures
January 31, 2001 ......................................... 2,925,000 2,425,000
Note payable to Sanwa Bank; monthly payments of
$16,666, including interest at a rate of London Inter-
Bank Offered Rate (LIBOR) plus 2.5%; matures
January 31, 2002; secured by assets of the Company
(excluding the office building) .......................... 816,674 616,682
Note payable to Sanwa Bank; monthly payments range
from $12,000 to $25,000, interest accrued monthly at the
bank's index rate plus 2.375%; matures March 1, 2007;
secured by deed .......................................... -- 6,778,460
---------- -----------
5,956,675 12,013,874
Less current portion ....................................... (722,966) (879,040)
---------- -----------
$5,233,709 $11,134,834
========== ===========
</TABLE>
The first note payable with Sanwa Bank also provided for a line-of-credit
of up to $1,000,000 that expired on April 30, 1997. At January 31, 1998, there
were no borrowings outstanding against this credit line.
F-133
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE (CONTINUED)
At January 31, 1998, the Company has a $3,000,000 unused line-of-credit
with a bank to be drawn upon as needed, with interest at the bank's prime rate
plus 0.5%. In addition, the Company may use up to $1,500,000 of the line for
letters-of-credit. This line-of-credit is secured by the assets of the Company.
Maturities of long-term debt are approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended January 31:
1999 ........................... $ 879,040
2000 ........................... 893,998
2001 ........................... 1,851,908
2002 ........................... 227,764
2003 ........................... 246,791
Thereafter ..................... 7,914,373
-----------
$12,013,874
===========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases nightclubs, theaters and storage space pursuant to
noncancellable operating leases. Certain leases require contingent rentals to
be paid based on a percentage of gross sales of tickets, merchandise, and food
and beverage. These leases expire on various dates through June 2021.
At January 31, 1998, the future minimum operating lease payments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended January 31:
1999 ........................... $ 543,354
2000 ........................... 547,211
2001 ........................... 485,961
2002 ........................... 451,694
2003 ........................... 425,633
Thereafter ..................... 2,367,353
----------
$4,821,206
==========
</TABLE>
Total minimum rental expense included in operating expenses for the years
ended January 31, 1996, 1997 and 1998 was $810,956, $438,500 and $706,219,
respectively, and the contingent rental expense was $541,334, $627,222 and
$725,787, respectively. Included in cost of revenues is $6,145,944, $6,392,616
and $7,265,769 of contingent rentals paid based on gross sales for the years
ended January 31, 1996, 1997 and 1998, respectively.
Shoreline Amphitheater Lease and Agreement
The Shoreline Amphitheater Lease and Agreement, as amended, provides for,
among other things, that the City of Mountain View, California (the "City")
owns certain real property (the "Site") which it has leased to the Company for
the purpose of constructing and operating the amphitheater. The lease
terminates after 35 years on November 30, 2021, and the Company has the option
to extend for three additional five-year periods.
The Company is obligated to pay as rent to the City a certain percentage
of "gross receipts" received annually by the Company and additional rent based
on the "net available cash" of the Company, as such terms are defined in the
agreement.
F-134
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense charged to operations for the years ended January 31, 1996,
1997 and 1998 amounted to $594,002, $396,789 and $613,933, respectively.
As of the year ended January 31, 1997, the Company was obligated to pay
the City $93,200 monthly, which related to $9,500,000 of funds provided the
Company by the City pursuant to the lease. Prior to the refinancing of this
arrangement as a $6.9 million note payable to Sanwa Bank (see Note 5), the
Company had accounted for this obligation as a long-term liability amortizable
on a monthly basis over the 20-year period commencing August 1, 1986. The
principal and interest (10.24%) on this liability were being amortized monthly.
At January 31, 1997, the outstanding balance amounted to $6,740,395, of which
$35,676 was current.
Seattle White River Amphitheatre
The Company has committed payments for the construction of an amphitheatre
in the Seattle, Washington market totaling $10 million. Through January 31,
1998, the Company has paid $3,921,812 toward this project. This amount is
included in other assets on the balance sheet. The Company has also capitalized
interest pertaining to the capital expenditures for the amphitheatre of
$175,633 at January 31, 1998, which is also included in other assets on the
balance sheet.
Employment Contracts
The Company has entered into employment contracts with certain key
employees which amount to $2,300,000 per year. These contracts are in effect
until the first note payable to Sanwa Bank (see Note 5) is paid in full or six
years, whichever comes first. According to these agreements, compensation and
other benefits will cease if discharged with just cause, death or disability,
and resignation of employment. Benefits do not cease if discharged without just
cause.
Contingencies
The Company is involved in various legal and other matters arising in the
normal course of business. Based upon information available to management, its
review of these matters to date and consultation with counsel, management
believes that any liability relating to these matters would not have a material
effect on the Company's financial position and results of operations.
7. SUBSEQUENT EVENTS
Acquisition of Companies by SFX Entertainment, Inc.
On February 24, 1998, the stockholders of the Company sold all of the
outstanding capital stock of the Companies to SFX Entertainment, Inc. for cash
consideration of $60.8 million (including the repayment of $12 million in the
Companies' debt and the issuance of 562,640 shares of common stock of SFX
Entertainment, Inc.). The Company has agreed to have net working capital, as
defined, at the closing at least equal to the Company's debt.
F-135
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Concert/Southern Promotions
We have audited the accompanying combined balance sheet of
Concert/Southern Promotions and Affiliated Companies as of December 31, 1997,
and the related combined statements of operations, cash flows and stockholders'
equity for the year then ended. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Concert/Southern
Promotions and Affiliated Companies at December 31, 1997, and the combined
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
March 13, 1998
F-136
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 612,967
Accounts receivable ........................................ 185,437
Due from owners (Note 3) ................................... 332,754
Prepaid expenses and other current assets .................. 115,844
----------
Total current assets ........................................ 1,247,002
Investments in equity investees (Note 2) .................... 895,790
Property and equipment:
Land ....................................................... 19,638
Leasehold improvements ..................................... 286,998
Furniture and equipment .................................... 496,265
----------
802,901
Accumulated depreciation and amortization .................. 460,483
----------
342,418
----------
Total assets ................................................ $2,485,210
==========
LIABILITIES AND COMBINED STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ...................... $ 229,558
Deferred income ............................................ 368,150
----------
Total current liabilities ................................... 597,708
Combined stockholders' equity (Note 4) ...................... 1,887,502
----------
Total liabilities and combined stockholders' equity ......... $2,485,210
==========
</TABLE>
See accompanying notes.
F-137
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Operating revenues:
Concert revenue ............................. $14,796,977
Cost of concerts ............................ 9,877,586
-----------
4,919,391
Operating expenses:
Salaries--officers .......................... 364,000
Bonuses--officers ........................... 564,767
Salaries--other ............................. 367,356
Rent expense ................................ 207,220
Legal and accounting fees ................... 201,435
Depreciation and amortization ............... 78,682
General and administrative expenses ......... 1,367,304
-----------
3,150,764
-----------
Income from operations ....................... 1,768,627
Other income:
Interest income ............................. 59,624
Losses from equity investees ................ (79,629)
-----------
Net income ................................... $ 1,748,622
===========
</TABLE>
See accompanying notes.
F-138
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES
Net income ...................................................................... $ 1,748,622
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 78,682
Losses from equity investees ................................................. 79,629
Changes in operating assets and liabilities:
Accounts receivable ......................................................... 1,000,781
Prepaid expenses and other current assets ................................... 69,896
Accounts payable and accrued expenses ....................................... (452,361)
Deferred income ............................................................. 368,150
Net cash provided by operating activities ....................................... 2,893,399
FINANCING ACTIVITIES
Due to/from owner ............................................................... (398,080)
Distributions paid to stockholder ............................................... (2,722,827)
------------
Net cash used in financing activities ........................................... (3,120,907)
------------
Net decrease in cash and cash equivalents ....................................... (227,508)
Cash and cash equivalents at beginning of year .................................. 840,475
------------
Cash and cash equivalents at end of year ........................................ $ 612,967
============
</TABLE>
See accompanying notes.
F-139
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Balance, January 1, 1997 ............. $ 2,861,707
Distributions to stockholder ......... (2,722,827)
Net income ........................... 1,748,622
------------
Balance, December 31, 1997 ........... $ 1,887,502
============
</TABLE>
See accompanying notes.
F-140
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Combination
The accompanying combined financial statements include the accounts of
Southern Promotions, Inc., High Cotton, Inc., Buckhead Promotions, Inc.,
Northern Exposure, Inc., Pure Cotton, Inc., Cooley and Conlon Management, Inc.
("CCMI") and Interfest, Inc. and their wholly-owned subsidiaries: Concert/
Southern Chastain Promotions ("Concert/Southern"), Roxy Ventures, Cotton Club
and Midtown Music Festival (collectively, the "Companies"). Intercompany
transactions and balances among these companies have been eliminated in
combination. The Companies are presented on a combined basis to reflect common
ownership by Alex Cooley, Peter Conlon and Stephen Selig III.
Concert/Southern is the predominant musical event promoter in the Atlanta,
Georgia region, and through Chastain Joint Ventures ("Chastain Ventures") is
the operator, pursuant to a long-term lease with the City of Atlanta, of the
Chastain Park Amphitheater. Chastain Ventures is owned equally by
Concert/Southern and the Atlanta Symphony Orchestra, and is accounted for by
Concert/Southern on the equity method. Buckhead Promotions and Northern
Exposure equally own Roxy Ventures which holds a long-term lease for the Roxy
Theatre, and Pure Cotton holds a long-term lease for the Cotton Club.
Interfest, Inc. promoted the three-day Midtown Music Festival held in downtown
Atlanta during 1997. In addition, High Cotton owns 52.6% of HC Properties,
Inc., a real estate investment company which is accounted for on the equity
method.
The Companies record revenue when earned. Concert revenue includes
ticketing, concession, and sponsorship revenue. Deferred income relates
primarily to deposits received in advance of the concert season.
Property and Equipment
Land, leasehold improvements, and furniture and equipment are stated at
cost. Depreciation of furniture and equipment is provided primarily by the
straight-line method over the estimated useful lives of the respective classes
of assets. Leasehold improvements are amortized over the life of the lease or
of the improvement, whichever is shorter.
Income Taxes
The Companies have been organized as either partnerships or corporations
which have elected to be taxed as "S Corporations." The "S Corporation"
elections are effective for both federal and state tax purposes. Accordingly,
all items of income, loss, deduction or credit are reported by the partners or
shareholders on their respective personal income tax returns and, therefore, no
current or deferred federal or state taxes have been provided in the
accompanying combined financial statements.
The difference between the tax basis and the reported amounts of the
Companies' assets and liabilities was $16,576 at December 31, 1997.
Risks and Uncertainties
Accounts receivable are due from ticket vendors and venue box offices.
These amounts are typically collected within 20 days of a performance.
Management considers accounts receivable to be fully collectible; accordingly,
no allowance for doubtful accounts is required.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-141
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS IN EQUITY INVESTEES
The following is a summary of the financial position and results of
operations of the Companies' equity investees as of and for the period ended
December 31, 1997:
<TABLE>
<CAPTION>
CHASTAIN
PARK AMPHITHEATER HC PROPERTIES
------------------- --------------
(50% OWNED) (52.6% OWNED)
<S> <C> <C>
Current assets ......................... $ 322,527 $ 51,820
Property and equipment ................. 468,145 810,480
Other assets ........................... -- 415,145
--------- ----------
Total assets ........................... $ 790,672 $1,277,445
========= ==========
Current liabilities .................... $ 129,953 $ 1,927
Partners' capital ...................... 660,719 1,275,518
--------- ----------
Total liabilities and partners' capital $ 790,672 $1,277,445
========= ==========
Revenue ................................ $ 653,251 $ 87,407
Expenses ............................... 747,055 165,328
--------- ----------
Net income (loss) ...................... $ (93,804) $ (77,921)
========= ==========
</TABLE>
3. RELATED PARTY TRANSACTIONS
The Companies have an arrangement with Stephen Selig III whereby the cash
receipts of Concert/Southern, Buckhead Promotions and Roxy Ventures are
transferred to the Selig Enterprises, Inc. Master Cash Account (the "Master
Account"). All subsequent payments made by the Companies are funded by the
Master Account. Accordingly, the Companies' cash held by the Master Account of
$281,058 is recorded as due from owner.
In addition, CCMI has recorded a receivable from its stockholders of
$51,696.
4. STOCKHOLDERS' EQUITY
The Companies' stocks are as follows:
<TABLE>
<CAPTION>
SHARES SHARES PAR
AUTHORIZED ISSUED VALUE
------------ -------- ------
<S> <C> <C> <C>
Southern Promotions ......... 1,000,000 5,000 $1
High Cotton ................. 10,000 550 1
Buckhead Promotions ......... 1,000,000 500 1
Northern Exposure ........... 1,000,000 1,000 1
Pure Cotton ................. 100,000 500 1
CCMI ........................ 10,000 1,000 1
Interfest ................... 100,000 500 1
-----
9,050
=====
</TABLE>
F-142
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
Leases
The following is a schedule of future minimum rental payments under
operating leases (principally office and venue facilities) that have initial or
remaining lease terms in excess of one year as of December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Year ended December 31:
1998 ................ $ 222,539
1999 ................ 183,198
2000 ................ 188,991
2001 ................ 133,350
2002 ................ 136,350
Thereafter .......... 174,375
----------
Total ............... $1,038,803
==========
</TABLE>
Certain office facilities have renewal and escalation clauses.
Legal Matters
On October 10, 1997, Concert/Southern settled a lawsuit agreeing to pay
$100,000. Such amount has been provided for in the accompanying combined
statement of operations.
The Companies have also been named in various other lawsuits arising in
the normal course of business. It is not possible at this time to assess the
probability of any liability against the Companies as a result of these
lawsuits. Management has stated that all cases will be vigorously defended.
6. SUBSEQUENT EVENTS
On March 4, 1998, SFX Entertainment Inc. acquired the Companies for a
total cash purchase price of $16,900,000 (including a working capital payment
of $300,000).
Prior to the sale of the Companies to SFX, the sole shareholder of High
Cotton received a distribution of High Cotton's interest in HC Properties, Inc.
F-143
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Falk Associates Management Enterprises, Inc.
We have audited the accompanying combined balance sheets of Falk
Associates Management Enterprises, Inc. as of December 31, 1996 and 1997, and
the related combined statements of operations and stockholders' equity
(deficit) and cash flows for the years then ended. These financial statements
are the responsibility of management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Falk Associates Management Enterprises, Inc. at December 31, 1996 and 1997, and
the combined results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
April 10, 1998
F-144
<PAGE>
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1996 1997
------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash .................................................................. $ 964,265 $ 34,586
Cash surrender value of officers' life insurance ...................... 73,336 115,436
Accounts receivable ................................................... 641,204 614,051
Current portion of stockholder loan receivable ........................ 92,669 116,524
Other current assets .................................................. 13,428 33,456
---------- ------------
1,784,902 914,053
---------- ------------
Fixed assets, net of accumulated depreciation and amortization ......... 85,200 63,714
Certificate of deposit, noncurrent ..................................... 200,906 211,331
Accounts receivable .................................................... 514,051 --
Stockholder loan receivable ............................................ 506,400 389,873
Other .................................................................. 58,900 7,119
---------- ------------
Total assets ........................................................... $3,150,359 $ 1,586,090
========== ============
LIABILITIES AND COMBINED STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses ................................. $ 221,952 $ 165,504
Payroll taxes payable ................................................. 907,446 --
Stockholder loan payable .............................................. 95,000 95,000
Current portion of settlement agreement ............................... 134,552 145,652
Current portion of deferred revenue ................................... 673,744 1,358,149
Current portion of long-term debt ..................................... 309,313 310,162
---------- ------------
2,342,007 2,074,467
---------- ------------
Settlement agreement, less current portion ............................. 658,756 513,103
Deferred revenue, less current portion ................................. -- 1,031,250
Long-term debt, less current portion ................................... 46,548 36,200
Combined stockholders' equity (deficit) ................................ 103,048 (2,068,930)
---------- ------------
Total liabilities and combined stockholders' equity (deficit) .......... $3,150,359 $ 1,586,090
========== ============
</TABLE>
See accompanying notes.
