<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration File No.: 333-43287
<PAGE>
PROSPECTUS
[SFX ENTERTAIMENT, INC. LOGO]
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
SFX Broadcasting, Inc. ("SFX Broadcasting") currently operates in two
principal lines of business: radio broadcasting and live entertainment. In
August 1997, SFX Broadcasting entered into an agreement (as amended, the "SFX
Merger Agreement") to merge (the "SFX Merger") its radio business with a
subsidiary of SBI Holdings Corporation ("SFX Buyer"). If the SFX Merger is
consummated, then, among other things, holders of SFX Broadcasting's Class A
common stock will have the right to receive $75.00 per share, holders of SFX
Broadcasting's Class B common stock will have the right to receive $97.50 per
share and holders of SFX Broadcasting's Series D preferred stock will have
the right to receive $82.40 per share, subject to certain adjustments. In the
SFX Merger Agreement, SFX Broadcasting retained the right to spin off its
live entertainment business to its stockholders (the "Spin-Off"). If the
conditions to the Spin-Off are satisfied or waived, SFX Broadcasting will
consummate the Spin-Off by issuing shares of its subsidiary, SFX
Entertainment, Inc. (the "Company"), which holds SFX Broadcasting's live
entertainment operations, to SFX Broadcasting's stockholders as a dividend in
a taxable transaction. See "Certain Federal Income Tax Consequences." Based
on the number of SFX Broadcasting's shares and interests in its director
deferred stock ownership plan outstanding, and assuming the exercise of
outstanding options and warrants of SFX Broadcasting before the record date
for the Spin-Off, SFX Broadcasting will distribute in the Spin-Off
approximately 14,550,000 shares of the Company's Class A common stock, par
value $.01 per share (the "Company Class A Common Stock"), and 1,047,037
shares of the Company's Class B common stock, par value $.01 per share (the
"Company Class B Common Stock" and, with the Company Class A Common Stock,
the "Company Common Stock"). This Prospectus is the Company's prospectus
relating to those shares.
Upon the consummation of the Spin-Off and the SFX Merger:
The Company will:
o continue to own and operate SFX Broadcasting's live entertainment venue
operation, promotion, production and marketing and consulting business (the
"Entertainment Business"), representing on a pro forma basis giving effect to
the Recent Acquisitions (as defined herein) approximately 68% of SFX
Broadcasting's revenues for the year ended December 31, 1997 and 37% of SFX
Broadcasting's assets as of that time.
SFX Broadcasting will be wholly-owned by SBI Holdings Corporation and will:
o continue to own and operate SFX Broadcasting's radio broadcasting
business, which would on a continuing basis, giving pro forma effect to the
Recent Acquisitions, represent approximately 32% of SFX Broadcasting's
revenues for the year ended December 31, 1997 and 63% of SFX Broadcasting's
assets as of that time; and
o at the time of the SFX Merger, make a payment to the Company, or receive
a payment from the Company, for Working Capital (as defined in "Agreements
Relating to the Spin-Off--Distribution Agreement").
Before the Spin-Off, the Company and SFX Broadcasting will enter into a
Distribution Agreement, which will govern the terms and conditions of the
Spin-Off (the "Distribution Agreement"). A form of the Distribution Agreement
has been filed as an exhibit hereto. See "Agreements Relating to the
Spin-Off--Distribution Agreement" and "Additional Information."
In the Spin-Off, for each share of SFX Broadcasting's Class A common stock
held on April 20, 1998 (the "Spin-Off Record Date"), the holder will receive
one share of Company Class A Common Stock, which has one vote in most matters
submitted to a vote of the stockholders. For each share of SFX Broadcasting's
Class B common stock owned on the Spin-Off Record Date, the holder will
receive one share of Company Class B Common Stock, which has 10 votes in most
matters submitted to a vote of the stockholders. Holders of SFX
Broadcasting's Series D preferred stock will receive the number of shares of
Company Class A Common Stock obtained by multiplying the number of shares
held by 1.0987 (rounded down to the next whole share). For each share of SFX
Broadcasting's Class A common stock credited under SFX Broadcasting's
director deferred stock ownership plan, the holder of that interest will
receive one share of Company Class A Common Stock. In addition, persons who
exercise certain warrants of SFX Broadcasting after the Spin-Off Record Date
will be entitled to receive, among other things, up to 636,289 shares of
Company Class A Common Stock. Holders will not receive cash in lieu of
fractional shares. The Company intends to distribute the shares of Company
Common Stock pursuant to the Spin-Off on or about April 27, 1998. The receipt
of shares by the stockholders of SFX Broadcasting in the Spin-Off will be a
taxable transaction. After the Spin-Off and certain other transactions
described in this Prospectus, Robert F.X. Sillerman, the Executive Chairman
of the Company, will beneficially own approximately 46.1%, and all directors
and executive officers together will beneficially own approximately 52.5%, of
the combined vote of the Company Common Stock. Accordingly, these individuals
will generally be able to control the election of a majority of Company's
board of directors, as well as stockholder votes on most other matters. See
"Risk Factors--Control by Management; Stock Issued to Management,"
"Management," "Principal Stockholders of the Company" and "Certain
Relationships and Related Transactions."
SFX Broadcasting stockholders will not pay any consideration for receiving
Company Common Stock in the Spin-Off. The Company Class A Common Stock has
been approved for quotation on The Nasdaq Stock Market's National Market (the
"Nasdaq National Market") under the symbol "SFXE." See "Listing and Trading
of Company Class A Common Stock."