F-145
<PAGE>
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
COMBINED STATEMENTS OF OPERATIONS AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997
------------- ----------------
<S> <C> <C>
REVENUES
Agent fees ..................................................... $6,364,503 $ 10,881,588
EXPENSES
Stockholders' salary expense ................................... 4,732,430 10,594,773
Other salary expense ........................................... 969,293 1,177,197
Depreciation and amortization .................................. 113,486 115,309
Travel and entertainment ....................................... 503,475 552,951
General and administrative expenses ............................ 627,174 677,453
---------- ------------
6,945,858 13,117,683
---------- ------------
(Loss) income from operations .................................. (581,355) (2,236,095)
OTHER INCOME (EXPENSE)
Interest income -- stockholders' loan .......................... 32,305 27,237
Interest income -- third party ................................. 142,917 115,714
Interest expense -- third party ................................ (91,996) (78,834)
Other income ................................................... 2,200 --
---------- ------------
85,426 64,117
Net (loss) income .............................................. (495,929) (2,171,978)
Combined stockholders' equity at beginning of year ............. 598,977 103,048
---------- ------------
Combined stockholders' equity (deficit) at end of year ......... $ 103,048 $ (2,068,930)
========== ============
</TABLE>
See accompanying notes.
F-146
<PAGE>
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1997
-------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income ....................................................... $ (495,929) $ (2,171,978)
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation and amortization ........................................ 113,486 115,309
Non-cash interest expense ............................................ 75,702 65,447
Non-cash interest income ............................................. (32,188) (37,753)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ........................... 17,538 541,204
Decrease (increase) in other current assets .......................... 559 (20,028)
Increase (decrease) in accounts payable and accrued expenses ......... 71,526 (56,448)
Increase (decrease) in payroll taxes payable ......................... 461,584 (907,446)
Increase (decrease) in deferred revenue .............................. 479,319 1,715,655
---------- -------------
Net cash provided by (used in) operating activities ..................... 691,597 (756,038)
---------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets ................................................ (70,467) (42,042)
Increase in cash surrender value of officers' life insurance ............ (31,336) (42,100)
---------- -------------
Net cash used in investing activities ................................... (101,803) (84,142)
---------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of long-term debt .............................................. (300,000) (309,499)
Proceeds from long-term debt borrowings ................................. 355,861 300,000
Proceeds from stockholder loan receivable ............................... -- 120,000
Payment on settlement agreement ......................................... (200,000) (200,000)
---------- -------------
Net cash (used in) provided by financing activities ..................... (144,139) (89,499)
---------- -------------
Net increase (decrease) in cash ......................................... 445,655 (929,679)
Cash at beginning of period ............................................. 518,610 964,265
---------- -------------
Cash at end of period ................................................... $ 964,265 $ 34,586
========== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest .................................................. $ 16,294 $ 13,386
========== =============
</TABLE>
See accompanying notes.
F-147
<PAGE>
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The accompanying combined financial statements include the accounts of
Falk Associates Management Enterprises, Inc. ("FAME") and Financial Advisory
Management Enterprises, Inc. ("FINAD") (collectively, the "Companies").
Transactions and balances among the Companies have been eliminated in
combination. The Companies are subject to common ownership.
In exchange for a percentage fee or commission, FAME provides
representation services regarding the negotiation of professional sporting
contracts and marketing and endorsement contracts. FINAD provides financial
management services including, but not limited to, the implementation of
financial planning to meet clients' savings and financial goals, the receipt
and deposit of funds, cash flow budgeting and analysis, preparation of
financial statements and tax return services, in exchange for an annual fixed
fee and an additional percentage fee based on the dollar value of assets
managed and monitored.
Revenue Recognition
The Companies revenues arise primarily from percentage fees or commissions
received for the negotiation of professional sporting contracts and marketing
and endorsement contracts. The Companies recognize revenue ratably over the
period of the associated contract. Deferred revenue is recorded on the
accompanying combined balance sheets when funds are received in advance of the
performance period and is recognized over the period of performance.
Accounts Receivable
Accounts receivable consist of amounts due from professional athletes for
services rendered or for fees due related to prior performance that has been
contractually deferred to a later date. Management considers these accounts
receivable as of December 31, 1996 and 1997 to be collectible; accordingly, no
allowance for doubtful accounts is recorded.
Fixed Assets
Fixed assets are stated at cost. Depreciation and amortization of fixed
assets is provided on the straight-line method over the estimated useful lives
of the assets including 5 years for technical equipment, 7 years for furniture
and office equipment and 10 years for leasehold improvements.
Income Taxes
The Companies are cash-basis taxpayers and have elected to be taxed as S
Corporations for federal and state income tax purposes. All items of income,
loss and credits are reported by the Companies stockholders on their respective
personal income tax returns. Accordingly, no current and deferred federal
corporate income taxes have been provided in the accompanying combined
financial statements. However, since the Companies operate in the District of
Columbia ("D.C.") they are subject to D.C. income tax. No D.C. income tax
benefits have been provided on the Companies' D.C. net operating loss
carryforwards and other deductible temporary differences due to the uncertainty
of recognizing future tax benefits for these items.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
The Companies derive substantially all of its agent fees from the
representation services they provide regarding the negotiation of professional
sporting contracts and marketing and endorsement contracts for professional
athletes in the National Basketball Association ("NBA"). In March 1998, the NBA
Board of
F-148
<PAGE>
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Governors voted to exercise the league's right to re-open its Collective
Bargaining Agreement (the "Agreement") with the National Basketball Players
Association. As a result, the Agreement will expire as of June 30, 1998. As a
matter of Collective Bargaining, the Agreement, when it expires, continues in
place until it is replaced by a successor agreement, or until some other labor
remedies are utilized by one party or the other, meaning a strike or a lockout
or a moratorium collectively. Should there be a work stoppage due to either a
lockout or strike and NBA games are not played, it would be likely that the
Companies agent fees would be negatively impacted.
Significant Customer
The Companies three most significant sources of revenue provided a
majority of the Companies combined agent fees for the year ended December 31,
1996 and 1997, respectively.
Interim Financial Information
The interim financial data as of March 31, 1998 and for three-month
periods ended March 31, 1997 and 1998 is unaudited and certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. However, in
the opinion of Management, the interim data includes all adjustments,
consisting only of normal recurring adjustments necessary for a fair statement
of the results for the interim periods. The results of operations for the
interim periods are not necessarily indicative of the results to be expected
for the entire year.
2. FIXED ASSETS
Fixed assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Furniture and office equipment ......................... $ 150,739 $ 159,467
Technical equipment .................................... 169,112 200,300
Leasehold improvements ................................. 4,841 6,967
---------- ----------
324,692 366,734
Less accumulated depreciation and amortization ......... (239,492) (303,020)
---------- ----------
$ 85,200 $ 63,714
========== ==========
</TABLE>
3. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Time note (A) ................... $ 200,000 $ 200,000
Line of credit (B) .............. 100,000 100,000
Note payable (C) ................ 55,861 46,362
---------- ----------
Long term debt .................. 355,861 346,362
Less current maturities ......... (309,313) (310,162)
---------- ----------
Total long-term debt ............ $ 46,548 $ 36,200
========== ==========
</TABLE>
- ----------
(A) On December 31, 1996 and 1997, respectively, the Companies had
outstanding a six-month $200,000 time note (the "Time Note") with a
bank (the "Bank"). Interest was set at the prime rate which
approximated 8.25% at both December 31, 1996 and 1997, respectively.
Interest is payable monthly in arrears. The Companies may repay the
principal at any time during the six-month period ended June 30,
1998, with all remaining principal and outstanding interest in full
on June 30, 1998. The time note contains covenants which, among
other things, restrict the pledging of assets without prior written
approval of the Bank.
F-149
<PAGE>
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(B) On December 31, 1996 and 1997, respectively, the Companies had
outstanding a $100,000 one-year line of credit with the Bank which
was fully drawn as of those dates. Interest was set at the prime
rate which approximated 8.25% at both December 31, 1996 and 1997,
respectively. Interest is payable monthly in arrears. Principal and
any outstanding interest is payable in full at December 31, 1998.
The line of credit contains covenants which are similar to those in
the Time Note.
(C) In December 1996, the Companies entered into a five year $55,861
note payable with the Bank. Interest was fixed at 8.75%. Commencing
January 1997, the note became payable in 59 monthly installments
consisting of principal and interest with the final payment equal to
any remaining principal and interest due. The note is secured by
specific computer hardware and software which was purchased with the
proceeds of the note payable.
At December 31, 1997, the aggregate amounts of long-term debt due during
the next four years are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- ------------------------- -----------
<S> <C>
1998 ............... $310,162
1999 ............... 11,088
2000 ............... 12,098
2001 ............... 13,014
--------
$346,362
========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Companies are obligated under certain noncancellable operating leases.
Rent expense, principally for office space, amounted to approximately $149,400
and $167,300 for the years ended December 31, 1996 and 1997, respectively. In
March 1998, the Companies entered into a sublease for additional office space.
Future minimum rental payments under noncancellable operating leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 OPERATING LEASES
- ------------------------- -----------------
<S> <C>
1998 ............... $ 214,000
1999 ............... 244,000
2000 ............... 247,000
2001 ............... 250,000
2002 ............... 184,000
----------
$1,139,000
==========
</TABLE>
Settlement Agreement
In 1994, the Companies were party to a $1.9 million legal settlement
arising from a civil suit wherein they were jointly and severally liable to
make settlement payments over a seven year period. The carrying value of the
settlement agreement was approximately $793,300 and $658,800 at December 31,
1997 and 1996, respectively, discounted at a 8.25% interest rate.
Agreement and Memorandum of Understanding
In January 1992, an Agreement and Memorandum of Understanding (the
"Agreement") was executed between the Companies' principal stockholder and a
third party which formerly employed the principal stockholder. Under the terms
of the Agreement, the Companies are obligated to remit to the third party a
percentage of the Companies fees as received for the representation services
provided regarding the negotiation of professional sporting contracts and
marketing and endorsement contracts. Agreement terms are limited to those
professional athletes who became clients of the Companies at the time of the
Companies formation and generally does not give the third party any right to
fees related to contract renewals.
F-150
<PAGE>
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Stock Appreciation Rights
In December 1996, the Companies issued stock appreciation rights ("SARs")
to a stockholder and executive vice president of the Companies. The SARs are
exercisable only upon the occurrence of defined terms and conditions, including
the sale or merger of the Companies to a third party or upon termination of
employment. Accordingly, upon the exercise of the SAR's, the Companies will
record expense in the combined statement of operations equal to the fair value
of the SARs.
5. RELATED PARTY TRANSACTIONS
Stockholder Loan Receivable
In January 1993, the Companies entered into two eight-year promissory loan
notes with a stockholder of the Companies for face amounts of $384,000 and
$96,000. The loans accrue interest at a fixed rate of 5.7% with monthly
payments of principal and accrued interest commencing January 1, 1997.
Stockholder Loan Payable
In January 1993, the principle stockholder of the Companies made a $95,000
non-interest bearing advance to the Companies in connection with its formation.
This advance is due on demand and has been classified as a current liability in
the accompanying combined balance sheets.
Stockholders' Life Insurance
The Companies are the owners and beneficiaries of key-man life insurance
policies carried on the lives of its stockholders' with cash surrender values
totaling approximately $73,300 and $115,400 as of December 31, 1996 and 1997,
respectively. No loans are outstanding against the policies, but there is no
restriction in the policy regarding loans.
The life insurance contracts are accompanied by mandatory stock purchase
agreements relating to the amount of the proceeds of the life insurance. Upon
death, the insured's estate will be obligated to sell, and the Companies will
be obligated to purchase the insured's stock up to the value of the stock or
the proceeds of insurance, whichever is lesser. The purpose is to protect the
Companies against an abrupt change in ownership.
6. EMPLOYEE BENEFIT PLAN
During 1997, the Companies began sponsoring a deferred contribution plan
(the "Plan"). The Plan enables all full time employees who have completed one
year of service with the Companies to make voluntary contributions to the Plan
not to exceed the dollar limits as prescribed by the Internal Revenue Service.
Under the Plan, the Companies matches an employee's contribution up to a
maximum of 3% of their salary. The Companies contribution for the year ended
December 31, 1997 was approximately $40,800.
7. STOCKHOLDERS AGREEMENT
The stockholders of the Companies currently maintain a Stockholders
Agreement (the "Agreement") which place restrictions on the transfer (as
defined in the Agreement) of their stock.
8. SUBSEQUENT EVENT
On June 4, 1998 the stockholders of the Companies completed the sale of
the Companies to a subsidiary of SFX Entertainment, Inc. ("SFX") whereby SFX
acquired all of the outstanding capital stock of the Companies for a total
purchase price of approximately $82.2 million (including approximately $7.9
million which the Companies received for the reimbursement of certain taxes
incurred and excluding $4.7 million of taxes paid on behalf of the Companies
which will be refunded to SFX in 1999) and the issuance of 1.0 million shares
of SFX's Class A Common Stock. The sale agreement also provides for payments by
SFX to the Companies for additional amounts up to an aggregate of $15.0 million
in equal annual installments over five years contingent on the achievement of
certain EBITDA (as defined) targets and for additional payments by SFX if the
companies EBITDA performance exceeds the targets by certain amounts.
F-151
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Members
Blackstone Entertainment LLC
We have audited the accompanying combined balance sheets of Blackstone
Entertainment LLC as of December 31, 1996 and 1997, and the related combined
statements of income, members' equity and cash flows for the years then ended.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We have conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Blackstone Entertainment LLC at December 31, 1996 and 1997, and the combined
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
May 1, 1998 ERNST & YOUNG LLP
New York, New York
F-152
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including $50,000 and $55,000
of restricted cash at December 31, 1996 and 1997,
respectively ......................................... $ 2,025,731 $ 3,529,135
Accounts receivable .................................... 551,776 275,820
Due from related parties ............................... 60,751 310,874
Due from members ....................................... 234,822 165,117
Other current assets ................................... 151,872 219,789
----------- -----------
Total current assets .................................... 3,024,952 4,500,735
Fixed assets, net ....................................... 14,680,344 13,394,676
Intangible assets, net .................................. 212,682 177,823
----------- -----------
Total assets ............................................ $17,917,978 $18,073,234
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .................. $ 819,690 $ 1,675,061
Notes payable, current portion ......................... 1,427,172 1,388,806
Capital leases payable, current portion ................ 344,038 487,334
Deferred income ........................................ 545,537 547,270
Due to related parties ................................. 241,677 --
Loans payable to members ............................... 1,500,000 2,461,239
----------- -----------
Total current liabilities .............................. 4,878,114 6,559,710
Notes payable, net of current portion ................... 8,564,888 6,816,668
Capital leases payable, net of current portion .......... 1,080,959 693,061
Other ................................................... 50,825 --
----------- -----------
Total liabilities ....................................... 14,574,786 14,069,439
Members' equity ......................................... 3,343,192 4,003,795
----------- -----------
Total liabilities and members' equity ................... $17,917,978 $18,073,234
=========== ===========
</TABLE>
See accompanying notes.
F-153
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Gross revenues ............................... $ 48,824,066 $ 50,587,721
Operating costs and expenses:
Operating costs ............................. 35,631,428 35,806,833
Promotion expenses .......................... 2,596,861 2,837,208
General and administrative expenses ......... 4,634,399 5,756,993
Depreciation and amortization ............... 2,026,637 2,033,245
------------ ------------
Total operating costs and expenses ........... 44,889,325 46,434,279
Operating income (loss) ...................... 3,934,741 4,153,442
Investment income ............................ 189,970 329,696
Interest expense ............................. (1,132,556) (1,071,731)
------------ ------------
Net income (loss) ............................ $ 2,992,155 $ 3,411,407
============ ============
</TABLE>
See accompanying notes.
F-154
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1996 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .......................................... $ 2,992,155 $ 3,411,407
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................... 2,226,637 2,033,245
Other ................................................... 543 --
(Increase) decrease in assets:
Accounts receivable ....................................... (180,773) 275,956
Other current assets ...................................... 284,240 (67,917)
Increase (decrease) in liabilities:
Deferred income ........................................ (149,523) 1,733
Accounts payable and accrued expenses .................. (34,164) 855,371
Due to/from related parties and members ................ (68,475) (422,095)
Other .................................................. (11,461) (50,825)
------------ ------------
Net cash provided by operating activities .................. 5,059,179 6,036,875
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets ................................ (1,678,666) (386,983)
------------ ------------
Net cash used in investing activities ...................... (1,678,666) (386,983)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable and consulting agreement ......... (1,227,498) (1,986,586)
Payments on to capital leases .............................. (17,182) (370,337)
Changes in loans payable to members ........................ (119,189) --
Distributions to members ................................... (1,720,546) (1,789,565)
------------ ------------
Net cash used in financing activities ...................... (3,084,415) (4,146,488)
------------ ------------
Net increase in cash and cash equivalents .................. 296,098 1,503,404
Cash and cash equivalents, beginning of period ............. 1,729,633 2,025,731
------------ ------------
Cash and cash equivalents, end of period ................... $ 2,025,731 $ 3,529,135
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Capital lease additions .................................... $ 125,735 $ 538,526
Cash paid during the year for interest ..................... $ 1,301,210 $ 1,017,371
</TABLE>
See accompanying notes.