PLEASE READ THIS PROSPECTUS CAREFULLY SINCE IT CONTAINS IMPORTANT
INFORMATION. ALSO, PAY PARTICULAR ATTENTION TO THE "RISK FACTORS" BEGINNING
ON PAGE 12.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is April 20, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
SUMMARY................................. 3
The Company............................ 3
The Spin-Off and the SFX Merger ....... 5
The Spin-Off........................... 7
Summary Consolidated Financial Data .. 10
RISK FACTORS............................ 12
Absence of Combined Operating History;
Potential Inability to Integrate
Acquired Businesses................... 12
Risks Related to Recent Acquisitions .. 12
Financing Matters ..................... 13
Substantial Leverage................... 14
Indemnification Arrangements........... 15
Future Charges to Earnings ............ 16
Future Acquisitions.................... 16
Expansion Strategy; Need for
Additional Funds...................... 17
Restrictions Imposed by the Company's
Indebtedness.......................... 17
Working Capital Adjustments and
Repayment of Advances................. 18
Dependence on Key Personnel............ 18
Potential Conflicts of Interest ....... 19
Control of Motor Sports and Theatrical
Businesses............................ 19
BGP Right of First Refusal............. 19
Control of Concerts ................... 20
Control by Management; Stock Issued to
Management............................ 20
Economic Conditions and Consumer
Tastes................................ 20
Availability of Artists and Events .... 21
Control of Venues...................... 21
Seasonality............................ 21
Competition............................ 21
Regulatory Matters..................... 22
Environmental Matters.................. 22
Fraudulent Conveyance.................. 22
Anti-Takeover Effects.................. 23
Limited Market for Company Class A
Common Stock; Potential Volatility of
Stock Price .......................... 23
OVERVIEW OF THE LIVE ENTERTAINMENT
INDUSTRY............................... 24
Concert Promotion Industry............. 24
Theatrical Industry.................... 24
Motor Sports Industry.................. 25
BUSINESS................................ 26
General................................ 26
SFX Merger and the Spin-Off ........... 26
1997 Acquisitions ..................... 26
Recent Acquisitions ................... 27
The Company's Live Entertainment
Activities............................ 29
Operating Strategy..................... 37
Properties ............................ 38
Employees.............................. 39
Litigation............................. 39
Potential Conflicts of Interest ....... 39
Seasonality............................ 40
Competition............................ 40
Regulatory Matters..................... 40
Forward-Looking Statements............. 40
THE SPIN-OFF............................ 42
Background and Reasons for the
Spin-Off.............................. 42
Manner of Effecting the Spin-Off ...... 43
Regulatory Matters..................... 44
AGREEMENTS RELATING TO THE SPIN-OFF .... 45
Distribution Agreement................. 45
Tax Sharing Agreement.................. 50
Employee Benefits Agreement............ 51
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES........................... 52
LISTING AND TRADING OF COMPANY CLASS A
COMMON STOCK........................... 54
1
<PAGE>
PAGE
------
DIVIDEND POLICY......................... 54
CAPITALIZATION.......................... 55
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS .................. 57
SELECTED CONSOLIDATED FINANCIAL DATA .. 72
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................. 74
1997 Acquisitions ..................... 74
Recent Acquisitions.................... 75
Spin-Off and SFX Merger................ 77
Results of Operations.................. 77
Historical Results..................... 80
Liquidity and Capital Resources ....... 81
MANAGEMENT.............................. 88
Directors and Executive Officers ...... 88
Executive Compensation................. 91
Employment Agreements and Arrangements
with Certain Officers and Directors .. 92
PRINCIPAL STOCKHOLDERS OF THE COMPANY .. 95
Possible Change in Control............. 97
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................... 98
Agreements with SFX Broadcasting ..... 98
Company Common Stock to be Received in
the Spin-Off.......................... 98
Issuance of Stock to Holders of SFX
Broadcasting's Options and SARs ...... 98
Employment Agreements.................. 98
Delsener/Slater Employment Agreements . 99
Assumption of Employment Agreements;
Certain Change of Control Payments ... 100
Indemnification of Mr. Sillerman ...... 100
Potential Conflicts of Interest ....... 100
Relationship Between Howard J. Tytel
and Baker & McKenzie.................. 101
Arrangement Between Robert F.X.
Sillerman and Howard J. Tytel......... 101
Triathlon Fees......................... 101
Relationships and Transactions with
SFX Broadcasting ..................... 101
Meadows Repurchase..................... 101
SHARES ELIGIBLE FOR FUTURE SALE......... 103
DESCRIPTION OF CAPITAL STOCK............ 105
Common Stock........................... 105
Transfer Agent and Registrar .......... 106
Preferred Stock........................ 106
Warrants and Other Securities of SFX
Broadcasting ......................... 107
DESCRIPTION OF INDEBTEDNESS............. 108
Notes.................................. 108
Credit Facility........................ 109
Other Debt............................. 112
ADDITIONAL INFORMATION.................. 113
LEGAL MATTERS........................... 113
EXPERTS................................. 113
INDEX TO FINANCIAL STATEMENTS........... F-1
</TABLE>
UNTIL MAY 15, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMPANY CLASS A COMMON STOCK DISTRIBUTED
HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS.
2
<PAGE>
SUMMARY
The following is a summary of the information contained elsewhere in this
Prospectus. This summary does not purport to be complete and is qualified in
its entirety by, and is subject to, the more detailed information and
financial statements, including the notes thereto, set forth in this
Prospectus. Unless otherwise indicated, all information in this Prospectus
assumes consummation of the Spin-Off (including recapitalizing the Company to
increase its authorized capital stock and to increase the number of shares of
Company Common Stock outstanding) and the SFX Merger described in "The
Spin-Off." Industry data used throughout this Prospectus was obtained from
industry publications and has not been independently verified by the Company.
THE COMPANY
The Company is a leading promoter and producer of, and operator of venues
for, live entertainment events. The Company believes that it owns and/or
operates the largest network of venues used principally for music concerts
and other live entertainment events in the United States, with 39 venues
either directly owned or operated under lease or exclusive booking
arrangements in 21 of the top 50 markets, including 9 amphitheaters in 6 of
the top 10 markets. Through its large number of venues, its strong market
presence and the long operating histories of the Company and the businesses
acquired pursuant to the Recent Acquisitions and the 1997 Acquisitions (as
defined herein), the Company operates an integrated franchise that promotes
and produces a broad variety of live entertainment events locally, regionally
and nationally. During 1997, approximately 25 million people attended 9,100
events promoted and/or produced by the Company and the businesses acquired in
the Recent Acquisitions (the "Acquired Businesses"), including approximately
3,880 music concerts, 4,850 theatrical shows and 188 specialized motor sports
events. These events included: (a) music concerts featuring artists such as
The Rolling Stones, Phish, Fleetwood Mac, Ozzy Osbourne and Alanis
Morissette, (b) music festivals such as the George Strait Country Music
Festival, (c) touring theatrical productions such as The Phantom of the
Opera, Jekyll & Hyde, Rent and The Magic of David Copperfield and (d)
specialized motor sports events, such as Truck Fest and American Motorcycle
Association Supercross racing events.
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. 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 (a) creates tours for music concert, theatrical,
specialized motor sports and other events, (b) develops and manages
Broadway-style touring theatrical shows ("Touring Broadway Shows"), and (c)
develops specialized motor sports and other live entertainment events. In
connection with its live entertainment events, the Company also derives
related revenue streams, including from the sale of corporate sponsorships
and advertising, the sale of concessions and the merchandising of a broad
range of products. On a pro forma basis giving effect to the 1997
Acquisitions and the Recent Acquisitions, the Company's music and ancillary
businesses would have comprised approximately 78%; theater would have
comprised approximately 16%; and specialized motor sports would have
comprised approximately 6% of the Company's total net revenues for the year
ended December 31, 1997.