F-155
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
COMBINED STATEMENT OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
MEMBERS'
EQUITY
---------------
<S> <C>
Balance, January 1, 1996 ........... $ 2,071,583
Net income ......................... 2,992,155
Distributions to members ........... (1,770,546)
Capital contributions .............. 50,000
------------
Balance, December 31, 1996 ......... 3,343,192
Net income .........................
Distributions to members ........... (2,750,804)
------------
Balance, December 31, 1997 ......... $ 4,003,795
============
</TABLE>
See accompanying notes.
F-156
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Blackstone Entertainment LLC ("the Company") was organized on October 1,
1997 as a Massachusetts Limited Liability Company. On that date, the net assets
of the following companies (collectively, "Don Law and Affiliates"), which had
been commonly controlled and functionally related, and a related parcel of land
located in Mansfield, Massachusetts were contributed in formation of the
Company:
- Great Woods, Inc.
- Time Trust Associates Joint Venture
- Harborlights Pavilion, Inc.
- NEXT, Inc.
- Don Law Company, Inc.
- Orpheum Management Corporation
- Black and Copper, Ltd.
- Andrew Trust LLC
These financial statements reflect the businesses subject to the
transaction described in Note 10 and accordingly, represent the combined
results of Blackstone Entertainment LLC and Don Law and Affiliates as a
predecessor. The net assets transferred to the Company have been recorded at
their historical book values.
Nature of Business
Great Woods, Inc., a Massachusetts corporation, managed and operated the
Great Woods Center for the Performing Arts in Mansfield, Massachusetts. Time
Trust Associates Joint Venture, a Massachusetts general partnership, held title
to the real estate on which the facility is situated.
Harborlights Pavilion, Inc., a Massachusetts corporation, managed and
operated the Harborlights Pavilion in Boston, Massachusetts.
NEXT, Inc., a Massachusetts corporation, operated a computerized ticketing
system for entertainment facilities and theaters throughout the New England
area.
Don Law Company, Inc., a Massachusetts corporation, promoted concerts and
other entertainment events throughout the New England area.
Orpheum Management Corporation, a Massachusetts corporation, managed the
Orpheum Theatre in Boston, Massachusetts.
Black and Copper, Ltd., a Massachusetts corporation, provided graphic
design, advertising, marketing and promotional services principally to its
related entities.
Andrew Trust LLC owned additional parcels of land surrounding the Great
Woods Center for the Performing Arts in Mansfield, Massachusetts.
Limited Liability Company
The Company's operating agreement provides that liability of its members
is limited to their capital invested in the Company. The Company's operating
agreement does not limit its term of existence, and provides for dissolution
upon the occurrence of certain events, one of which is the acquisition by one
member of all of the outstanding ownership interest.
F-157
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Member Classes and Priorities
The Company's operating agreement provides for one of its members to
receive a priority distribution of current year earnings and liquidation
proceeds to $2,250,000. The remaining members receive a matching distribution
subsequent to the priority distribution of $2,250,000. All additional proceeds
are then divided evenly among the members. The operating agreement provides for
both priorities to disappear upon the Company's attainment of certain
distribution levels.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, time deposits, commercial paper
and money market mutual funds. The Company invests its excess cash in highly
rated companies and financial institutions. These deposits have original
maturities that do not exceed three months. During the course of the year, the
Company maintained balances in financial institutions in excess of FDIC insured
limits. Included in cash and cash equivalents at December 31, 1996 and 1997 is
approximately $50,000 and $55,000, respectively, of restricted cash to be used
for future Orpheum Theatre renovations and improvements.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed over estimated
useful lives ranging from three to thirty-nine years utilizing straight-line
and accelerated methods. Depreciation expense charged to operations was
$1,992,321 and $1,798,386 during the years ended December 31, 1996 and 1997,
respectively.
Intangible Assets, Net
Intangible assets consisting of goodwill which is being amortized over
fifteen years using the straight-line method and organization costs incurred
when Harborlights Pavilion, Inc. and NEXT, Inc. were established are being
amortized over five years using the straight-line method. These assets are
shown on the combined balance sheets net of accumulated amortization of
$125,665 and $360,524 as of December 31, 1996 and 1997. Total amortization
expense charged to operations was $34,316 and $234,859 during the years ended
December 31, 1996 and 1997.
Revenue Recognition
All divisions, except for NEXT, recognize event-related revenue upon
completion of each performance. Advance ticket receipts for performances are
recorded as deferred revenue. Costs incurred which relate to future
performances are recorded as prepaid expenses. The NEXT division recognizes
revenues as tickets are sold and services are performed.
Income Taxes
The Company is treated as a partnership for federal and state income tax
purposes. The Company's earnings and losses are included in the members' income
tax returns in relation to their respective ownership interests; accordingly,
no provision is required for federal and state income taxes.
Advertising Expense
The Company expenses advertising costs as incurred. Advertising expense
amounted to approximately $1,849,000 and $2,061,000 during the years ended
December 31, 1996 and 1997, respectively.
F-158
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Year 2000 (unaudited)
The Company has addressed the risks associated with year 2000 compliance
with respect to its ticketing system based on consultation with its vendors.
Future costs associated with such compliance are not expected to be
significant.
2. FIXED ASSETS, NET
Fixed assets, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1996 1997
--------------- ----------------
<S> <C> <C>
Performing art facilities .............. $ 21,454,305 $ 21,496,711
Land and site improvements ............. 2,133,905 2,327,127
Equipment under capital leases ......... 1,426,874 1,567,690
Machinery and equipment ................ 1,484,682 1,628,996
Furniture and fixtures ................. 494,480 522,372
Leasehold improvements ................. 243,982 244,982
Motor vehicles ......................... 156,135 189,663
------------- -------------
27,394,363 27,977,541
Less accumulated depreciation .......... (12,714,019) (14,582,865)
------------- -------------
$ 14,680,344 $ 13,394,676
============= =============
</TABLE>
F-159
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
1. The Company is obligated under a note payable to the FDIC
dated May 11, 1988 in the original amount of $10,600,000. On
May 9, 1995, the note was modified and extended to mature
February 15, 2005. At such time, a balloon payment of
approximately $3,500,000 will be required. The note is
payable in monthly principal installments of $44,167 plus
interest at 8.98% per annum. The note is collateralized by
substantially all assets of the Great Woods Inc. and Time
Trust Join Venture, including a mortgage on the real estate
and facility, and a security interest in all operating permits
and licenses, programming and concession contracts, and
insurance policies on the lives of two members. ........................ $7,752,942 $7,222,942
2. The Company is obligated to a concessionaire under an
unsecured five-year installment note in the original amount of
$1,600,000 which matures on June 30, 1998. The note is
payable in annual principal installments of $320,000 with
interest payable quarterly at 1.5% over the prime rate. ................ 640,000 320,000
3. The Company is obligated under a five-year installment note
dated May 18, 1994 payable to a bank in the original amount
of $1,600,000. The note is payable in monthly installments of
$33,136 including interest at 8.9% per annum and is
collateralized by all assets of the Harborlights Pavilion Inc. ......... 829,118 492,532
4. The Company is obligated to a concessionaire under an
unsecured installment note dated August 19, 1994 in the
original amount of $350,000 bearing interest at 1% over the
prime rate. The remaining outstanding principal balance and
any accrued interest is due November 1, 1998. The note is
personally guaranteed by the members of the Company. ................... 210,000 140,000
5. The Company is obligated to a concessionaire under an
unsecured and noninterest bearing note dated July 11, 1994 in
the original amount of $150,000. The note is due in annual
installments of $30,000 with the final installment due
October 15, 1998. ...................................................... 60,000 30,000
6. The Company is obligated under a note payable from
Andrew Trust LLC to a bank dated December 12, 1996 in
the original amount of $500,000. Interest is payable monthly
at 0.75% over the prime rate and the principal reaches
maturity on December 12, 1999. ......................................... 500,000 --
---------- ----------
9,992,060 8,205,474
Current maturities ..................................................... 1,427,172 1,388,806
---------- ----------
Long-term debt ......................................................... $8,564,888 $6,816,668
========== ==========
</TABLE>
F-160
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
December 31:
<S> <C>
1999 ................ $ 653,726
2000 ................ 530,000
2001 ................ 530,000
2002 ................ 530,000
2003 ................ 530,000
Thereafter .......... 4,042,942
----------
$6,816,668
==========
</TABLE>
The Company has an unsecured demand line of credit with a bank of
$2,000,000 which expires April 30, 1998. Interest is payable monthly at 1% over
the prime rate. The Company had no amounts outstanding under this line of
credit as of December 31, 1996 and 1997.
The bank note payable collaterialized by the assets of Harborlights
Pavilion, Inc. and the demand line of credit are subject to several financial
covenants which the company is currently in the process of renegotiating. For
the years ended December 31, 1996 and 1997, Harborlights Pavilion, Inc. failed
at least one of these financial covenants. Management anticipates that based
upon discussions with the bank, the loan will not be called.
4. CAPITAL LEASE OBLIGATIONS
The Company is obligated under capital lease agreements for certain
business equipment. The leases have been capitalized at the fair value of the
leased equipment with a corresponding liability recorded. Each payment is
allocated between a reduction of the liability and interest expense to yield a
constant periodic rate of interest on the remaining balance of the obligation.
At December 31, 1997, future minimum payments due on the lease agreements
are as follows:
Year ended December 31:
<TABLE>
<CAPTION>
<S> <C>
1998 ................................................ $ 564,474
1999 ................................................ 564,625
2000 ................................................ 155,095
2001 ................................................ 15,961
---------
1,300,155
Amount representing interest ........................ 119,760
---------
Present value of net minimum lease payments ......... 1,180,395
Current portion ..................................... 487,334
---------
Long-term portion ................................... $ 693,061
=========
</TABLE>
5. LOANS PAYABLE TO MEMBERS
The Company is obligated to members in the amount of $961,239 which
represents the balance of advances made by them in conjunction with the
transfer of assets on October 1, 1997. The loans are unsecured and noninterest
bearing, and are expected to be repaid during 1998.
The Company is obligated to two members for loans totaling $1,500,000 at
both December 31, 1996 and 1997. The loans are unsecured, bear interest at 6.5%
per annum, and have no formal repayment terms.
F-161
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Lease Commitments and Rent Expense
Total rent expense amounted to approximately $487,000 and $577,000 for the
years ended December 31, 1996 and 1997, respectively, of which $92,700 was paid
to an affiliate during 1996 and 1997. At December 31, 1997, the Company is
committed under the following noncancellable operating leases:
1) The Company is obligated under a five-year license agreement dated
March 31, 1994 for the lease of a parcel of real estate located on Fan Pier in
Boston, Massachusetts. The agreement provides for a minimum annual rent of
$250,000 through 1998. Additional rent is required based on the number of
tickets sold annually in excess of a 100,000 ticket base. The landlord has the
right to terminate the license agreement upon giving written notice by November
of each year, for termination in the following calendar year.
2) Under an agreement with the owner of the Orpheum Theatre, the Company
has exclusive booking and scheduling rights for the Theatre and sole
responsibility for granting concessions for the sale of food and refreshments
at the Theatre. Under the terms of the agreement, the Company is required to
pay a hall rental charge of $4,750 per performance for the period January 1998
through December 2000, plus additional amounts for artist rehearsals. The
Company is reimbursed for the hall rental charges by the shows' promoters and
earns commissions from the Theatre's owner based on the annual volume of rental
fees paid.
3) The company is obligated under three leases with an affiliate. During
1996 and 1997, the combined rent for these three leases was $92,700 each year.
4) The company is obligated under a one year lease for the NEXT, Inc.
premises for rent payments of $53,750 through December 31, 1998.
Other Commitments
The Company is obligated under a ten-year consulting agreement with the
former owner of a concert promotion business which was acquired in 1992. The
consulting agreement requires scheduled annual payments totaling of $828,000
over the next four years.
The Company is obligated under a consulting agreement with a member
requiring annual payments of $100,000 renewable annually.
7. PROFIT SHARING PLANS
The Company maintains 401(k) profit sharing plans covering eligible
employees who meet certain age and length of service requirements. Employees
may elect voluntary salary reductions; company contributions are made at the
discretion of the managing member. The Company did not make any matching
contributions during the years ended December 31, 1996 and 1997.
8. LITIGATION
Great Woods, Inc. is a defendant in several lawsuits that management
believes are without merit. In the event of an adverse judgment, management
believes its insurance coverage is sufficient to cover any potential losses.
9. EMPLOYMENT AGREEMENTS
Two employees have employment agreements pursuant to which they may
received contingent consideration upon the occurrence of specified events. One
of the employees is entitled to 0.6% of the net proceeds from the sale,
refinancing or other disposition of the Company or its ownership interests. The
F-162
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
other is entitled to 5% of the defined after tax proceeds from the sale of
Great Woods , Inc. less certain defined contingent consideration paid prior to
the date of sale. The Company is obligated under an informal employment
arrangement with the General Manager of the NEXT, Inc. which provides for a
base salary of $150,000 in addition to a bonus based on performance. The
arrangement is renewable annually.
In connection with employment agreements, certain employees were paid
$610,000 in 1997 in connection with the sale of membership interests by the
principal owner to the Company. Such amount was recorded as a charge to
earnings in 1997.
10. SUBSEQUENT EVENT
On July 2, 1998, SFX Entertainment, Inc. acquired the Company for
aggregate consideration of approximately $92.2 million, including the repayment
of approximately $7.0 million in debt.
F-163
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of Magicworks Entertainment Incorporated:
We have audited the accompanying balance sheets of Magicworks Entertainment
Incorporated (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related statements of income, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Magicworks Entertainment
Incorporated and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the two years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 23, 1998.
F-164
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................................. $ 5,505,372 $ 6,367,179
Accounts and notes receivable, net .................................... 1,802,623 1,921,356
Inventories ........................................................... 486,954 268,959
Preproduction costs ................................................... -- 610,697
Advances and temporary deposits ....................................... 582,809 525,975
Due from affiliates ................................................... 36,849 75,945
Prepaid show expenses ................................................. 929,566 178,352
Other current assets .................................................. 423,565 553,252
----------- -----------
TOTAL CURRENT ASSETS ................................................ 9,767,738 10,501,715
PROPERTY AND EQUIPMENT, NET ............................................ 2,098,785 2,076,310
INVESTMENTS IN PARTNERSHIPS ............................................ 4,273,973 918,564
DEFERRED COSTS, NET .................................................... 983,679 1,105,114
INTANGIBLE ASSETS, NET ................................................. 399,167 325,745
OTHER ASSETS ........................................................... 67,500 --
----------- -----------
TOTAL ASSETS .......................................................... $17,590,842 $14,927,448
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt ..................................... $ 299,557 $ 302,956
Accounts payable ...................................................... 1,252,517 1,467,843
Accrued liabilities ................................................... 543,466 1,043,553
Advance ticket sales .................................................. 3,479,469 844,373
Deferred income taxes ................................................. -- 137,131
Due to affiliates ..................................................... 492,079 72,732
----------- -----------
TOTAL CURRENT LIABILITIES ........................................... 6,067,088 3,868,588
DEFERRED INCOME TAXES .................................................. -- 274,263
LONG-TERM DEBT, NET OF CURRENT PORTION ................................. 6,047,163 6,177,492
----------- -----------
TOTAL LIABILITIES ..................................................... 12,114,251 10,320,343
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 5,000,000 shares authorized; none
issued .............................................................. -- --
Common stock, $.001 par value; 50,000,000 shares authorized; 24,404,300
and 24,394,300 issued and outstanding in 1997 and 1996, respectively 24,404 24,394
Additional paid-in capital ............................................ 4,078,618 4,151,026
Retained earnings ..................................................... 1,373,569 431,685
----------- -----------
TOTAL STOCKHOLDERS' EQUITY .......................................... 5,476,591 4,607,105
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $17,590,842 $14,927,448
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-165
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
REVENUES
Production ........................................ $18,364,315 $ 30,255,931
Promotion ......................................... 35,465,041 36,310,528
Merchandising ..................................... 4,919,075 2,686,238
Other ............................................. 5,167,418 2,414,340
----------- ------------
TOTAL REVENUES .................................. 63,915,849 71,667,037
----------- ------------
OPERATING EXPENSES
Production ........................................ 16,223,813 28,019,575
Promotion ......................................... 30,858,323 30,765,158
Salaries, wages, and benefits ..................... 4,844,302 3,699,334
Merchandising ..................................... 3,596,529 1,933,983
General and administrative ........................ 5,585,949 3,892,705
----------- ------------
TOTAL OPERATING EXPENSES ........................ 61,108,916 68,310,755
----------- ------------
INCOME FROM OPERATIONS ............................. 2,806,933 3,356,282
OTHER INCOME (EXPENSE)
Interest income ................................... 150,256 286,596
Interest expense .................................. (686,275) (491,630)
----------- ------------
INCOME BEFORE MINORITY INTERESTS
AND PROVISION FOR INCOME TAXES ................. 2,270,914 3,151,248
MINORITY INTERESTS ................................. (406,591) 11,731
----------- ------------
INCOME BEFORE PROVISION FOR
INCOME TAXES ................................... 1,864,323 3,162,979
PROVISION FOR INCOME TAXES ......................... (747,324) (597,216)
----------- ------------
NET INCOME AND NET INCOME BEFORE
PRO FORMA INCOME TAXES FOR
PERIODS PRIOR TO JULY 29, 1996 ................. $ 1,116,999 2,565,763
PRO FORMA INCOME TAXES ............................. (1,161,758)
------------
PRO FORMA NET INCOME ............................ $ 1,404,005
============
NET INCOME AND PRO FORMA NET INCOME PER SHARE,
BASIC AND DILUTED ................................. $ 0.05 $ 0.06
=========== ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ......... 24,398,546 22,907,463
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-166
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
STOCK PAID-IN EARNINGS TOTAL
---------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 ............... $21,831 $ 129,507 $ 2,077,894 $ 2,229,232
Issuance of common stock, net of cost of
$1,255,668............................... 2,563 3,927,519 -- 3,930,082
Stock options granted to non-employees..... -- 94,000 -- 94,000
Distributions ............................. -- -- (4,211,972) (4,211,972)
Net income ................................ -- -- 2,565,763 2,565,763
------- ---------- ------------ ------------
BALANCE AT DECEMBER 31, 1996 ............... 24,394 4,151,026 431,685 4,607,105
Stock registration costs .................. -- (91,148) -- (91,148)
Stock issued to an employee ............... 10 18,740 -- 18,750
Distributions ............................. -- -- (175,115) (175,115)
Net income ................................ -- -- 1,116,999 1,116,999
------- ---------- ------------ ------------
BALANCE AT DECEMBER 31, 1997 ............... $24,404 $4,078,618 $ 1,373,569 $ 5,476,591
======= ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-167
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................................... $ 1,116,999 $ 2,565,763
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
Depreciation and amortization ...................................................... 633,792 526,318
Bad debt expense ................................................................... 1,143,499 --
Write-down of investments in partnerships .......................................... 58,226 269,519
Deferred income tax (benefit) provision ............................................ (631,362) 411,394
Minority interests ................................................................. 406,591 (11,731)
Income from investments in partnerships ............................................ (1,097,599) (83,922)
Stock issued to an employee ........................................................ 18,750 --
Stock options granted to non employees ............................................. -- 94,000
Gain (loss) on sale of property and equipment ...................................... (62,327) 27,734
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts and notes receivable .................................................... (1,024,766) (684,316)
Inventories ...................................................................... (217,995) (108,029)
Preproduction costs .............................................................. 610,697 897,617
Advances and temporary deposits .................................................. (56,834) (117,781)
Prepaid show expenses ............................................................ (751,214) (178,352)
Other current assets ............................................................. 294,416 39,069
Other assets ..................................................................... (67,500) --
Deferred costs ................................................................... (44,604) 182,929
Accounts payable ................................................................. (215,326) 556,442
Accrued liabilities .............................................................. (526,139) 150,879
Advance ticket sales ............................................................. 2,635,096 (2,767,831)
Deferred Income .................................................................. -- --
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ....................................... 2,222,400 1,769,702
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment .................................................. (452,584) (953,930)
Proceeds from sale of assets ........................................................ 206,500 --
Investments in partnerships ......................................................... (2,316,036) (894,089)
Payments from (advances to) affiliates .............................................. 458,443 (153,241)
Intangible assets ................................................................... (200,000) 4,952
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ........................................... (2,303,677) (1,996,308)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt .................................................................. 8,243,700 1,914,057
Repayment of debt ................................................................... (8,377,428) (3,070,417)
Net proceeds from (cash used for) private placement ................................. (91,148) 9,115,832
Distributions to minority interests in excess of contributions by minority interests (380,539) (1,458,726)
Distributions ....................................................................... (175,115) (4,211,972)
Capital contributions ............................................................... -- --
Deferred debt issuance costs ........................................................ -- (792,577)
------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ............................. (780,530) 1,496,197
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................. (861,807) 1,269,591
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ........................................ 6,367,179 5,097,588
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR .............................................. $ 5,505,372 $ 6,367,179
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ......................................................................... $ 681,996 $ 490,628
============ ============
Income taxes ..................................................................... $ 1,264,475 $ 250,000
============ ============
SUPPLEMENTAL INFORMATION ON NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of notes to common stock .............................................. -- --
------------ ------------
Distribution of notes receivable to affiliates ................................... $ -- $ --
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-168
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Magicworks Entertainment Incorporated (the "Company"), through its
subsidiaries and partnerships, acquires domestic and international stage and
ancillary rights to theatrical productions, produces and promotes live
entertainment, manages and books performances and shows, and provides ancillary
services including transportation and merchandising of a broad range of
products associated with its productions and performers.
MERGERS, ACQUISITIONS AND BUSINESS COMBINATIONS
On July 29, 1996, the Company consummated a simultaneous merger (the
"Merger") with certain other affiliated businesses. On the same date and on
September 27, 1996, the Company issued and sold 400.06 and 14.8 Units,
respectively, in a private placement (see Note 4). Upon completion of the
private placement, the Company merged with and into Shadow Wood Corporation
("Shadow Wood"), a publicly-traded Delaware corporation. In accordance with the
terms of the Merger, each share of the Company's common stock issued and
outstanding was converted into one share of Shadow Wood's common stock. Shadow
Wood was the surviving corporation and investors in the private placement
became security holders of Shadow Wood. Shadow Wood changed its name to
Magicworks Entertainment Incorporated.
On August 28, 1996, the Company acquired all of the outstanding capital
stock of MovieTime Entertainment, Inc. ("MovieTime") in exchange for 1,199,999
shares of the Company's common stock. MovieTime was formed in May 1995. The
principals of MovieTime are the same as the principals and management of the
Company. Accordingly, the acquisition was accounted for on a historical cost
basis in a manner similar to a pooling of interests. The consolidated financial
statements presented for periods prior to the acquisition date have been
restated to reflect the accounts of MovieTime since inception. Revenues and
loss generated by MovieTime since inception and included in the accompanying
consolidated statements of income are as follows:
<TABLE>
<CAPTION>
1996
--------------
<S> <C>
Revenues .................................... $ 81,077
----------
Loss before pro forma income taxes .......... $ (674,703)
==========
</TABLE>
Revenues and loss generated by MovieTime prior to the date of acquisition
and included in the accompanying consolidated statements of income for the year
ended December 31, 1996 were $59,546 and ($449,161), respectively. Effective
April 30, 1997, the Company dissolved MovieTime and ceased its operations.
On December 31, 1996, the Company acquired all of the outstanding capital
stock of Space Agency, Inc. ("Space"), now known as Magicworks West, Inc. (see
Name changes section of Note 1), in exchange for 1,320,001 shares of the
Company's common stock. The acquisition has been accounted for using the
pooling of interests method of accounting. Accordingly, the consolidated
financial statements presented for periods prior to the acquisition date have
been restated to reflect the accounts of Space since inception. Revenues,
income and distributions to stockholders generated by Space since inception and
included in the accompanying consolidated statements of income are as follows:
<TABLE>
<CAPTION>
1996
--------------
<S> <C>
Revenues ...................................... $24,740,750
===========
Income before pro forma income taxes .......... $ 1,149,712
===========
Distributions to stockholders ................. $ 1,606,331
===========
</TABLE>
F-169
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A final S-Corporation distribution of $175,115 was made to the Space
stockholders during 1997.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Magicworks Entertainment Incorporated, all its subsidiaries and certain
partnerships involved in theatrical productions. All significant intercompany
balances and transactions have been eliminated.
The partnerships in theatrical productions include the Judas Company
("Judas") which was formed in 1992, Dolliko which was formed in 1994,
Impossible Touring Company ("Impossible"), Ain't Misbehavin' Company ("Ain't
Misbehavin") which commenced in 1995 and The Deathtrap Company ("Deathtrap")
which was formed in 1996. The tours of these theatrical productions came to an
end during the first half of 1997. Although the Company held less than a 51%
ownership interest in these partnerships, their results were consolidated as
the Company exercised control over the operating and financial policies of
these partnerships, both contractually and in practice, and such control was
not temporary.
The portion of these partnerships not owned by the Company are presented
as minority interests in the accompanying consolidated financial statements.
The amount of minority interest fluctuates depending on the timing of
performances and distributions. Income from operations from the partnerships
included in the accompanying consolidated statements of income was $80,543 and
$338,624 in 1997 and 1996, respectively.
For periods prior to July 29, 1996, the accompanying financial statements
present the combined results of Magic Promotion, Inc., Magic Promotions, Inc.,
Touring Artists Group, Inc., Performing Arts Management of North Miami, Inc.,
Diamond Bullet Merchandising, Inc., MovieTime Entertainment, Inc. and Space
Agency, Inc.
NAME CHANGES
The Company has effectuated corporate name changes for the following
subsidiaries:
<TABLE>
<CAPTION>
FORMER NAME NEW NAME
- ------------------------------------ ---------------------------------------------
<S> <C>
Magic Promotion, Inc. Magicworks Entertainment International, Inc.
Magic Promotions, Inc. Magicworks Theatricals, Inc. ("MTI")
Diamond Bullet Merchandising, Inc. Magicworks Merchandising, Inc. ("MMI")
MagicSpace, Inc. (1) Magicworks West, Inc. ("MWI")
Magic Concert Promotions, Inc. Magicworks Concerts, Inc. ("MCI")
</TABLE>
- ----------
(1) Space, which was acquired by the Company on December 31, 1996, was
subsequently merged into MagicSpace, Inc.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and investments in short-term
highly liquid financial instruments, primarily time deposits and money market
accounts, with original maturities of three months or less. Due to the short
maturity period of the cash equivalents, the carrying amount of these
instruments approximates their fair values. Included in cash and cash
equivalents are interest-bearing deposits of $3,752,423 and $3,886,969 at
December 31, 1997 and 1996, respectively.
INVENTORIES
Inventories are valued at the lower of cost, determined on a first-in
first-out basis, or net realizable value.
F-170
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PREPRODUCTION COSTS
Preproduction costs consist mainly of pre-opening advertising and
promotion, rehearsal salaries, set design and construction expenditures
incurred prior to the first performance of a consolidated theatrical
production. These costs are expensed over the terms of the respective shows,
which range from 12 to 24 months.
PREPAID SHOW EXPENSES
Prepaid show costs consist of all costs relating to promoting a show
including artist advances and advertising. These costs are expensed over the
term of the related show for a period not to exceed six months.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Assets are depreciated using the straight-line method over
the estimated useful lives of the assets, or the lease terms if shorter, as
follows:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements .......... Lease term
Furniture and equipment ......... 3 to 7 years
Vehicles ........................ 10 to 15 years
</TABLE>
Repairs of property and equipment and minor replacements and renewals are
charged to maintenance expense, which is included in general and administrative
expenses, as incurred.
INVESTMENTS IN PARTNERSHIPS
The Company has partnership interests, ranging from 1% to 20%, in various
theatrical productions. Because the Company does not exercise significant
influence over the operating and financial policies of these productions, these
investments are carried at cost, $1,069,716 and $397,331 at December 31, 1997
and 1996, respectively, and income is only recognized when received in the form
of distributions. The Company recognized no income from these partnerships in
1997 and 1996.
The Company has eleven joint venture interests ranging from 21% to 50%, in
various seasonal productions. Because the Company exercises influence over the
operating and financial policies of these productions, these investments are
accounted for under the equity method. The carrying value of such investments
was $3,204,257 and $521,233 at December 31, 1997 and 1996, respectively. The
Company recognized income from investments in partnerships of $1,097,599 and
$83,922 in 1997 and 1996, respectively.
Income recognized from investments in partnerships is classified as other
revenue in the consolidated statements of income.
DEFERRED COSTS
Deferred costs include pre-opening legal and professional fees incurred in
connection with the North Miami Performing Arts Center (The "Arts Center")
amounting to $373,532 which will be amortized over a maximum period of three
years once operations commence (see Note 9).
Additionally, deferred debt costs of approximately $836,000 were incurred
in connection with the private placement of debt (see Note 4), and are being
amortized over the 5-year term of the debt. Amortization of deferred debt costs
amounted to $166,039 and $68,566 in 1997 and 1996, respectively.
F-171
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Booking agreement (1) ........................ $ -- $ 341,595
Management operating agreements (2) .......... 300,000 466,962
Trademark (3) ................................ 200,000 --
---------- ----------
500,000 808,557
Less accumulated amortization ................ (100,833) (482,812)
---------- ----------
Intangible assets, net ....................... $ 399,167 $ 325,745
========== ==========
</TABLE>
- ----------
(1) The booking agreement resulted from the acquisition of the National
Artists Management Company, Inc. in 1992. The agreement was amortized
over a period of five years and was fully amortized at December 31, 1997.
(2) Management operating agreements consist of various agreements being
amortized over periods from five to thirty years. As of December 31, 1997
agreements amounting to $166,962 have been fully amortized and only one
agreement remains in effect, the management operating agreement relating
to the proposed Arts Center (see Note 9). That agreement is being
amortized over a thirty-year period, the term of the agreement which
began in 1993.
(3) The trademark was acquired when the Company entered into a limited
liability company agreement to form The Booking Group, LLC, and will be
amortized over a five-year period beginning in 1997.
Amortization expense incurred associated with intangible assets amounted
to $126,579 and $123,745 for 1997 and 1996, respectively.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company reviews long-lived assets and intangible
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be fully recoverable. If this review
indicates the asset will not be recoverable, as generally determined based on
estimated undiscounted cash flows over the remaining amortization period, the
carrying amount of the asset would be adjusted to fair value.
REVENUES
Revenues are recognized when earned, which is generally at the time of the
theatrical performance or entertainment event. Production revenues represent
the Company's share of performance revenues earned for events where the Company
functions as the event's producer. Producer activities include acquisition of
theatrical stage rights and all activities necessary to mount the production.
Such activities include, but are not limited to, engaging a director, set
construction, costume preparation, arrangements of lighting and sound
equipment, staging rehearsals and theater bookings. Cash received in advance of
a performance is reflected as advance ticket sales in the accompanying
consolidated balance sheets. Promotion revenues represent the Company's share
of performance operating results where the Company serves as promoter. The
promotion of an event involves the presentation of such event at particular
venues. The promoter is responsible for ticket sales, advertising and marketing
of the event. In certain cases, the Company may function as both the producer
and promoter of an event. With respect to the Company's share of production and
promotion receipts, when the Company holds an interest in a show of less than
51%, the Company records its share of the net profits, but does not record the
corresponding revenues or expenses.
F-172
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECEIVABLES
Receivables include amounts due from shows which the Company acts as the
promoter, advances to shows for start-up costs which will be repaid from profit
distributions, and amounts due from theaters for ticket sales. The Company
provides an allowance for losses on accounts receivable based on a monthly
review of the outstanding receivables and evaluation of their collectibility.
Changes in the allowance for losses on accounts receivable for the year ended
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance, beginning of the year ......... $ --
Provision for uncollectibles ........... 1,143,499
Write-offs ............................. (471,428)
---------
Balance, end of the year ............... $672,071
=========
</TABLE>
A substantial portion of the Company's revenues are derived from the
production and promotion of live entertainment acts and events throughout the
United States, Canada and South America. Changes in the entertainment
preferences of the general populations could affect the Company's future
revenues.
CONCENTRATIONS OF CREDIT RISK
The Company has no significant off balance sheet concentration of credit
risk. The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents.
INCOME TAXES
As a result of the Merger, the Company and its subsidiaries, previously
S-Corporations, became subject to U.S. corporate income tax. Prior to July 30,
1996, the stockholders included their proportionate share of the Company's
income in their respective tax returns.
The accompanying consolidated statements of income include pro forma
income taxes due for periods prior to the Merger as if the Company had been
subject to federal and state corporate income taxes, based on the tax laws in
effect during those periods and statutory rates applied to pre-tax accounting
income.
The Company follows the SFAS No. 109, "Accounting for Income Taxes," which
requires, among other things, recognition of future tax benefits measured at
enacted rates attributable to deductible temporary differences between
financial statement and income tax bases of assets and liabilities and to tax
net operating loss carryforwards to the extent that realization of said
benefits is more likely than not.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1997 and 1996, the carrying amount of cash and cash
equivalents, accounts and notes receivable and accounts payable approximates
fair value due to the short-term nature of these accounts.