The Company believes that it owns 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 amphitheaters,
theaters and other venues owned and/or operated under lease or exclusive
booking arrangements by the Company:
3
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF TOTALS
MARKET NUMBER OF THEATERS AND TOTAL SEATING
MARKET RANK(1)AMPHITHEATERS(2) CLUBS(2) VENUES(2) CAPACITY
- ------------------------------ -------- -------------- -------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
New York--Northern New
Jersey--Long Island .......... 1 2 2 4 37,570
Los Angeles--Riverside--Orange
County ....................... 2 2 -- 2 40,500(3)
San Francisco--Oakland--San
Jose.......................... 5 2 4 6 49,499(4)
Philadelphia--Wilmington
--Atlantic City .............. 6 1 -- 1 25,000
Dallas--Fort Worth ............ 9 1 -- 1 20,100
Houston--Galveston--Brazoria . 10 1 1 2 15,800
Atlanta ....................... 12 2 2 4 28,250
St. Louis ..................... 17 1 2 3 24,100
Phoenix--Mesa ................. 18 1 -- 1 20,000
Pittsburgh .................... 19 1 -- 1 22,500
Kansas City ................... 24 1 2 3 30,000
Sacramento--Yolo .............. 26 -- 1 1 N/A(4)
Indianapolis .................. 28 1 1 2 23,700
Columbus ...................... 30 1 -- 1 20,000
Charlotte--Gastonia--Rock Hill 32 1 -- 1 18,000
Hartford ...................... 36 1 -- 1 25,000
Rochester ..................... 39 1 -- 1 12,700
Nashville ..................... 41 1 -- 1 20,100
Oklahoma City ................. 43 1 -- 1 9,000
Raleigh--Durham--Chapel Hill . 47 1 -- 1 20,000
West Palm Beach--Boca Raton .. 50 1 -- 1 20,000
Reno .......................... 119 1 -- 1 8,500
-------------- -------------- --------- ---------------
Total......................... 25 15 40 490,319(3),(4)
</TABLE>
- ------------
(1) Based on the July 1994 population of metropolitan statistical areas as
set forth in the 1996 Statistical Abstracts of the United States.
(2) Does not include venues in the 31 markets where the Company sells
subscriptions for Touring Broadway Shows. See "Business--The Company's
Live Entertainment Activities--Production."
(3) Additional seating of approximately 40,000 is available for certain
events.
(4) Club seating, which cannot be accurately determined because clubs
typically have either open or reserved seating for any given event, is
not reflected.
The Company was formed as a wholly-owned subsidiary of SFX Broadcasting in
December 1997 as the parent company of SFX Concerts, Inc. ("Concerts").
Concerts was formed by SFX Broadcasting in January of 1997 to acquire and
hold SFX Broadcasting's live entertainment operations. Concerts acquired
Delsener/Slater Enterprises, Ltd. ("Delsener/Slater"), a New York-based
concert promotion company, in January 1997. In March 1997, Concerts acquired
a 37-year lease to operate the Meadows Music Theater ("Meadows"), a
25,000-seat indoor/outdoor complex located in Hartford, Connecticut. In June
1997, Concerts acquired Sunshine Promotions, Inc., a concert promoter in the
Midwest, and certain other related companies ("Sunshine Promotions" and,
together with the acquisitions of Delsener/Slater and the Meadows lease, the
"1997 Acquisitions").
In February and March of 1998, the Company completed its acquisitions of
PACE Entertainment Corporation ("PACE"); Contemporary Group ("Contemporary");
BG Presents, Inc. ("BGP"); Album Network, Inc., SJS Entertainment Corporation
and The Network 40 (collectively, "Network"); Concert/ Southern Promotions
("Concert/Southern") and certain related entities. The aggregate purchase
price of such acquisitions was approximately $442.1 million in cash,
including repaid debt and payments for working capital, $7.8 million in
assumed debt and the agreement to issue, or the issuance of securities
4
<PAGE>
convertible into, an aggregate of approximately 4.2 million shares of Company
Class A Common Stock (approximately 22% of the outstanding shares of Company
Common Stock after the Spin-Off and other issuances described herein, other
than the Offering (as defined herein)). The acquisitions of PACE,
Contemporary, BGP, Network and Concert/Southern are collectively referred to
as the "Recent Acquisitions."
In February 1998, the Company completed the private placement of $350.0
million of 9 1/8% Senior Subordinated Notes due 2008 (the "Notes") and
borrowed $150.0 million under the Company's $300 million senior credit
facility (the "Credit Facility"). The offering of the Notes and the borrowing
under the Credit Facility are collectively referred to herein as the
"Financing." The proceeds of the Financing were used to consummate the Recent
Acquisitions.
The Company intends to complete a public offering of five million shares
of Company Class A Common Stock (the "Offering") and has filed a registration
statement (Registration No. 333-50079) relating to the Offering. The net
proceeds to be received by the Company from the Offering, after deducting the
underwriting discount and estimated offering expenses, are estimated to be
approximately $132.5 million (approximately $152.4 million if the
underwriters' over-allotment option is exercised in full), assuming a public
offering price of $28.50 per share (the last price of the Company Class A
Common Stock (trading on a when issued basis) on the over-the-counter market
on April 9, 1998). The Company intends to use the net proceeds from the
Offering to make an anticipated tax indemnity payment to SFX Broadcasting, to
make certain change of control payments pursuant to certain employment
agreements being assumed by the Company and for general corporate purposes.
There can be no assurance that the Offering will be consummated as presently
contemplated or at all. See "Risk Factors--Financing Matters" and
"--Indemnification Arrangements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Certain agreements of the Company, including the Distribution Agreement,
the Tax Sharing Agreement (as defined herein), the Employee Benefits
Agreement (as defined herein), certain employment agreements and the
agreements relating to the Recent Acquisitions provide for tax and other
indemnities, purchase price adjustments and future contingent payments in
certain circumstances. The Company may also be responsible for certain other
payments in connection with, and to be made contemporaneously with or prior
to, the consummation of the SFX Merger and/or the Spin-Off, including the
amount of any shortfall in Working Capital. There can be no assurance that
the Company will have sufficient sources of funds to make such payments
should they come due. In addition, consistent with its operating strategy,
the Company intends to pursue additional expansion opportunities and expects
to continue to identify and negotiate with respect to acquisitions in the
live entertainment business. See "Risk Factors--Risks Related to Recent
Acquisitions," "--Financing Matters," "--Indemnification Arrangements," and
"--Working Capital Adjustments and Repayment of Advances," "Management's
Discussion and Analysis of Financing Condition and Results of Operations,"
"Certain Relationships and Related Transactions--Indemnification of Mr.