NET INCOME AND PRO FORMA NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 simplifies the current
standards for computing earnings per share
F-173
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
("EPS") under Accounting Principles Board Opinion ("APB") 15, "Earnings per
Share," by replacing the existing calculation of primary EPS with a basic EPS
calculation. It requires a dual presentation, for complex capital structures,
of basic and diluted EPS on the face of the income statement and requires a
reconciliation of basic EPS factors to diluted EPS factors. The impact of
adopting SFAS 128 in 1997 was immaterial.
Basic net income and pro forma net income per common share is computed by
dividing net income or pro forma net income by the weighted average number of
common shares outstanding. Diluted net income and pro forma net income per
common share assumes the maximum dilutive effect from stock options and
warrants, and conversion of the Company's convertible notes (see Note 4). For
all periods presented, basic and diluted net income per share are the same.
The following is the reconciliation of the numerators and denominators of
the basic and dilutive earnings per share calculation:
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Weighted average number of common shares ......................... 24,398,546 22,907,463
Impact of dilutive warrants and options (1) ...................... 35,894 81,649
---------- ----------
Weighted average number of shares of common stock and common
stock equivalents for fully diluted earnings per share .......... 24,434,440 22,989,112
========== ==========
</TABLE>
- ----------
(1) Unsecured senior convertible notes are anti-dilutive.
STOCK-BASED COMPENSATION
In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation", which applies to transactions with non-employees, the Company
has recognized expense for stock options issued to consultants in fiscal 1996,
as more fully described in Note 10. The Company intends to continue applying
the provisions of APB 25, "Accounting for Stock Issued to Employees" for
transactions with employees, as permitted by SFAS 123.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 129, "Disclosures of
Information about Capital Structure" which is effective for fiscal years ending
after December 15, 1997. SFAS No. 129 requires disclosing information about an
entity's capital structure. The impact of adopting SFAS No. 129 in fiscal 1997
was immaterial.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which is required to be adopted in fiscal 1998. This statement
establishes standards to reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This
statement requires that an enterprise (a) classify items of other comprehensive
income by their nature in financial statements and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of statements of financial
position. Comprehensive income is defined as the change in equity during the
financial reporting period of a business enterprise resulting from non-owner
sources. The Company currently does not have other comprehensive income and
therefore does not believe the adoption of SFAS No. 130 will have a significant
impact on its financial statement presentation.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is required to be adopted in
fiscal 1998. This statement requires that a public business enterprise report
financial and descriptive information about its reportable operating segments
F-174
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
including, among other things, a measure of segment profit or loss, certain
specific revenue and expense items, and segment assets. The Company currently
has one reporting segment and therefore does not believe the adoption of SFAS
No. 131 will have a significant impact on its financial statement presentation.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the current fiscal year's presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Leasehold improvements ............... $ 134,100 $ 121,001
Furniture and equipment .............. 665,534 617,823
Vehicles ............................. 1,834,200 2,085,022
---------- ----------
2,633,834 2,823,846
---------- ----------
Less accumulated depreciation and
amortization ........................ (535,049) (747,536)
---------- ----------
Property and equipment, net .......... $2,098,785 $2,076,310
========== ==========
</TABLE>
3. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -------------
<S> <C> <C>
Payroll-related accruals .......... $130,249 $ 190,495
Accrued royalties ................. -- 574,103
Accrued show expenses ............. 240,582 --
Other ............................. 172,635 278,955
-------- ----------
$543,466 $1,043,553
======== ==========
</TABLE>
4. PRIVATE PLACEMENT
On July 29, 1996, the Company issued and sold 400.06 Units for which it
received net proceeds of $8,782,832. On September 27, 1996, the Company sold an
additional 14.8 Units pursuant to the private placement for which it received
additional net proceeds of $333,000. Each unit consists of an unsecured senior
convertible note (the "Notes") in the principal amount of $12,500 bearing
interest at a rate of 10% per annum, and 5,000 shares of common stock. The
value attributable to the common shares was $2.50 per share. As a placement
fee, the placement agent received 488,820 shares of the Company's common stock.
The Notes require interest payments semi-annually on June 30 and December
31. The Notes contain mandatory sinking fund requirements which are calculated
to retire 75% of the face amount of the Notes after payment of seven
consecutive equal quarterly contributions, the first such contribution to occur
on October 1, 1999 and every ninety days thereafter.
The principal amount and accrued and unpaid interest on each Note is
convertible (in whole but not in part), at any time prior to July 30, 2001, at
a conversion price of $3.50 per share (subject to adjustment in certain
circumstances). The Notes may be prepaid by the Company at its option, at the
principal amount plus accrued but unpaid interest.
In addition to the placement fee described above, the Company issued the
placement agent 500,000 warrants at an exercise price of $3.00 per share,
(subject to adjustment in certain circumstances), and has
F-175
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
authorized up to 1,481,643 redeemable warrants that may be issued in connection
with the prepayment of the Notes in certain circumstances at $3.50 per share.
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Various notes payable with interest ranging from 9.75% to
10.9%, principal due monthly through February 2004,
collateralized by vehicles. ................................... $1,160,970 $1,276,348
Convertible notes (see Note 4) ................................. 5,185,750 5,185,750
Capital lease obligation payable in monthly installments through
September 1997 including interest imputed at a rate of 10%,
collateralized by a vehicle. .................................. -- 18,350
---------- ----------
6,346,720 6,480,448
Less current portion ........................................... (299,557) (302,956)
---------- ----------
$6,047,163 $6,177,492
========== ==========
</TABLE>
Scheduled maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 ................... $ 299,557
1999 ................... 869,330
2000 ................... 2,480,791
2001 ................... 2,511,529
2002 ................... 185,513
----------
$6,346,720
==========
</TABLE>
The Company has a committed line of credit agreement expiring in May 1998
with a bank that provides for short-term borrowings of up to $5.0 million by
the Company. Borrowings under this agreement bear interest at the London
Interbank Offered Rate (LIBOR) plus 250 basis points. This agreement is
collateralized by substantially all the Company's assets. At December 31, 1997,
the full amount of the line of credit was available for borrowing.
6. EMPLOYEE BENEFIT PLANS
Effective January 1, 1988, the Company initiated a Money Purchase Plan and
Trust (the "Plan") for all full-time employees of MTI who have completed one
year of service and are at least 21 years of age. The Company contributes an
amount not to exceed 10% of the participating employee's compensation or
$16,000. In addition, the Plan permits the Company to make additional
discretionary contributions to the Plan. Total contributions to the Plan were
$85,000 and $55,792 in 1997 and 1996, respectively. Employees vest in the
Company's discretionary contributions at the rate of 20% per year upon
completion of two years of service.
MWI has a qualified profit sharing plan for the employees. Contributions
to the plan are determined by the Board of Directors each year, and are limited
to an amount not to exceed 15% of eligible compensation paid to participants
for the year. Employees are eligible to participate in the plan after one year
if they are over 21 and work at least 1,000 hours each year. MWI made
contributions to the plan of $23,500 and $59,222 in 1997 and 1996,
respectively.
Effective fiscal 1998, the Company plans to adopt a resolution to submit a
proposal to the Internal Revenue Service ("IRS") to freeze, distribute and
terminate both of the aforementioned plans, with the
F-176
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assets not to be distributed until a final determination letter is received by
the IRS. Through a professional employer organization, effective January 1998,
the Company has implemented a 401(k) Profit Sharing Plan and Trust, (the
"401(k) Plan"). With the exception of individuals employed by the Company as of
the initial plan year effective date, who will be immediately eligible to
participate in the plan, employees will become eligible to participate after
completing one year of service provided the employee is over the age 21.
Participants may elect to contribute from 1% to 15% of their annual
compensation into the 401(k) Plan. The Company will make matching contributions
in an amount equal to 25% of the participant's contribution. Participants shall
become vested in the employer contribution portion of their account as follows:
<TABLE>
<CAPTION>
YEARS OF VESTING SERVICE VESTING %
- -------------------------------- ----------
<S> <C>
1 ............................ 0%
2 ............................ 20%
3 ............................ 40%
4 ............................ 60%
5 ............................ 80%
6 or more .................... 100%
</TABLE>
The 401(k) Plan will be administered by, and offer the funds and
investment options of, a national asset management company.
7. RELATED PARTY TRANSACTIONS
In the normal course of its business, the Company conducts business with
certain stockholders and their respective affiliates. In the opinion of
management, the transactions with related parties are equivalent to terms from
unrelated parties.
Fees paid by the Company for accounting, general management, office and
other administrative services to entities controlled by certain principal
stockholders were $0 and $25,750 in 1997 and 1996, respectively, and are
reflected in general and administrative expenses in the accompanying
consolidated statements of income for the applicable periods.
The Company entered into three non-cancelable operating leases for office
space with related entities. As of December 31, 1997, one of the above
mentioned non-cancelable operating leases has expired and the Company continues
to occupy the premises on a month to month rental basis. The Company is
required to pay taxes, maintenance, insurance and utility costs. Payments under
these leases and rental arrangements totaled $106,832 and $80,504 in 1997 and
1996, respectively. See Note 9 for a summary of future minimum commitments
under the non-cancelable operating leases.
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------- -----------
<S> <C> <C>
Current .................. $1,378,686 $185,822
Deferred ................. (631,362) 411,394
---------- --------
$ 747,324 $597,216
========== ========
Federal .................. $ 653,436 $514,028
State .................... 93,888 83,188
---------- --------
$ 747,324 $597,216
========== ========
</TABLE>
Prior to July 29, 1996, the stockholders included their proportionate
share of the Company's income in their respective tax returns. Pro forma income
taxes represent the estimated tax provision, at 39%, which would have been
recorded had the Company been a taxable entity in 1996.
F-177
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the difference between the expected provision for
income taxes using the statutory federal tax rate and the Company's actual
provision is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ---------------
<S> <C> <C>
Provision using statutory rate of 34% ................... $633,870 $ 1,071,424
State income taxes ...................................... 61,522 50,745
Income earned in period prior to July 29, 1996 .......... -- (1,161,758)
Deferred income taxes recorded at July 29,
1996 ................................................... -- 548,525
Other ................................................... 51,932 88,280
-------- ------------
$747,324 $ 597,216
======== ============
</TABLE>
Deferred taxes are due to timing differences in reporting of certain
income and expense items for book purposes and income tax purposes. Deferred
taxes at December 31, 1996 consist primarily of the impact, prior to July 29,
1996, of the Company reporting its income on a cash basis.
9. COMMITMENTS AND CONTINGENCIES
LITIGATION
An arbitration proceeding had been instituted by MMI, a subsidiary of the
Company, against Robert L. Ferman ("Ferman"), a former financial advisor to
certain of the Company's predecessors. MMI's claim had been for rescission,
fraud and breach of fiduciary duty in connection with a consulting agreement
under which MMI agreed to pay Ferman a monthly retainer fee of $2,500 and an
equity position in MMI in the event that Ferman was successful in locating an
acceptable underwriter for a proposed initial public offering of the securities
of the Company or its affiliates. In March 1997, the Company and Ferman settled
the proceeding. Pursuant to a settlement agreement, the Company agreed to sell
to Ferman 500,000 shares of Common Stock (the "Settlement Shares") valued at
the market price as of the date of the Settlement Agreement in exchange for a
non-recourse promissory note (the "Note") in payment for the Settlement Shares.
The Settlement Shares will be held in escrow as security for the Note by the
Company pending payment of the Note. The parties have not yet signed a
settlement agreement and are in the process of revising the definitive
agreement for execution and expect the matter to be resolved in the near
future.
In October 1994, a former independent contractor filed a complaint against
the partnership that produced "Jesus Christ Superstar" in the Common Pleas
Court of Philadelphia County seeking consequential damages of $5,000,000
arising from the termination of an employment contract by such partnership. A
trial date has been set for June 1, 1998. Management believes, based on the
advice of counsel, that the lawsuit is without merit, and that the outcome of
this suit will not have a material adverse effect on its financial condition or
results of operations.
Performing Arts Management of North Miami, Inc., a wholly-owned subsidiary
of the Company ("PAM"), commenced an action against the City of North Miami
(the "City") for failure to perform under the operating management agreement
between PAM and the City relating to PAM's management of the Arts Center (see
Note 1). The City filed a counterclaim alleging that the Company had breached
the management contract. The dispute stems from the City's inability to deliver
a permit to the Company to build the Arts Center as required under the
operating agreement and the City's assertion that PAM breached the agreement by
failing to make certain payments alleged to be required thereunder. The trial
has been set to take place sometime within the two-week period beginning March
23, 1998. The Company intends to pursue its suit vigorously and to defend
itself against the City's counterclaim. The Company has incurred expenditures
related to its PAM contract totaling $673,532 at December 31, 1997, which have
F-178
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
been capitalized and are included in deferred costs and intangible assets in
the accompanying consolidated balance sheets. Management believes, based on the
advice of counsel, that the City's counterclaim is without merit, and that the
outcome of this suit will not have a material adverse effect on its financial
condition or results of operations.
In July 1997, Spinnaker III filed suit against MCI, U.S. Tobacco and Club
LaVela, alleging (among other things not related to Magic) that Magic breached
its contract with Spinnaker to host the ROAR Tour performance. The case is in
the discovery phase with no trial date yet set. Management believes, based on
the advice of counsel, that Spinnaker's claims are without merit, and that the
outcome of this suit will not have a material adverse effect on its financial
condition or results of operations.
MANAGEMENT AGREEMENTS
The Company entered into management agreements with Niko Associates
("Niko") to manage the daily general operations during the entire periods of
production of Dolliko, Judas and Impossible. Management fees are calculated
based on fixed weekly fees ranging from $2,000 to $5,000 per performance week
plus reimbursement of certain overhead related costs. Management fees paid by
the Company to Niko amounted to $405,000 and $635,000 in 1997 and 1996,
respectively, and are reflected in production expenses in the accompanying
consolidated statements of income.
OPERATING LEASES
The Company leases office space from affiliated (see Note 7) and
unaffiliated entities under operating lease agreements that extend through June
2001. The following is a schedule of approximate future minimum lease payments
required under such non-cancelable operating leases at December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AFFILIATED UNAFFILIATED TOTAL
- ------------------------- ------------ -------------- -----------
<S> <C> <C> <C>
1998 .................... $ 77,800 $ 58,300 $136,100
1999 .................... 80,200 67,450 147,650
2000 .................... 82,600 5,650 88,250
2001 .................... 28,000 -- 28,000
-------- -------- --------
$268,600 $131,400 $400,000
======== ======== ========
</TABLE>
The Company also has month-to-month leases with affiliated (see Note 7)
and unaffiliated entities. Rent expense amounted to $200,023 and $161,140, for
the years ended December 31, 1997 and 1996, respectively, and is included in
general and administrative expenses in the accompanying consolidated statements
of income.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with key personnel that
require future minimum payments as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -------------------------
<S> <C>
1998 .................. $1,631,000
1999 .................. 1,484,583
2000 .................. 1,191,250
2001 .................. 700,000
----------
$5,006,833
==========
</TABLE>
10. STOCK OPTIONS
At the discretion of management, the Company may grant options to purchase
the Company's stock to employees, directors, consultants, and other unrelated
parties. The Company granted options to
F-179
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
purchase an aggregate of 637,750 and 216,500 shares in 1997 and 1996,
respectively as follows:
<TABLE>
<CAPTION>
EXERCISE
OPTIONS PRICE
--------- --------------
<S> <C> <C>
Balance at December 31, 1995 ......... --
Grants .............................. 216,500 $2.50 - $3.50
Exercises ........................... --
Canceled ............................ --
-------
Balance at December 31, 1996 ......... 216,500 $2.50 - $3.50
Grants .............................. 637,750 $1.75 - $3.56
Exercises ........................... --
Canceled ............................ --
-------
Balance at December 31, 1997 ......... 854,250 $1.75 - $3.56
=======
</TABLE>
Options exercisable December 31, 1997 and 1996 were 259,250 and 166,500,
respectively.
The Company applies APB 25 and its related interpretations in accounting
for options granted to employees. Accordingly, no compensation cost has been
recognized related to such grants. Had compensation cost for the Company's
stock options been based on fair value at the grant dates for awards granted,
consistent with the provisions of SFAS 123, the Company's 1997 net income and
net income per share, and the 1996 pro forma net income and pro forma income
per share would have been reduced to the amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net income and pro forma net income ..........
As reported .................................. $1,116,999 $1,404,005
Pro forma for the impact of SFAS 123 ......... $1,011,728 $1,384,146
Net income per share and pro forma income per
share, basic and diluted
As reported .................................. $ .05 $ .06
Pro forma for the impact of SFAS 123 ......... $ .04 $ .06
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
expected volatility of 25.0%, risk-free interest rate of 6.5%, expected
dividends of $0 and expected terms of 3 years.