Sillerman" and "Agreements Relating to the Spin-Off--Distribution Agreement"
and "--Tax Sharing Agreement."
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.
THE SPIN-OFF AND THE SFX MERGER
In August 1997, SFX Broadcasting entered into the SFX Merger Agreement
among SFX Buyer, a wholly-owned subsidiary of SFX Buyer ("SFX Buyer Sub") and
SFX Broadcasting. Upon the terms and subject to the conditions set forth in
the SFX Merger Agreement, SFX Broadcasting will be merged with SFX Buyer Sub,
with SFX Broadcasting surviving the SFX Merger and becoming a wholly-owned
subsidiary of SFX Buyer. As a waivable condition to and in order to
facilitate the SFX Merger, SFX Broadcasting has agreed to effect the Spin-Off
(or an alternative transaction to dispose of the Company) prior to
consummation of the SFX Merger. The Spin-Off will separate the Entertainment
Business from SFX Broadcasting's radio broadcasting business and will enable
SFX Buyer to acquire only SFX
5
<PAGE>
Broadcasting's radio broadcasting business in the SFX Merger. It will also
allow SFX Broadcasting's stockholders to continue their equity participation
in the Entertainment Business.
In February 1998, SFX Broadcasting obtained consents under the indenture
governing certain of its notes and the certificate of designations of its
Series E preferred stock that were required to consummate the Spin-Off. In
addition, on March 26, 1998, the SFX Broadcasting's stockholders approved the
SFX Merger and certain amendments to the certificate of incorporation of SFX
Broadcasting to permit the SFX Merger and the Spin-Off as currently
contemplated.
The Board of Directors of SFX Broadcasting has determined that holders of
record of SFX Broadcasting's common stock, Series D preferred stock and
interests in SFX Broadcasting's director deferred stock ownership plan as of
the close of business on April 20, 1998 will be entitled to receive Company
Common Stock in the Spin-Off. SFX Broadcasting has indicated that it intends
to distribute such shares on or about April 27, 1998. The receipt of shares
by SFX Broadcasting's stockholders pursuant to the Spin-Off will be a taxable
transaction.
SFX Broadcasting has contributed to the Company all of its assets relating
to the Entertainment Business. At the time of the SFX Merger, SFX
Broadcasting will contribute any positive Working Capital 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, the Company estimates that
Working Capital to be received by the Company would have been approximately
$3.0 million (excluding the Series E Adjustment, as defined herein). The
actual amount of Working Capital as of the closing of the SFX Merger is
likely to differ substantially from the amount as of December 31, 1997, and
will be a function of, among other things, the operating results of SFX
Broadcasting through the date of the SFX Merger, the actual cost of
consummating the SFX Merger and the related transactions. SFX Broadcasting
will also incur certain other significant expenses prior to the consummation
of the SFX Merger that could reduce Working Capital, including the payment of
dividends and interest on SFX Broadcasting's debt and the Settlement Amount
(as defined herein). Moreover, Working Capital will be reduced by at least
$2.1 million pursuant to the Series E Adjustment. If the Company is required
to make Working Capital payments to SFX Broadcasting, there can be no
assurance that the Company will have the funds to do so or that it will have
sufficient funds to conduct its operations after making the required
payments. See "Agreements Relating to the Spin-Off--Distribution Agreement"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
In the Spin-Off, shares of Company Common Stock will be distributed pro
rata to holders on the Spin-Off Record Date of SFX Broadcasting's Class A
common stock, Class B common stock, Series D preferred stock and interests in
SFX Broadcasting's director deferred stock ownership plan, and the remaining
shares will be placed in escrow to be issued upon the exercise of certain
warrants of SFX Broadcasting. See "The Spin-Off." Pursuant to the SFX Merger
Agreement, when the SFX Merger is consummated, each outstanding share (except
for shares of holders who exercise dissenters' appraisal rights) of SFX
Broadcasting's (a) Class A common stock will convert into the right to
receive $75.00 (subject to increase under certain circumstances), (b) Class B
common stock will convert into the right to receive $97.50 (subject to
increase under certain circumstances), (c) Series D preferred stock will
convert into the right to receive $82.40 (subject to increase under certain
circumstances) and (d) Series C preferred stock will convert into the right
to receive $1,000.00 plus any accrued but unpaid dividends.
6
<PAGE>
THE SPIN-OFF
The following is a brief summary of certain terms of the Spin-Off. The
Spin-Off and the Distribution Agreement are more fully described under "The
Spin-Off" and "Agreements Relating to the Spin-Off," and a form of the
Distribution Agreement is filed as an exhibit hereto.
DISTRIBUTING COMPANY .......... SFX Broadcasting. References to SFX
Broadcasting include its subsidiaries,
except where the context otherwise requires.
DISTRIBUTED COMPANY ........... The Company, will hold the assets and be
responsible for the liabilities of SFX
Broadcasting relating to the Entertainment
Business, as well as certain other
liabilities. In connection with the SFX
Merger, the Company will be required to make
or entitled to receive certain payments of
Working Capital of SFX Broadcasting.
References to the Company include its
subsidiaries and assume completion of the
transfer of assets and liabilities, except
where the context otherwise requires. See
"Business" and "The Spin-Off."
SHARES TO BE ISSUED IN
CONNECTION WITH THE RECENT
ACQUISITIONS ................. 4,216,678 shares of Company Class A Common
Stock.
SHARES TO BE DISTRIBUTED
IN THE SPIN-OFF .............. Approximately 14,550,000 shares of Company
Class A Common Stock and 1,047,037 shares of
<F1>
Company Class B Common Stock. (1)
CONDITIONS TO THE SPIN-OFF .... The Spin-Off is subject to certain
conditions, however, the Spin-Off is not
conditioned on the prior consummation of the
SFX Merger. See "Agreements Relating to the
Spin-Off--Distribution Agreement--Conditions
to the Spin-Off."
DISTRIBUTION RATIO TO
SFX BROADCASTING
STOCKHOLDERS ................. For each share owned on the Spin-Off Record
Date of: (a) SFX Broadcasting's Class A
common stock, 1 share of Company Class A
Common Stock; (b) SFX Broadcasting's Class B
common stock, 1 share of Company Class B
Common Stock; and (c) SFX Broadcasting's
Series D preferred stock, approximately
1.0987 shares of Company Class A Common
Stock, rounded down to the nearest whole
number for each holder. In addition,
participants in SFX Broadcasting's director
deferred stock ownership plan will receive 1
share of Company Class A Common Stock per
share of SFX Broadcasting's Class A common
stock credited to their accounts. Shares of
Company Class A Common Stock will also be
placed in escrow for issuance upon exercise
of certain warrants of SFX Broadcasting. See
"The Spin-Off--Manner of Effecting the
Spin-Off."
- ------------
(1) Assumes that all presently outstanding and exercisable options and
warrants of SFX Broadcasting are exercised prior to the Spin-Off Record
Date. Includes the issuance of (i) 793,633 shares of Company Class A
Common Stock upon the exercise of options under SFX Broadcasting's
option plans, (ii) 804,384 shares of Company Class A Common Stock upon
the exercise of certain warrants of SFX Broadcasting and (iii) 2,766
shares issuable pursuant to SFX Broadcasting's director deferred stock
ownership plan. See "The Spin-Off--Manner of Effecting the Spin-Off."
Does not include shares to be issued in connection with the Recent
Acquisitions and pursuant to certain employment agreements after the
Spin-Off. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Acquisitions" and
"Management--Employment Agreements and Arrangements with Certain
Officers and Directors."
7
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
.............................. The receipt of Company Common Stock in the
Spin-Off will be a taxable event for the
stockholder for U.S. federal income tax
purposes and may also be taxable events
under applicable local, state and foreign
tax laws. See "Certain Federal Income Tax
Consequences."
TRADING MARKET ................ The Company Class A Common Stock has been
approved for quotation on the Nasdaq
National Market under the symbol "SFXE." See
"Listing and Trading of Company Class A
Common Stock."
ASSETS AND LIABILITIES
OF THE COMPANY ............... SFX Broadcasting will transfer to the
Company all of its assets relating to the
Entertainment Business, and the Company will
assume all of SFX Broadcasting's
Entertainment Business liabilities, as well
as certain other liabilities. See
"Business," "The Spin-Off," "Agreements
Relating to the Spin-Off," "Management's
Discussion and Analysis of Financial
Condition and Results of Operations" and
"Description of Indebtedness."
WORKING CAPITAL ............... At the time of the SFX Merger, SFX
Broadcasting will pay to the Company any
positive Working Capital; if Working Capital
is negative, the Company must pay the amount
of the shortfall to SFX Broadcasting. As of
December 31, 1997, the Company estimates
that Working Capital to be received by the
Company would have been approximately $3.0
million (excluding the Series E Adjustment).
However, certain transactions contemplated
by SFX Broadcasting are likely to
significantly reduce Working Capital. See
"Risk Factors--Working Capital Adjustments
and Repayment of Advances," "The Spin-Off,"
"Agreements Relating to the Spin-Off" and
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations--Liquidity and Capital
Resources."
EFFECT OF THE SPIN-OFF ........ SFX Broadcasting will deliver to Chase
Mellon Shareholder Services, L.L.C., as the
distribution agent (the "Distribution
Agent") and as escrow agent (the "Escrow
Agent"), shares of Company Class A Common
Stock representing all of the outstanding
shares of Company Class A Common Stock and
Company Class B Common Stock. The
Distribution Agent will distribute shares of
Company Class A Common Stock to the holders
of SFX Broadcasting's Class A common stock,
Series D preferred stock and interests in
SFX Broadcasting's director deferred stock
ownership plan, and will distribute shares
of Company Class B Common Stock to the
holders of SFX Broadcasting's Class B common
stock, in each case to the holders as of the
close of business on the Spin-Off Record
Date. Holders of certain warrants of SFX
Broadcasting who exercise their warrants
after the Spin-Off Record Date will be
entitled to receive from the Escrow Agent
shares of Company Class A Common Stock, in
addition to stock of SFX Broadcasting or
cash in lieu thereof. See "The
Spin-Off--Manner of Effecting the Spin-Off."
8
<PAGE>
RELATIONSHIP WITH SFX
BROADCASTING AFTER THE
SPIN-OFF ..................... After the Spin-Off, the Company and SFX
Broadcasting will be separate companies.
However, until the consummation of the SFX
Merger, they will share their boards of
directors, senior management and
administrative functions. The Company and
SFX Broadcasting have agreed to indemnify
each other after the Spin-Off for
liabilities arising from various matters,
including from the other company's assets
and operations. The Company may also be
responsible for certain taxes resulting from
the Spin-Off. See "Risk
Factors--Indemnification Arrangements,"
"Agreements Relating to the Spin-Off" and
"Management."
SPIN-OFF RECORD DATE .......... April 20, 1998.
DATE OF THE SPIN-OFF .......... If the conditions to the Spin-Off set forth
in the Distribution Agreement are fulfilled
or waived and the Spin-Off has not been
terminated by SFX Broadcasting, the Spin-Off
will be effected on April 27, 1998. See
"Agreements Relating to the
Spin-Off--Distribution Agreement."
DISTRIBUTION AGENT, TRANSFER
AGENT AND REGISTRAR .......... Chase Mellon Shareholder Services, L.L.C.
RISK FACTORS .................. Stockholders should carefully review the
matters discussed under the section titled
"Risk Factors" in this Prospectus.