In 1996, the Company recorded expense of $94,000 related to 200,000 stock
options granted to non-employees of the Company. In determining the expense to
be recorded, the Company applied the Black-Scholes model using the same
assumptions described above.
11. SUBSEQUENT EVENTS
On September 11, 1998 the Company was acquired by SFX Entertainment Inc.
F-180
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- -------------
(UNAUDITED) (NOTE 1)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ................................................... $ 4,500 $ 8,944
Cash escrow ................................................................. 746 704
Accounts receivable, net .................................................... 14,791 6,930
Prepaid production costs .................................................... 1,193 553
Prepaid expenses and other current assets ................................... 595 436
-------- --------
Total current assets ...................................................... 21,825 17,567
Property and equipment, net .................................................. 2,895 2,040
Receivables--non current ..................................................... 1,365 668
Notes receivable ............................................................. 2,135 1,887
Deposits and deferred expenses ............................................... 2,314 677
Intangible assets--net ....................................................... 59,648 23,951
-------- --------
$ 90,182 $ 46,790
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses ....................................... $ 8,728 $ 4,592
Acquisition indebtedness--current portion ................................... 1,515 775
Escrow payable .............................................................. 685 527
Deferred revenues ........................................................... 523 626
-------- --------
Total current liabilities ................................................. 11,451 6,520
Notes payable--bank .......................................................... 33,140
Acquisition indebtedness--non-current ........................................ 3,777 2,144
Deferred rent ................................................................ 651 696
Deferred income taxes ........................................................ 964 960
Common stock (545 shares) subject to put options ............................. 3,420 3,184
Stockholders' equity
Preferred stock, $.01 par value; 5,000 shares authorized, no shares issued
Common stock, $.01 par value; 25,000 shares authorized, 18,086
(September 30, 1998) and 17,913 (December 31, 1997) shares issued
and outstanding ........................................................... 175 174
Additional paid-in capital .................................................. 39,593 36,885
Accumulated deficit ......................................................... (3,003) (3,781)
Cumulative translation adjustment ........................................... 14 8
-------- --------
Total stockholders' equity ................................................ 36,779 33,286
-------- --------
$ 90,182 $ 46,790
======== ========
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1997 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
F-181
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues ............................................ $14,199 $5,817 $35,470 $ 11,991
Operating expenses .................................. 8,739 3,716 23,726 7,664
General and administrative expenses ................. 2,865 1,500 8,239 4,502
Non cash compensation ............................... (157) 81 367 165
Depreciation and amortization ....................... 660 72 1,463 91
------- ------ ------- --------
Income/(loss) from operations ....................... 2,092 448 1,675 (431)
Interest expense, net ............................... 227 222 120 224
Financing expense ................................... -- 756 -- 756
------- ------ ------- --------
Income/(loss) before income taxes ................... 1,865 (530) 1,555 (1,411)
Income taxes ........................................ 423 77 541 77
------- ------ ------- --------
Net income/(loss) ................................... 1,442 (607) 1,014 (1,448)
Accretion of obligation related to the put option
issued in connection with the ProServ
acquisition ........................................ 79 -- 236 --
------- ------ ------- --------
Net income/(loss) applicable to common
stockholders ....................................... $ 1,363 $ (607) $ 778 $ (1,488)
======= ====== ======= ========
Net income/(loss) per share--basic and dilutive ..... $ .08 $ (.08) $ .05 $ (.20)
======= ====== ======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-182
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES .................................. $ (3,547) $ (2,184)
INVESTING ACTIVITIES
Recent Acquisitions, net of cash acquired ............................. (30,736) --
Purchase of equipment and leasehold improvements, net of landlord
contribution ........................................................ (702) (1,240)
Employee loan ......................................................... -- (424)
Deposits and deferred expenses ........................................ (970) (2,200)
Increase in other assets .............................................. (568)
--------
Net cash used in investing activities ............................... (32,408) (4,432)
--------- --------
FINANCING ACTIVITIES
Proceeds under Credit Agreement ....................................... 33,140 --
Proceeds from Bridge Financing ........................................ -- 10,500
Costs related to stock offerings ...................................... (187) (131)
Costs related to Credit Agreement ..................................... (667) --
Costs related to Tender Offer ......................................... -- (9,580)
Payment of acquisition indebtedness ................................... (775) (500)
--------- --------
Net cash provided by financing activities ........................... 31,511 289
--------- --------
NET DECREASE/INCREASE IN CASH .......................................... (4,444) (6,327)
CASH AT BEGINNING OF PERIOD ............................................ 8,944 7,231
--------- --------
CASH AT END OF PERIOD .................................................. $ 4,500 $ 904
========= ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
Issuance of common stock to an employee ............................... $ 100 --
========= ========
In connection with Recent Acquisitions
Issuance of common stock ............................................ $ 2,616 --
========= ========
Notes payable ....................................................... $ 2,594 --
========= ========
Obligation to issue common stock in future .......................... $ 416 --
========= ========
Note received in connection with sale of an interest in an associated
company ............................................................... $ 300 --
========= ========
Issuance of options to purchase 105 shares of Common stock in connection
with Bridge Financing for the Tender Offer ............................ $ 394
========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-183
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE TOTAL
NUMBER OF COMMON PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES STOCK CAPITAL DEFICIT ADJUSTMENT EQUITY
----------- ---------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance--December 31, 1997 ..... 17,913 $174 $36,885 $ (3,781) 8 $33,286
Issuance of common stock:
In connection with
acquisitions ................ 549 5 2,611 2,616
To an employee ................ 16 100 100
Cancellation of IPO Escrow
Shares ........................ (392) (4) 4 --
QBQ Escrow Shares .............. 180 180
Secondary Offering costs ....... (187) (187)
Foreign currency translation
adjustment .................... 6 6
Net income for period .......... 778 778
-------- -------
Balance--September 30, 1998
(unaudited) ................... 18,086 $175 $39,593 $ (3,003) $14 $36,779
====== ===== ======= ======== === =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-184
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- MERGER WITH SFX ENTERTAINMENT
On July 23, 1998, The Marquee Group, Inc. (the "Company") entered into an
Agreement and Plan of Merger, as amended (the "Merger Agreement"), with SFX
Entertainment, Inc. ("Parent") and SFX Acquisition Corp., a wholly-owned
subsidiary of Parent ("Sub"), pursuant to which Sub will merge with and into
the Company (the "Merger") and the Company will continue as the surviving
corporation of the Merger. Pursuant to the Merger Agreement, upon the
consummation of the Merger, each outstanding share of common stock, $.01 par
value, of the Company will be converted into the right to receive from Parent
0.1111 shares of Class A Common Stock, $.01 par value, of Parent (the "SFX
Class A Common Stock")(the "Exchange Ratio"). If the SFX Class A Common Stock
Price (as defined below) is greater than $42.75, then the Exchange Ratio shall
be the quotient obtained by dividing $4.75 by the SFX Class A Common Stock
Price. The term "SFX Class A Common Stock Price" means the average of the last
reported sale price for the fifteen consecutive trading days ending on the
fifth trading day prior to the effective time of the Merger on the primary
exchange on which the SFX Class A Common Stock is traded (the NASDAQ National
Market).
Additionally, the Merger Agreement places certain restrictions on the
conduct of business by the Company, including a restriction on the incurrence
of indebtedness and the making of capital expenditures.
The consummation of the Merger is subject to the satisfaction of a number
of conditions set forth in the Merger Agreement, including approval by the
Company's stockholders. Certain of these conditions have been satisfied as of
November 12, 1998, including the expiration of the applicable waiting period
for the merger under the Hart-Scott-Rodino Antitrust Improvement Act of 1976,
as amended. The Merger is expected to be consummated in the first quarter of
1999.
NOTE 2 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Item 310(b) of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for an interim period
are not necessarily indicative of the results that may be expected for a full
year. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1997.
The Company was formed in July 1995 for the purpose of providing
integrated event management, television programming and production, marketing,
talent representation and consulting services in the sports, news and
entertainment industries. In furtherance of its business strategy, the Company
acquired by merger on December 12, 1996, concurrently with the closing of its
initial public offering ("IPO"), Sports Marketing & Television International,
Inc. ("SMTI"), which provides production and marketing services to sporting
events, sports television shows, and professional and collegiate leagues and
organizations, and Athletes and Artists, Inc. ("A&A"), a sports and media
representation firm. The acquisitions of SMTI and A&A are referred to as the
"1996 Acquisitions". In October 1997, the Company acquired ProServ, Inc. and
ProServ Television, Inc. (collectively, "ProServ") (the "ProServ Acquisition")
and QBQ Entertainment, Inc. ("QBQ") (the "QBQ Acquisition") (collectively, the
"1997 Acquisitions"). The Company also completed the secondary offering (the
"Second Offering") of 8,500,000 shares of its common stock at $5.00 per share
in the fourth quarter of 1997. In August and September 1998, the Company
acquired Alphabet City Industries, Inc. and Alphabet City Sports Records, Inc.,
Cambridge Holding Corporation, Park Associates Limited, Tony Stephens
Associates Limited, and Tollin/Robbins
F-185
<PAGE>
Productions (collectively, the "Recent Acquisitions"). Accordingly, the
accompanying condensed consolidated financial statements include the accounts
of the Company, the 1997 Acquisitions and the Recent Acquisitions from their
respective dates of acquisition. All significant intercompany transactions and
accounts have been eliminated.
NOTE 3 -- EARNINGS PER COMMON SHARE
Basic earnings per share applicable to common stockholders is based upon
the net loss after reduction of amounts, if any, for accretion of the
obligation related to the put option issued in connection with the ProServ
Acquisition divided by the weighted average number of shares of common stock
outstanding during the year. Shares of common stock placed in escrow upon
completion of the Company's initial public offering have been excluded from the
calculation of basic earnings per share. The Company's outstanding options,
warrants and contingently issuable shares are not included for diluted earnings
per share because the effect would be anti-dilutive for 1997. The following
table sets forth the computation of the adjusted weighted average number of
common stock outstanding:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- ------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Denominator for basic earnings per share--weighted
average shares .............................................. 16,859 16,660
Effect of dilutive securities--Employee stock options ......... 177 141
------ ------
Denominator for dilutive earnings per share--adjusted
weighted average shares ..................................... 17,036 16,801
====== ======
</TABLE>
NOTE 4 -- NON-CASH COMPENSATION CHARGE
In connection with the acquisition of QBQ in October 1997, the Company
placed in escrow 78,702 shares of its common stock issued to the seller as a
portion of the purchase price. As of March 31, 1998, the Company has determined
that it is probable that the financial thresholds required to be met for the
release of these escrowed shares will be achieved in 1998, and, accordingly has
recorded a charge of $180,000 for the nine months ended September 30, 1998 as
non-cash compensation in the accompanying condensed consolidated statements of
operations. This compensation charge will be adjusted based upon the changes in
the fair market value of the shares subject to the escrow arrangement through
the actual release date.
NOTE 5 -- BANK CREDIT AGREEMENT
On July 31, 1998, the Company and its subsidiaries entered into a Credit
Agreement, as amended, (the "Credit Agreement") with BankBoston, NA, which
provides for a revolving line of credit for loans and letters of credit
(subject to a $2 million sublimit) of up to $35 million in the aggregate. The
revolving credit facility under the Credit Agreement may be used to finance
acquisitions and to fund working capital needs. Loans under the Credit
Agreement bear interest at a floating rate equal to a base rate which
approximates prime plus an applicable margin, or a Eurocurrency rate plus an
applicable margin. The applicable margin is dependent on the Company achieving
certain leverage ratios. In August and September 1998, the Company borrowed a
total of approximately $33.1 million under the revolving credit facility in
connection with the Recent Acquisitions, with the interest rate associated with
such borrowings of approximately 8.3% for domestic borrowings and 10.5% for
British \P borrowings (at September 30, 1998). The obligations of the Company
under the Credit Agreement are secured by a first priority security interest in
all existing and future acquired property of the Company, including the capital
stock of its subsidiaries. The Company's obligations under the Credit Agreement
are also guaranteed by the Company's present and future subsidiaries and
secured by a first priority security interest in all existing and future
property of these subsidiaries. The Credit Agreement also contains financial
leverage and coverage ratios, which may inhibit the Company's ability to incur
other indebtedness, and restrictions on capital expenditures, distributions and
other payments. However, the Company will be permitted to incur
F-186
<PAGE>
additional indebtedness outside of the Credit Agreement to acquire businesses
secured solely by the assets of such acquired businesses, as long as the
Company is in compliance with the financial covenants of the Credit Agreement
exclusive of such indebtedness and the related borrowing base applicable to the
businesses acquired. The term of the Credit Agreement is three years with
borrowing availability reduced periodically commencing January 1, 2000. See
"Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for additional
information.
NOTE 6 -- RECENT ACQUISITIONS
On August 3, 1998, the Company consummated its acquisition of
substantially all of the assets of Alphabet City Industries, Inc. and all of
the outstanding stock of Alphabet City Sports Records, Inc., both of which are
sports and music marketing companies which develop strategic alliances among
sports leagues, music companies and corporate sponsors (collectively, the
"Alphabet City Acquisition"). The aggregate purchase price for the Alphabet
City Acquisition was approximately $3.4 million in cash (excluding assumed
liabilities) and 200,000 shares of the Company's common stock. In addition, the
Company may be obligated to make significant additional payments (up to $9
million) based upon the financial performance of the acquired businesses.
On August 6, 1998, the Company consummated its acquisition of all of the
outstanding stock of Cambridge Holding Corporation ("Cambridge"), a golf
representation company, whose client roster includes a mix of established PGA
Tour winners and many prospects on the Nike Tour (the "Cambridge Acquisition").
The aggregate purchase price for Cambridge was approximately $3.5 million in
cash and 89,536 shares of the Company's common stock. In addition, the Company
may be obligated to make additional payments aggregating approximately $2.0
million based upon the future financial performance of Cambridge.
On August 13, 1998, the Company acquired Park Associates Limited ("PAL"),
a sports and media talent representation firm in the United Kingdom. (the "PAL
Acquisition"). The initial consideration for the PAL Acquisition was
approximately \P1.6 million (approximately $2.6 million) in cash and 117,440
shares of the Company's common stock. In addition, the Company will pay an
additional \P800,000 (approximately $1.3 million) in cash and \P200,000
(approximately $330,000) in common stock (based on the closing price of such
stock as reported in The Wall Street Journal during the twenty days prior to
the date of each payment) in five equal annual installments.
On September 2, 1998, the Company consummated its acquisition of Tony
Stephens Associates Limited ("TSA"), a major soccer talent representation firm
in the United Kingdom (the "TSA Acquisition"). The initial consideration for
the TSA Acquisition was approximately \P1.8 million (approximately $3.0
million), of which \P1.4 million (approximately $2.5 million) was paid in cash
and 142,291 shares of the Company's common stock were issued. In addition, the
Company will pay an additional \P200,000 (approximately $330,000) in cash and
\P50,000 (approximately $83,000) in the form of shares of the Company's common
stock.
On September 18, 1998, the Company consummated its acquisition of all the
issued and outstanding equity interests in Halcyon Days, Productions, Inc.,
Robbins Entertainment Group, Inc. and Tollin/ Robbins Management, LLC
(collectively, "Tollin/Robbins") (the "Tollin/Robbins Acquisition"). Tollin/
Robbins is an award-winning independent film and television production company.
The initial consideration for the Tollin/Robbins Acquisition was $20.5 million
in cash. In addition, the two sellers will each receive $800,000 in cash,
payable in four equal annual installments beginning September 1, 1999 and will
receive additional consideration based on the EBITDA (as defined in the
acquisition agreement) of the acquired entities through 2003, payable in shares
of the Company's common stock and cash.
The funds used to consummate each of the Recent Acquisitions were
principally obtained from borrowings under the Credit Agreement.
F-187
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of
The Marquee Group, Inc.
We have audited the accompanying consolidated balance sheet of The Marquee
Group, Inc. and Subsidiaries (the "Company") as of December 31, 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the two years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly in
all material respects, the consolidated financial position of the Company at
December 31, 1997, and the consolidated results of its operations and its cash
flows for the two years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
New York, New York
March 5, 1998
F-188
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 8,944
Cash escrow .............................................................. 704
Accounts receivable -- net ............................................... 6,930
Television and event costs ............................................... 553
Prepaid expenses and other current assets ................................ 436
--------
Total current assets .................................................. 17,567
Property and equipment, net ............................................... 2,040
Noncurrent receivables .................................................... 668
Notes receivable .......................................................... 1,887
Deposits .................................................................. 677
Intangible assets -- net .................................................. 23,951
--------
$ 46,790
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ................................. $ 4,592
Acquisition indebtedness -- current portion .............................. 775
Escrow payable ........................................................... 527
Deferred revenues ........................................................ 626
--------
Total current liabilities ............................................. 6,520
Acquisition indebtedness -- non-current ................................... 2,144
Deferred rent ............................................................. 696
Deferred income taxes ..................................................... 960
Common stock (545 shares) subject to put options .......................... 3,184
Stockholders' equity
Preferred stock, $.01 par value, 5,000 shares authorized, no shares issued
Common stock, $.01 par value; 25,000 shares authorized, 8,769 and
17,913 shares issued and outstanding ................................... 174
Additional paid-in capital ............................................... 36,885
Accumulated deficit ...................................................... (3,781)
Cumulative translation adjustment ........................................ 8
--------
Total stockholders' equity ............................................ 33,286
--------
$ 46,790
========
</TABLE>
See accompanying notes.
F-189
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
Revenues .................................................................. $ 21,268 $ 2,869
Operating expenses ........................................................ 14,459 2,563
General and administrative expenses ....................................... 6,316 2,199
Deferred compensation ..................................................... 145 56
Depreciation and amortization ............................................. 371 5
-------- --------
Loss from operations ...................................................... (23) (1,954)
Interest expense, net ..................................................... 22 283
Loss on abandonment of lease .............................................. 466 --
Financing expense ......................................................... 756 193
-------- --------
Loss before income taxes .................................................. (1,267) (2,430)
Income tax benefit (provision) ............................................ (45) 20
-------- --------
Net loss .................................................................. (1,312) (2,410)
Accretion of obligation related to the put option issued in connection with
the ProServ acquisition .................................................. 59 --
-------- --------
Net loss applicable to common stockholders ................................ $ (1,371) $ (2,410)
======== ========
Net loss per share applicable to common stockholders-basic and dilutive ... $ (0.15) $ (1.03)
======== ========
Weighted number of shares outstanding ..................................... 9,377 2,347
======== ========
</TABLE>
See accompanying notes.
F-190
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF COMMON ADDITIONAL
SHARES STOCK PAID-IN CAPITAL
----------- -------- -----------------
<S> <C> <C> <C>
Balance -- December 31, 1995 .......... 1,938 $ 19 $ --
Issuance of common stock:
Issuance to employee ................. 50 -- 119
Conversion of Debentures ............. 667 7 1,993
Initial public offering, net of
offering costs ..................... 3,852 39 15,547
Acquisitions ......................... 2,262 23 1,488
Distribution to acquired companies'
former stockholders .................. -- -- (10,970)
"S" Corporation dividend .............. -- -- (382)
Amortization of deferred
compensation ......................... -- -- --
Net loss for the year ended
December 31, 1996 .................... -- -- --
----- ---- ----------
Balance -- December 31, 1996 .......... 8,769 88 7,795
Initial public offering costs ......... -- -- (131)
Issuance of common stock:
Second offering, net of offering
costs .............................. 8,500 85 38,470
Acquisitions ......................... 644 1 624
Tender Offer .......................... -- -- (10,280)
Issuance of options:
In connection with financing of
Tender Offer ....................... -- -- 394
In connection with acquisitions ...... -- -- 13
Amortization of deferred
compensation ......................... -- -- --
Foreign currency translation
adjustment ........................... -- -- --
Net loss for the year ended
December 31, 1997 .................... -- -- --
----- ---- ----------
17,913 $174 $ 36,885
====== ==== ==========
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE
DEFERRED ACCUMULATED TRANSLATION
COMPENSATION DEFICIT ADJUSTMENT TOTAL
-------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance -- December 31, 1995 .......... $ -- $ -- -- $ 19
Issuance of common stock:
Issuance to employee ................. (119) -- -- --
Conversion of Debentures ............. -- -- -- 2,000
Initial public offering, net of
offering costs ..................... -- -- -- 15,586
Acquisitions ......................... -- -- -- 1,511
Distribution to acquired companies'
former stockholders .................. -- -- -- (10,970)
"S" Corporation dividend .............. -- -- -- (382)
Amortization of deferred
compensation ......................... 56 -- -- 56
Net loss for the year ended
December 31, 1996 .................... -- (2,410) -- (2,410)
------- -------- -- ----------
Balance -- December 31, 1996 .......... (63) (2,410) -- 5,410
Initial public offering costs ......... -- -- -- (131)
Issuance of common stock:
Second offering, net of offering
costs .............................. -- -- -- 38,555
Acquisitions ......................... -- -- -- 625
Tender Offer .......................... -- -- -- (10,280)
Issuance of options:
In connection with financing of
Tender Offer ....................... -- -- -- 394
In connection with acquisitions ...... -- -- -- 13
Amortization of deferred
compensation ......................... 63 -- -- 63
Foreign currency translation
adjustment ........................... -- -- 8 8
Net loss for the year ended
December 31, 1997 .................... -- (1,371) -- (1,371)
------- -------- -- ----------
$ -- $ (3,781) $ 8 $ 33,286
======= ======== === ==========
</TABLE>
See accompanying notes.
F-191
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Operating activities
Net loss ......................................................................... $ (1,371) $ (2,410)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................... 385 5
Deferred compensation ........................................................... 145 56
Deferred income taxes ........................................................... -- (40)
Noncash financing expense ....................................................... 394 --
Accretion of put option and imputed interest .................................... 189 --
Loss on abandonment of lease .................................................... 335 --
Changes in operating assets and liabilities:
Cash escrow ................................................................... (461) --
Accounts receivable ........................................................... (2,297) 906
Television and event costs .................................................... (553) --
Prepaid expenses .............................................................. 100 (178)
Accounts payable and accrued liabilities ...................................... (1,551) (173)
Escrow payable ................................................................ 323 --
Deferred revenues ............................................................. 573 --
--------- --------
Net cash used in operating activities ............................................ (3,789) (1,834)
--------- --------
Investing activities
Purchase of equipment and leasehold improvements, net of landlord contribution (1,473) (122)
Employee loan ................................................................ (446) --
Security deposits ............................................................ (527) (45)
--------- --------
Net cash used in investing activities ............................................ (2,446) (167)
--------- --------
Financing activities
Proceeds from loans payable -- related parties ............................... -- 767
Repayments of loans payable to related parties ............................... (122) (200)
Proceeds of private placement ................................................ -- 1,555
Proceeds from IPO, net of offering costs ..................................... (131) 15,586
Distribution to subsidiaries' former stockholders ............................ -- (9,000)
Cash acquired through acquisition of subsidiaries ............................ -- 504
Proceeds from bridge financing ............................................... 10,500 --
Costs related to Tender Offer ................................................ (10,280) --
Proceeds from second offering, net of offering costs ......................... 38,555 --
Payment of acquisition indebtedness .......................................... (882) --
Acquisitions, net of cash acquired ........................................... (15,223) --
Loan to seller of business acquired .......................................... (1,500) --
Payment of acquired indebtedness ............................................. (2,469) --
Repayment of bridge financing ................................................ (10,500) --
--------- --------
Net cash provided by financing activities ........................................ 7,948 9,212
--------- --------
Increase in cash and cash equivalents ............................................ 1,713 7,211
Cash at beginning of period ...................................................... 7,231 20
--------- --------
Cash at end of period ............................................................ $ 8,944 $ 7,231
--------- --------
Supplemental disclosure of non-cash financing activities:
Exchange of loans payable to related parties for Debentures ...................... -- $ 445
========= ========
Conversion of debentures to common stock ......................................... -- $ 2,000
========= ========
Issuance of acquisition indebtedness ............................................. $ 1,319 $ 1,970
========= ========
S Corporation dividend payable ................................................... -- $ 382
========
Issuance of common stock in connection with acquisitions ......................... $ 3,750 --
=========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes .................................................................... $ 313 $ --
========= ========
Interest ........................................................................ $ 285 $ 254
========= ========
</TABLE>
See accompanying notes.
F-192
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND ORGANIZATION
The Marquee Group, Inc. (the "Company"), which began operations in 1996,
provides integrated event management, television programming and production,
marketing, talent representation and consulting services in the sports, news
and other entertainment industries.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries after elimination of all intercompany accounts
and transactions.
REVENUE RECOGNITION
The primary sources of the Company's revenues are fees from providing
event management, television programming and production, sports marketing and
consulting services and commissions from representation of sports, news and
entertainment personalities. Revenues from events are recognized when the
events are held. Revenues from television programming and production services
are recognized when the programs are available for broadcast. Marketing
revenues are recognized for guaranteed amounts when contractual obligations are
met (subsequent royalties are recorded when received). Revenues from
advertising services are recognized in the month the advertisement is broadcast
or printed. Commissions based on profit or gross receipt participations are
recorded upon the determination of such amounts. Consulting revenue is
recognized as services are provided. Commissions from the Company's talent
representation services are recognized as revenue when they become payable to
the Company under the terms of the Company's agreements with its clients.
Generally, such commissions are payable by clients upon their receipt of
payments for performance of services.
CASH EQUIVALENTS
The Company considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents.
TELEVISION AND EVENT COSTS
Television and event costs are recorded as incurred and are expensed when
the programs are available for use or when the event is held.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives ranging from five to
seven years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the remaining lease term.
INTANGIBLES
Intangibles represent the excess of the purchase price of acquisitions
over the tangible net assets acquired and are amortized over twenty years using
the straight-line method. The Company periodically reviews the recoverability
of the carrying value of these assets and the period of amortization based on
the current and expected future non-discounted income from operations of the
entities giving rise to these intangibles to determine whether events and
circumstances warrant revised estimates of carrying value or useful lives.
F-193
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DEFERRED RENT
The Company leases premises under leases which provide for periodic
increases over the lease term. Pursuant to Statement of Financial Accounting
Standards No. 13, "Accounting for Leases," the Company records rent expense on
a straight-line basis. The effect of these differences is recorded as deferred
rent.
INCOME TAXES
The Company accounts for income taxes under the liability method as
required by Statement of Financial Accounting Standards Board Statement No. 109
("FAS 109"), "Accounting for Income Taxes." FAS 109 requires an asset and
liability approach to financial accounting and reporting for income taxes.
Under this approach, differences between financial statement and tax bases of
assets and liabilities are determined, and deferred income tax assets and
liabilities are recorded for those differences that have future tax
consequences. Valuation allowances are established, if necessary, to reduce any
deferred tax asset recorded to an amount that will more likely than not be
realized in future periods. Income tax expense is composed of the current tax
payable or refundable for the period plus or minus the net change in deferred
tax assets and liabilities.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings, basic earnings per share excludes any dilutive effects
of options, warrants and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented in conformity
with the Statement No. 128 requirements.
Basic earnings per share applicable to common stockholders is based upon
net loss after reduction of amounts, if any, for accretion of the obligation
related to the put option issued in connection with the ProServ Acquisition
(see Note 3) divided by the weighted average number of shares of common stock
outstanding during the year. Shares of common stock placed in escrow upon
completion of the Initial Public Offering ("IPO") described in Note 2 and in
connection with the QBQ Acquisition described in Note 3 have been excluded from
the calculation of basic earnings per share. The shares of common stock issued
upon the automatic conversion of the debentures (see Note 5) are considered
outstanding for all periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
At December 31, 1997 and 1996, approximately 90% of the Company's cash and
cash equivalents was invested with one financial institution.
F-194
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the year ended December 31, 1997, one client represented approximately
28% of reported revenues.
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of entities comprising the Company's client
base.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the carrying amounts of its financial
instruments, principally noncurrent receivables and liabilities, approximates
the fair value.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1996 financial statements
to conform to the 1997 presentation.
2. PUBLIC OFFERINGS AND TENDER OFFER
In December 1996, the Company closed its initial public offering ("IPO")
of 3,852,500 units (the "Units"), each unit consisting of one share of common
stock and one redeemable warrant, at a price of $5.00 per Unit. Each warrant
entitles the holder to purchase one share of common stock at an exercise price
of $7.50, subject to adjustment, at any time until December 4, 2001. The
warrants are redeemable by the Company under certain circumstances at a
redemption price of $.05 per warrant. (See below.)
The Company also granted to the underwriters, or their designees, options
(the "IPO Options") to purchase up to 335,000 Units. The Units purchasable upon
exercise of the IPO Options are identical to the Units described above, except
that the underlying warrants are redeemable only by the Company under limited
circumstances. The IPO Options are exercisable during a three-year period
commencing December 12, 1998 at an exercise price of $8.25, subject to
adjustment in certain events.
Certain of the Company's officer/stockholders have placed an aggregate of
1,275,000 of their shares of common stock in escrow. These shares will not be
assignable or transferable (but may be voted) until such time as they are
released from escrow based upon the Company meeting certain annual earnings
levels or the common stock attaining certain price levels. All reserved shares
remaining in escrow on March 31, 2000 will be forfeited and contributed to the
Company's capital. In the event the Company attains any of the earnings
thresholds or stock prices providing for the release of the escrow shares to
the stockholders, the Company will recognize compensation expense at such time
based on the then fair market value of the shares.
In September 1997, the Company purchased in a tender offer approximately 4
million of the 4.5 million outstanding warrants at a cash purchase price of
$2.40 per warrant. In order to consummate its purchase of the Warrants, the
Company borrowed $10.5 million pursuant to a loan agreement (the "Bridge
Facility"). The Company repaid such borrowing with a portion of the net
proceeds of its second public offering described below. In connection with the
Bridge Facility, the Company paid the lender fees and expenses of $362,000 and
issued to the lender immediately exercisable options to acquire an aggregate of
105,000 shares of common stock, at an exercise price of $2.25, subject to
adjustment in certain circumstances. The options will expire in 2007. As a
result of the issuance of the options, the Company recorded financing expense
of $394,000 in 1997.
On October 14, 1997 and November 12, 1997, the Company consummated a
second public offering (the "Second Offering") of 8.5 million shares (including
the Underwriters' overallotment) of the Company's common stock at $5.00 per
share. The proceeds to the Company after deducting the underwriting discount
and commissions and other expenses was approximately $39 million.
F-195
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACQUISITIONS
1996 ACQUISITIONS
On December 12, 1996, the Company acquired by merger, concurrently with
the closing of its IPO, Sports Marketing & Television International, Inc.
("SMTI") which provides production and marketing services to sporting events,
sports television shows and professional and collegiate leagues and
organizations and, Athletes and Artists, Inc. ("A&A"), a sports and media
talent representation firm, collectively the "1996 Acquisitions". The SMTI
stockholders received cash of $6,500,000 from the proceeds of the IPO, an
additional $1,500,000 payable in five equal installments over five years and
1,292,307 shares of the Company's common stock. The A&A stockholders received
cash of $2,500,000 from the proceeds of the IPO, miscellaneous reimbursements
of $80,000, an additional $1,000,000 payable in five equal installments over
five years and 969,231 shares of the Company's common stock.
The 1996 Acquisitions were accounted for as a consolidation at historical
cost due to the significance of the equity interests in the Company held by the
former stockholders of SMTI and A&A following completion of the acquisitions.
Accordingly, the acquired assets and liabilities were recorded at their
historical amounts. The capital stock of SMTI and A&A was included in
additional paid-in capital. In addition, the cash paid to the former
stockholders of SMTI and A&A was recorded as a dividend charged to additional
paid-in capital.
SMTI was an S Corporation prior to the merger. The SMTI stockholders
received a distribution of approximately $350,000 during 1997, which represents
40% of the taxable earnings of SMTI prior to the merger.
The accompanying consolidated financial statements include the accounts of
SMTI and A&A from December 12, 1996.
ACQUISITION OF PROSERV
On October 14, 1997, the Company acquired all of the outstanding stock of
ProServ, Inc. and ProServ Television, Inc. (collectively, "ProServ"), an
established provider of international sports event management, television
production, marketing, talent representation and consulting. The aggregate
purchase price for ProServ was approximately $10.8 million in cash and 250,000
shares of the Company's common stock. The Company may be obligated to make
additional earn-out payments over the next four years of up to $2.5 million
based upon ProServ achieving, during this period, certain levels of revenues
and earnings before interest, taxes, depreciation and amortization. The Company
also repaid approximately $2.5 million of ProServ's outstanding indebtedness at
the acquisition date. The Company used a portion of the proceeds of the Second
Offering to finance the acquisition and the repayment of the outstanding
indebtedness. Under certain circumstances, the Company may be required to
repurchase up to all of the 250,000 shares of the common stock issued in
connection with the acquisition for an aggregate purchase price of up to $1.9
million.
The acquisition was accounted for using the purchase method, with the
aggregate puchase price allocated to the tangible net assets based upon
estimated fair market values. The total purchase price of $13.4 million, which
includes costs incurred in connection with the acquisition, exceeded the
tangible net asset deficiency acquired by approximately $17 million, which has
been recorded as an intangible. ProServ's results of operations for the period
from the October 14, 1997 have been included in the accompanying consolidated
financial statements. The potential earn-out will be recorded as additional
purchase price when earned.