9
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per 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 and the historical financial statements of the Company for the year
ended December 31, 1997. 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 the notes thereto
of the Company, the 1997 Acquisitions and the Recent Acquisitions included
herein. The financial information has been derived from the audited and
unaudited financial statements of the Company, the 1997 Acquisitions and the
Recent Acquisitions. The pro forma summary data for the year ended December
31, 1997 are 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
PREDECESSOR
------------------------------------------ ----------
1997 (1)
PRO FORMA
1993 1994 1995 1996 1997 (UNAUDITED)
--------- --------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................ $46,526 $92,785 $47,566 $50,362 $ 96,144 $638,159
Operating expenses..................... 45,635 90,598 47,178 50,686 83,417 568,607
Depreciation & amortization............ 762 755 750 747 5,431 39,339
Corporate
expenses (2).......................... -- -- -- -- 2,206 4,206
--------- --------- --------- ---------- ---------- -----------
Operating income (loss)................ $ 129 $ 1,432 $ (362) $(1,071) $ 5,090 $ 26,007
Interest expense....................... (148) (144) (144) (60) (1,590) (47,296)
Other income .......................... 85 138 178 198 295 566
Equity income (loss) from investments -- (9) 488 524 509 6,998
--------- --------- --------- ---------- ---------- -----------
Income (loss) before income taxes ..... $ 66 $ 1,417 $ 160 $ (409) $ 4,304 $(13,725)
Income tax provision .................. (57) (5) (13) (106) (490) (3,500)
--------- --------- --------- ---------- ---------- -----------
Net income (loss)...................... $ 9 $ 1,412 $ 147 $ (515) $ 3,814 $(17,225)
========= ========= ========= ========== ========== ===========
Accretion on temporary equity (3) ..... (3,300)
-----------
Net loss applicable to common shares . $(20,525)
===========
Net loss per common share (4).......... $ (0.82)
===========
Weighted average common shares
outstanding (4)(5).................... 25,550
===========
OTHER OPERATING DATA:
EBITDA (6)............................. $ 891 $ 2,187 $ 388 $ (324) $ 10,521 $ 65,346
========= ========= ========= ========== ========== ===========
Cash flow from:
Operating activities.................. $ 2,959 $ (453) $ 4,214 $ 1,005
Investing activities.................. -- -- (435) (73,296)
Financing activities.................. (477) (216) (1,431) 78,270
</TABLE>
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands)
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
PREDECESSOR
-------------------------------------
1993 1994 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current assets.............. $1,823 $4,453 $3,022 $6,191
Property and equipment,
net........................ 4,484 3,728 2,978 2,231
Intangible assets, net ..... -- -- -- --
Total assets................ 6,420 8,222 6,037 8,879
Current liabilities......... 4,356 3,423 3,138 7,973
Long-term debt, including
current portion............ -- 1,830 -- --
Temporary equity(3)......... -- -- -- --
Stockholders' equity........ 6,420 2,969 2,900 907
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1997
PRO FORMA
1997 (UNAUDITED)(7)
--------- ------------
<S> <C> <C>
Current assets.............. $ 11,220 $159,243
Property and equipment,
net........................ 59,685 192,482
Intangible assets, net ..... 60,306 431,820
Total assets................ 146,942 835,670
Current liabilities......... 21,514 101,573
Long-term debt, including
current portion............ 16,178 534,925
Temporary equity(3)......... -- 16,500
Stockholders' equity........ 102,144 153,310
</TABLE>
- ------------
(1) The Unaudited Pro Forma Statement of Operations Data for the year ended
December 31, 1997 are presented as if the Company had completed the
1997 Acquisitions, the Recent Acquisitions, the Financing, the
Spin-Off, the Offering and the SFX Merger as of January 1, 1997.
(2) Corporate expenses are reduced by $1,794,000 for fees earned from
Triathlon Broadcasting Company ("Triathlon") for the year ended
December 31, 1997. The right to receive such fees in the future was
assigned to the Company by SFX Broadcasting in connection with the
Spin-Off. Future fees may vary, above the minimum fee of $500,000,
depending upon the level of acquisition and financing activities of
Triathlon. See "Certain Relationships and Related
Transactions--Triathlon Fees."
(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 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 presented as temporary equity on the pro forma
balance sheet. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Liquidity and Capital Resources."
(4) Includes 500,000 shares of the Company Class A Common Stock issued to
the PACE sellers in connection with the Fifth Year Put Option; these
shares are not included in calculating the net loss per common share.
(5) Reflects the assumed issuance of 5,000,000 shares of Company Class A
Common Stock in connection with the Offering.
(6) "EBITDA" is defined as earnings before interest, taxes, other income,
net, equity income (loss) from investments and depreciation and
amortization. Although EBITDA is not a measure of performance
calculated in accordance with generally accepted accounting principals
("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 effect EBITDA but have not been
reflected herein. Had such adjustments been made, EBITDA as so adjusted
("Adjusted EBITDA") on a pro forma basis would have been approximately
$77,344,000 for the year ended December 31, 1997. These adjustments
include the elimination of duplicative staffing and general and
administrative expenses of $5,000,000 and include the Company's pro
rata share of income from investments in subsidiaries accounted for
under the equity method of $6,998,000 for the year ended December 31,
1997. 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.
(7) The Unaudited Pro Forma Balance Sheet Data at December 31, 1997 are
presented as if the Company had completed the Recent Acquisitions, the
Financing, the Spin-Off, the Offering and the SFX Merger as of December
31, 1997. Retained earnings on a pro forma basis for the Financing, the
Recent Acquisitions, the Spin-Off and the SFX Merger have not been
adjusted for future charges to earnings which will result from the
issuance of stock and options granted to certain executive officers and
other employees of the Company or certain other costs. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Future Charges
to Earnings."
11
<PAGE>
RISK FACTORS
Stockholders should carefully consider and evaluate the following risk
factors together with the other information set forth in this Prospectus.
Certain statements, estimates, predictions and projections contained in
this Prospectus under "Summary," "Risk Factors," "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"The Spin-Off" in addition to certain statements contained elsewhere in this
Prospectus, 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"), although these sections do not apply to this offering. These
forward-looking statements are prospective, involving risks and
uncertainties. While these forward-looking statements, and any assumptions on
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;
inability to successfully implement operating strategies (including the
achievement of cost savings); failure to derive anticipated benefits from the
Recent Acquisitions; failure to raise additional financing; working capital
adjustments; 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 under "Risk Factors" or elsewhere in this Prospectus.
Stockholders 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 of this Prospectus or to
reflect the occurrence of unanticipated events.
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, which have all been
acquired since January 1997. The Company consummated the 1997 Acquisitions
between January and June of 1997 and the Recent Acquisitions in February and
March of 1998. Prior to their acquisition by the Company, these acquired
companies operated independently. In addition, each of the Acquired
Businesses has significantly increased the size and operations of the
Company. The Unaudited Pro Forma Condensed Combined Financial Statements
include the combined operating results of the Acquired Businesses 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 the Acquired Businesses operated on a combined
basis during those periods. On a pro forma basis, as of December 31, 1997 and
for the year then ended, the Recent Acquisitions represented 85% of the
Company's revenues and 82% of assets. The Company's prospects should be
considered in light of the numerous risks commonly encountered in business
combinations. Although the anticipated management of the Company has
significant experience in other industries, there can be no assurance that
the Company's management group will be able to effectively integrate the
Acquired Businesses. 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 or the Company. See "--Dependence on
Key Personnel" and "Business."