ACQUISITION OF QBQ
On October 14, 1997, the Company acquired substantially all of the assets
of QBQ Entertainment, Inc. ("QBQ"), a company that books tours and appearances
for a variety of entertainers. The aggregate
F-196
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
purchase price for QBQ was approximately $3.1 million in cash, $1.6 million
payable in annual installments payable over eight years and 393,514 shares of
common stock, including 78,702 shares held in escrow and subject to forfeiture
if certain financial performance tests are not met. In connection with an
employment agreement with the chief executive officer and sole stockholder of
QBQ, the Company granted a five-year, non-recourse loan of $1.5 million,
secured by the common stock issued in connection with the QBQ acquisition. The
Company used a portion of the proceeds of the Second Offering to finance the
acquisition and the loan. Under certain circumstances, the Company may be
required to repurchase up to 295,135 shares of common stock issued in
connection with the acquisition for an aggregate purchase price of up to $1.9
million.
The QBQ acquisition was accounted for using the purchase method of
accounting and the results of its operations have been included in the
accompanying financial statements from October 14, 1997. The total purchase
price of approximately $7.2 million, which includes costs incurred in
connection with the acquisition, exceeded the tangible net assets acquired by
approximately the same amount and has been recorded as intangibles.
The following unaudited pro forma information is presented as if the
Company had completed the acquisition of ProServ, QBQ, SMTI and A&A and the
Secondary Offering at the beginning of the respective periods and gives effect
to the related contractually required reductions in personnel, officers'
salaries and employee benefits:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---------- ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Pro forma revenues ................................... $34,953 $ 29,932
Pro forma net loss applicable to common stockholders . $ (521) $ (2,814)
Pro forma net loss per share applicable to common
stockholders--basic and dilutive ................... $ (.03) $ (.17)
Pro forma weighted average shares .................... 16,559 16,559
</TABLE>
Aggregate maturities for the indebtedness related to the Company's
acquisitions, exclusive of the put options, as of December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
1998 ............................................. $ 775
1999 ............................................. 775
2000 ............................................. 730
2001 ............................................. 730
2002 ............................................. 230
Thereafter ....................................... 375
------
3,615
Less: amounts representing interest .............. 696
------
Total, including current portion of $775.......... $2,919
------
</TABLE>
F-197
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
At December 31, 1997, property and equipment consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
Furniture and fixtures ............................. $ 952
Leasehold improvements ............................. 1,190
Vehicles ........................................... 27
------
2,169
Accumulated depreciation and amortization .......... 129
------
$2,040
======
</TABLE>
5. PRIVATE PLACEMENT
In August 1996, the Company issued debentures (the "Debentures"), in the
aggregate principal amount of $2 million, each Debenture consisted of $50,000
principal amount of 10% Convertible Debentures. Interest on the Debentures of
$254,000 was calculated for the period from the final closing of the Private
Placement to a date one year from the effective date of the Company's IPO. The
Debentures were automatically converted into units (see Note 2) identical in
all respects to those offered in the IPO at a rate of one unit for each $3.00
principal amount of Debentures.
Stockholders of the Company and stockholders of SMTI and A&A purchased an
aggregate of $750,000 principal amount of Debentures, of which $445,103 was in
exchange for existing indebtedness of the Company to the stockholders. In
addition, the Company repaid $125,000 to one of the officer/ stockholders from
the proceeds of the private placement.
6. INCOME TAXES
The income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER
31,
-----------------
1997 1996
------ --------
(IN THOUSANDS)
<S> <C> <C>
Current:
Federal ................. $-- $ --
State and local ......... 45 (20)
--- -----
45 (20)
--- -----
Deferred:
Federal ................. -- 30
State and local ......... -- 10
--- -----
-- 40
--- -----
$45 $ 20
=== =====
</TABLE>
F-198
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the federal statutory tax rate to the actual effective
rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- ------------
<S> <C> <C>
Statutory rate ............................................... (34.0)% (34.0)%
State and local income taxes, net of federal benefit ......... 2.3 .4
Valuation allowance .......................................... 26.3 31.8
Permanent differences ........................................ 8.9 1.0
----- -----
Effective rate ............................................... 3.5% (.8)%
===== =====
</TABLE>
The deferred tax assets and liabilities is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER, 31,
-----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cumulative effect of change in tax accounting basis ......... $ (228) $ (343)
Deferred compensation expense ............................... (67) (29)
Deferred rent ............................................... (48) --
Net operating losses ........................................ 1,494 1,051
ProServ tax audits .......................................... (617) --
Valuation allowance ......................................... (1,494) (1,022)
-------- --------
Net deferred tax liabilities ................................ $ (960) $ (343)
======== ========
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $3.3 million which will begin to expire in 2011. ProServ had net
operating losses of approximately $2.6 million at the time of the acquisition.
These losses are subject to limitations under the Internal Revenue Code and
will begin to expire in 2010.
In connection with examinations of the consolidated federal tax returns of
ProServ for years 1993 through 1995, the Internal Revenue Service has
challenged the tax treatment of certain significant transactions. The French
taxing authorities are conducting an audit of ProServ's former subsidiary,
located in France, for the same period. Although ProServ's management believes
that there are valid defenses to defeat any tax assessment, the Company has
provided for these contingencies. Such amounts have been included in deferred
tax liabilities at December 31, 1997.
The Company recorded an increase in the valuation allowance of $472,000
for the year ended December 31, 1997.
7. STOCKHOLDERS' EQUITY
On July 17, 1996, the Board of Directors and stockholders of the Company
approved an increase in the authorized capitalization of the Company to 25
million shares of common stock, par value $.01 per share, and 5 million shares
of preferred stock, par value $.01 per share. In addition, in August 1996 the
Board of Directors and the stockholders of the Company approved a stock split
whereby 999 shares of the 1,000 shares of common stock outstanding at that time
were split on the basis of approximately 1,940-for-1 and the remaining one
share of common stock outstanding at that time was split on the basis of
50,000-for-1. All share information in the financial statements reflect the
stock split.
COMMON STOCK RESERVED FOR ISSUANCE
As of December 31, 1997, the Company has 1,197,503 shares of common stock
reserved for issuance upon the exercise of the warrants and the IPO Options
(see Note 2), 800,000 shares of common stock
F-199
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reserved for issuance upon exercise of options pursuant to the 1996 and 1997
Stock Option Plans and 315,000 shares reserved for issuance under other options
and warrants of the Company.
8. STOCK OPTION PLAN
The Company's Board of Directors has adopted and the stockholders have
approved the Company's 1996 and 1997 Stock Option Plans (the "Plan"). The Plan
provides for the grant, at the discretion of the Board of Directors, of (i)
options that are intended to qualify as incentive stock options within the
meaning of Section 422A of the Internal Revenue Code to certain employees and
consultants and (ii) options not intended to so qualify. The aggregate number
of shares of common stock for which options may be granted under the Plan is
800,000 shares.
The Plan is administered by a Stock Option Committee (the "Committee")
which is appointed by the Board of Directors. The Committee determines who
among those eligible will be granted options, the time or times at which
options will be granted, the terms of the options, including the exercise
price, the number of shares subject to the options and the terms and conditions
of exercise.
A summary of the activity in the Plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Granted--1996 ............................ 230,000 $ 5.71
Granted--1997 ............................ 7,500 $5.875
Forfeited--1997 .......................... (4,000) $ 5.00
------- -------
Outstanding at December 31, 1997 ......... 233,500 $ 5.72
======= =======
Exercisable at December 31, 1996 ......... -- --
======= =======
Exercisable at December 31, 1997 ......... 23,575 $ 5.69
======= =======
</TABLE>
Options outstanding as of December 31, 1997 have exercise prices ranging
from $5 to $6.25 per share. The options vest in annual installments over the
three to five year period commencing one year from the date of grant.
The Company has elected to follow Accounting Principles Board opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
options valuation models that were not developed for use in valuing employee
stock options. The exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant and,
therefore, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996:
<TABLE>
<CAPTION>
ASSUMPTION 1997 1996
- -------------------------------------------------------- --------- ---------------
<S> <C> <C>
Risk-free rate ...................................... 5.47% 5.45% to 6.18%
Dividend yield ...................................... 0% 0%
Volatility factor of the expected market price of the
Company's common stock ............................ .54 .72
Average life ........................................ 3 years 4 years
</TABLE>
F-200
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997
------------ ------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Pro forma net loss applicable to common stockholders ......... $ (2,454) $ (1,547)
Pro forma net loss per share applicable to common
stockholders--basic and dilutive ........................... $ (1.05) $ (0.16)
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1997 and 1996 was $2.43 and $2.57, respectively. The weighted
average remaining contractual life of options outstanding at December 31, 1997
is 4.8 years.
9. RELATED PARTY TRANSACTIONS
In December 1997, the Company repaid an officer/stockholder the $121,615
outstanding at December 31, 1996. Interest on the loan accrued at 12%.
The Company provided services as a subcontractor for SMTI aggregating
$724,000, for the period from January 1, 1996 to December 12, 1996 (see Note
3), which are included in 1996 revenues in the accompanying consolidated
statement of operations.
During August 1996, the Company entered into a six-year consulting
agreement with Sillerman Communications Management Corporation ("SCMC"), which
is controlled by Robert F.X. Sillerman, the Chairman of the Company and the
controlling stockholder of The Sillerman Companies, Inc. ("TSC"), a principal
stockholder of the Company, that provides for a monthly fee of $30,000
commencing in September 1997. In March 1997, SCMC assigned its rights,
obligations, and duties under the consulting agreement to The Sillerman
Companies, Inc. In October 1997, TSC waived its right to future monthly
payments under the consulting agreement.
In February 1997, the Company paid $400,000 to SCMC as an advance against
special advisory services to be provided. In connection with the ProServ
Acquisition and the QBQ Acquisition, TSC received Special Advisory Fees of
$450,000 (of which $400,000 was offset against the amounts previously
advanced), and, in connection with the Tender Offer, an immediately exercisable
option to purchase 200,000 shares of common stock at $7.00 per share. In
addition, the Company paid $75,000 to TSC for expenses.
In consideration for Mr. Sillerman's guarantee of a portion of the $1.5
million letter of credit issued to replace the escrow in connection with the
ProServ Acquisition, the Company, in November 1997, granted Mr. Sillerman an
immediately exercisable, five-year option to purchase 10,000 shares of common
stock at an exercise price per share of $5.00 and paid Mr. Sillerman $75,000,
including $25,000 for his related legal fees and expenses.
F-201
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In April 1997, in connection with the employment of an officer of the
Company, the Company loaned the officer $446,000 which loan by its terms may be
forgiven. In addition, the officer will over a three year period beginning with
his date of employment receive $100,000 payable in shares of Common Stock.
10. INVESTMENT IN JOINT VENTURE
SMTI and NBC formed a limited liability corporation, Celebrity Golf
Championship, LLC ("CGC") to conduct the annual golfing tournament known as The
Celebrity Golf Championship. Earnings are allocated 75% to NBC and 25% to SMTI
in accordance with the LLC agreement. All profits from CGC are distributed
annually.
Condensed financial information for CGC is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
---------------
(IN THOUSANDS)
<S> <C>
Cash ....................... $ 232
======
Due to SMTI ................ $ 232
======
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996
----------- ------
(IN THOUSANDS)
<S> <C> <C>
Revenues ................... $3,529 $2,743
Operating expenses ......... 2,699 2,067
----------- -------
Net income ................. $ 830 $ 676
=========== =======
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating leases that expire through
2008. These operating leases provide for basic annual rents plus escalation
charges. The aggregate future minimum lease payments (including the deferred
rent liability of $696,000) required under these leases, net of noncancelable
sublease income of $2,370,000 as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
1998 ................ $1,223
1999 ................ 1,124
2000 ................ 1,173
2001 ................ 1,078
2002 ................ 999
Thereafter .......... 3,862
------
$9,459
======
</TABLE>
The Company also rents office space on a month-to-month basis. Rent
expense amounted to $45,000 and $303,000, respectively, for the years ended
December 31, 1996 and 1997.
The Company has notified the landlord for space previously occupied by one
of the Company's subsidiaries that the space has been abandoned. The Company
has recorded a loss of $466,000 for the year ended December 31, 1997 related to
the settlement with the landlord and to write-off the related abandoned fixed
assets.
The Company has entered into employment agreements with key executives for
periods ranging from three to five years.
The Company is subject to certain legal proceedings and claims, which have
arisen, in the ordinary course of its business. In the opinion of management,
settlement of these actions, when ultimately concluded, will not have a
material adverse effect on the Company's financial condition.
F-202
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENT
In March 1998, the Company entered into a non-binding letter of intent to
acquire Alphabet City Industries and Alphabet City Sports Records, Inc.
(collectively, the "Pending Acquisition"), both of which are sports and music
marketing companies which develop strategic alliances among sports leagues,
music companies and corporate sponsors. The aggregate purchase price for the
Pending Acquisition will be approximately $3.0 million in cash and 1.0 million
in shares of Common Stock. In addition, the Company may be obligated to make
additional payments based upon the financial performance of the acquired
businesses. In connection with entering into the letter of intent, the Company
advanced Alphabet City Industries $350,000.
F-203
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX A
ACCREDITED INVESTOR LETTER
[BANKER]
[BANKER]
[BANKER]
[BANKER]
As Initial Purchasers in connection with the Offering Memorandum referred to
below
c/o [Banker]
[Address]
Ladies and Gentlemen:
In connection with our proposed purchase of 9 1/8% Senior Subordinated
Notes due 2008 (the "Notes") of SFX Entertainment, Inc. ("Issuer"), we confirm
that:
1. We have received a copy of the Offering Memorandum (the "Memorandum")
relating to the Notes and such information as we deem necessary in order to
make our investment decision. We acknowledge that we have read and agree to
the matters stated in the section entitled "Transfer Restrictions" of such
Memorandum and the restrictions on duplication and circulation of such
Memorandum.
2. We understand that any subsequent transfer of the Notes is subject to
certain restrictions and conditions set forth in the Indenture relating to
the Notes (the "Indenture") and that any subsequent transfer of the Notes
is subject to certain restrictions and conditions set forth in the
Memorandum under "Transfer Restrictions" and the undersigned agrees to be
bound by, and not to resell, pledge or otherwise transfer the Notes except
in compliance with such restrictions and conditions and the Securities Act
of 1933, as amended (the "Securities Act").
3. We understand that offer and sale of the Notes have not been
registered under the Securities Act, and that the Notes may not be offered
or sold except as permitted in the following sentence. We agree, on our own
behalf and on behalf of any accounts for which we are acting as hereinafter
stated, that if we should sell any Notes within two years after the
original issuance of the Notes, we will do so only (A) to the Issuer or any
subsidiary thereof, (B) in accordance with Rule 144A under the Securities
Act to a "qualified institutional buyer" (as defined therein), (C) to an
institutional "accredited investor" (as defined below) that, prior to such
transfer, furnishes to the Trustee (as defined in the Indenture) a signed
letter containing certain representations and agreements relating to the
restrictions on transfer of the Notes (the form of which letter can be
obtained from the Trustee) and, if such transfer is in respect of an
aggregate principal amount of Notes of less than $100,000, an opinion of
counsel acceptable to the Issuer that such transfer is in compliance with
the Securities Act, (D) outside the United States in accordance with Rule
904 of Regulation S under the Securities Act, (E) pursuant to the exemption
from registration provided by Rule 144 under the Securities Act (if
available) or (F) pursuant to an effective registration statement under the
Securities Act, and we further agree to provide to any person purchasing
any of the Notes from us a notice advising such purchaser that resales of
the Notes are restricted as stated herein.
4. We understand that, on any proposed resale of Notes, we will be
required to furnish to the Issuer and the Trustee such certifications,
legal opinions and other information as the Issuer and the Trustee may
reasonably require to confirm that the proposed sale complies with the
foregoing restrictions. We further understand that the Notes purchased by
us, not registered under the Securities Act, will bear a legend to the
foregoing effect.
5. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and
have such knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risks of our investment in the
Notes, and we and any accounts for which we are acting are each able to
bear the economic risks of our or their investment.
A-1
<PAGE>
6. We are acquiring the Notes purchased by us for our own account or for
one or more accounts (each of which is an institutional "accredited
investor") as to each of which we exercise sole investment discretion.
You, the Issuer and the Trustee are entitled to rely upon this letter and
are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby.
Very truly yours,
By:
--------------------------------------
Name:
------------------------------------
Office:
----------------------------------
A-2
<PAGE>
[SFX ENTERTAINMENT LOGO]