RISKS RELATED TO RECENT ACQUISITIONS
Although management believes that the consummation of the Recent
Acquisitions was in the best interests of the Company, it involves
substantial risks on the part of the Company. There can be no assurance that
the Recent Acquisitions will yield the expected benefits to the Company or
will not materially adversely affect the Company's business, financial
condition or results of operations.
12
<PAGE>
PACE Acquisition
The PACE acquisition agreement provides that each PACE seller will have an
option (the "Fifth Year Put Option"), exercisable for 90 days after the fifth
anniversary of the closing of the PACE acquisition, to require the Company to
repurchase up to one-third of the Company Class A Common Stock received by
that seller (representing 500,000 shares in the aggregate) for $33.00 in cash
per share. With certain limited exceptions, these option rights are not
assignable by the sellers. In certain circumstances, if the selling price of
the Company Class A Common Stock is less than $13.33 per share, the Company
may be required to make an offer to the sellers to provide an additional cash
payment or additional shares of Company Class A Common Stock, at the option
of each seller. Furthermore, pursuant to the terms of the Becker Employment
Agreement (as defined herein), during the period between December 12, 1999
and December 27, 1999, Mr. Becker, an Executive Vice President, Director and
a Member of the Office of the Chairman of the Company, will have the option
to, among other things, require the Company to purchase any stock or portion
thereof (including vested and unvested options) granted to him by the Company
and/or pay him an amount equal to the present value of the compensation
payable during the remaining term of his employment agreement. See
"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. The
Company is currently negotiating with the third party to waive this
restrictive provision; however, it is possible that the Company will be
unable to obtain the waiver. In management's view, this provision will not
materially affect the business or prospects of the Company.
Contemporary Acquisition
In addition, in the Contemporary acquisition agreement, the Company agreed
to make payments to any Contemporary sellers who own shares of Company Class
A Common Stock on the second anniversary of the closing of the Contemporary
acquisition. These payments will be due only if the average trading price of
1,402,850 shares of the Company Class A Common Stock issued during the
Contemporary aquisition is less than $13.33 per share during the 20-day
period ending on the second anniversary date. There can be no assurance that
the average trading price of the shares of Company Class A Common Stock will
be $13.33 per share at that time.
Network Acquisition
Pursuant to the Network acquisition agreement, the Company has agreed to
increase the purchase price for Network based on Network's actual 1998 EBITDA
(as defined in the acquisition agreement) as follows: (a) by $4.0 million if
the 1998 EBITDA equals or exceeds $9.0 million; (b) by an additional $4 for
each $1 of additional 1998 EBITDA between $9.0 million and $10.0 million; and
(c) by an additional $6 for each $1 of additional 1998 EBITDA between $10.0
million and $11.0 million. This contingent consideration of up to $14.0
million is payable in Company Class A Common Stock or, in certain
circumstances, in cash by no later than March 20, 1999.
FINANCING MATTERS
The Company will require additional financing in order to make all of the
payments described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
including the anticipated tax indemnification obligation to SFX Broadcasting
(approximately $101.0 million based on the trading price (on a when-issued
basis) of the Company Class A Common Stock on April 9, 1998), planned capital
expenditures (approximately $29.0 million), and certain change of control
payments to executive officers ($5.0 million). See "--Indemnification
Arrange-
13
<PAGE>
ments" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." The Company intends
to finance certain of these payments with the net proceeds of approximately
$132.5 million from the Offering (approximately $152.4 million if the
underwriters' over-allotment option is exercised in full); however there can
be no assurance that the Company will be able to complete the Offering or
obtain alternate financing on acceptable terms or at all. If completed, the
Offering will be dilutive to the ownership interests of the Company's
then-existing stockholders and the trading price of the Company Class A
Common Stock may be adversely affected. In addition, the Company intends to
pursue additional expansion opportunities and expects to continue to identify
and negotiate acquisitions in the live entertainment business. The Company is
currently negotiating with respect to certain acquisitions which the Company
intends to fund from its cash on hand, borrowings under the Credit Facility,
the proceeds from the Offering or through additional financings. However, the
Company has not entered into any definitive agreements with respect to any of
these acquisitions and there can be no assurance that the Company will be
able to consummate such acquisitions. See " -- Expansion Strategy; Need for
Additional Funds."
Furthermore, certain agreements of the Company, including the Distribution
Agreement, the Tax Sharing Agreement, the Employee Benefits Agreement,
certain employment agreements and the agreements relating to the Recent
Acquisitions provide for tax and other indemnities, purchase price
adjustments and future contingent payments in certain circumstances. There
can be no assurance that the Company will have sufficient sources of funds to
make such payments should they come due. In addition, consistent with its
operating strategy, the Company intends to pursue additional expansion
opportunities and expects to continue to identify and negotiate with respect
to substantial acquisitions in the live entertainment business. See "--Risks
Related to Recent Acquisitions," "--Indemnification Arrangements,"
"--Restrictions Imposed by the Company's Indebtedness," "--Substantial
Leverage" and "--Working Capital Adjustments and Repayment of Advances,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Certain Relationships and
Related Party Transactions--Indemnification of Mr. Sillerman" and
"Description of Indebtedness."
SUBSTANTIAL LEVERAGE
The Company is a highly leveraged company. As of December 31, 1997, on a
pro forma basis giving effect to the Offering and the application of the
proceeds therefrom, the Financing, the Recent Acquisitions and the Spin-Off,
the Company's consolidated indebtedness would have been approximately $534.9
million (of which $350.0 million would have consisted of the Notes, and the
balance would have consisted of $150.0 million in debt under the Credit
Facility, $16.2 million in pre-existing senior debt and $18.7 million of debt
assumed pursuant to the Recent Acquisitions), its temporary equity would have
been approximately $16.5 million, and its stockholders' equity would have
been approximately $153.3 million. See "Unaudited Pro Forma Condensed
Combined Financial Statements." On a pro forma basis for the Recent
Acquisitions, the Financing and the Offering, the Company's ratio of total
debt to total capitalization as of December 31, 1997 would have been .76 to
1.0. Certain of the agreements relating to the Recent Acquisitions provide
for other purchase price adjustments and future contingent payments in
certain circumstances. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Acquisitions." 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 "--Financing Matters," "Capitalization" and "Unaudited Pro Forma
Condensed Combined Financial Statements."
The Company's ability to make scheduled payments of principal, to pay
interest on or to refinance its indebtedness, or to fund planned 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 Acquired Businesses and their integration into the Company's
operations. There can be no assurance that the Company will be able to make
planned borrowings (including under the Credit Facility), that the Company's
business will generate sufficient cash flow from operations, or that future
borrowings will be available in an amount to enable the Company to service
its debt and to make necessary capital or other expenditures. The Company may
be required to
14
<PAGE>
refinance a portion of the principal amount of its indebtedness prior to
their respective maturities. There can be no assurance that the Company will
be able to raise additional capital through the sale of securities, the
disposition of assets or otherwise for any refinancing. See "--Financing
Matters" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
The degree to which the Company is and will be leveraged could have
material consequences to the holders of shares of Company Common Stock,
including, but not limited to, (a) increasing the Company's vulnerability to
general adverse economic and industry conditions, (b) limiting the Company's
ability to obtain additional financing to fund future acquisitions, working
capital, capital expenditures and other general corporate requirements, (c)
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 the cash flow to fund
working capital, capital expenditures or other general corporate purposes,
(d) limiting the Company's flexibility in planning for, or reacting to,
changes in its business and the industry and (e) placing the Company at a
competitive disadvantage to less leveraged competitors. In addition, the
Indenture and the Credit Facility contain, financial and other restrictive
covenants that limit the ability of the Company to, among other things,
borrow additional funds. Failure by the Company to comply with these
covenants could result in an event of default that, if not cured or waived,
could have a material adverse effect on the Company's business, financial
condition and results of operations. The indebtedness incurred under the
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 Notes and borrowings under the Credit Facility are
guaranteed by the Company's subsidiaries. See "--Restrictions Imposed by the
Company's Indebtedness" and "Description of Indebtedness."
INDEMNIFICATION ARRANGEMENTS
In the Distribution Agreement, the Company will agree to indemnify, defend
and hold SFX Broadcasting and its subsidiaries harmless from and against
certain liabilities to which SFX Broadcasting or any of its subsidiaries may
be or become subject. These liabilities relate to the assets, business,
operations, employees (including under any employment agreement assumed by
the Company in the Spin-Off), debts or liabilities of the Company and its
subsidiaries. Although the Company does not anticipate that any material
liabilities for which it has agreed to indemnify SFX Broadcasting and its
subsidiaries will arise, it is possible that the Company will become subject
to these liabilities. Any of these liabilities may have a material adverse
effect on the Company's business, financial condition or results of
operations. See "Agreements Relating to the Spin-Off--The Distribution
Agreement."
In addition, pursuant to the Tax Sharing Agreement, the Company also will
be responsible for certain taxes of SFX Broadcasting, including taxes imposed
with respect to income generated by the Company for periods prior to the
Spin-Off and taxes resulting from gain recognized in the Spin-Off. See
"Agreements Relating to the Spin-Off--Tax Sharing Agreement." The actual
amount of the gain will be based on the excess of the value of the Company
Common Stock distributed in the Spin-Off over the tax basis of that stock.
The Company believes that the amount of taxes that it will be required to
pay in connection with the Spin-Off will be determined by reference to the
trading price of the Company Common Stock on a date no later than the first
trading date following the Spin-Off. Increases or decreases in the value of
the Company Common Stock subsequent to such date will not affect the tax
liability. The Company will be allowed to offset any gain or income by the
net operating losses of SFX Broadcasting (including net operating losses
generated in the current year prior to the Spin-Off) which are available to
offset such gain or income. If the Company Common Stock had a value of
approximately $15 per share at the time of the Spin-Off, management believes
that no material indemnification payment would be required. Such
indemnification obligation would be approximately $4.0 million at $16 per
share and would increase by approximately $7.7 million for each $1.00
increase above the per share valuation of $16. If the Company Common Stock
were valued at $28.50 per share (the last price of the Company Class A Common
Stock (trading on a when issued basis) on the over-the-counter market on
April 9, 1998), management estimates that the Company would have been
required to pay approximately $101.0 million pursuant to such
15
<PAGE>
indemnification obligation. The Company intends to use a substantial portion
of the proceeds from the Offering to make such payment, although there can be
no assurance that the Company will be able to consummate the Offering, and
expects that such payment will be due on or about June 15, 1998. Such payment
will not result in any corresponding increase in the Company's assets or cash
flows and, therefore, stockholders will experience substantial dilution.
Concurrently with the execution of the SFX Merger Agreement, Mr. Sillerman
waived his right to receive indemnification from SFX Broadcasting, its
subsidiaries, SFX Buyer Sub and SFX Buyer, after the effective time of the
SFX Merger with respect to claims or damages relating to the SFX Merger
Agreement and the transactions contemplated thereby, except to the extent
that SFX Broadcasting can be reimbursed under the terms of its directors' and
officers' liability insurance. It is anticipated that, after the Spin-Off,
the Company will agree to indemnify (to the extent permitted by law) Mr.
Sillerman for any such claims or damages. In addition, pursuant to Messrs.
Sillerman's and Ferrel's existing employment agreements with SFX Broadcasting
(which will be assumed by the Company pursuant to the SFX Merger Agreement),
the Company will be obligated to indemnify them (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 SFX Broadcasting in
connection with the SFX Merger. See "Certain Relationships and Related
Transactions--Assumption of Employment Agreements; Certain Change of Control
Payments" and "--Indemnification of Mr. Sillerman."
FUTURE CHARGES TO EARNINGS
Consummation of the Recent Acquisitions will result in substantial charges
to earnings relating to interest expense and the recognition and amortization
of goodwill; these charges will increase the Company's losses or reduce or
eliminate its earnings, if any. As of December 31, 1997 the Company had
goodwill of approximately $60.3 million. This balance will substantially
increase in 1998 due to the Recent Acquisitions. Goodwill is being amortized
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."
The Company anticipates entering into employment agreements with certain
of its executive officers before the Spin-Off. In connection with these
agreements, the Company's Board (the "Board"), on the recommendation of its
Compensation Committee, agreed to sell the executive officers an aggregate of
650,000 shares of Company Class B Common Stock and 90,000 shares of Company
Class A Common Stock at a purchase price of $2.00 per share. The shares will
be issued on or about the Spin-Off Distribution Date. The Company will record
a non-cash compensation charge at the date of the sale equal to the fair
market value of the shares less the aggregate purchase price paid.
In addition, the Board, on the recommendation of its Compensation
Committee, also has approved the issuance of stock options exercisable for an
aggregate of 252,500 shares of Company 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 the three-year
exercise period to the extent that the fair value of the underlying Company
Class A Common Stock exceeds the exercise price on the date of issuance.
These substantial non-cash charges to earnings could increase the Company's
losses or reduce or eliminate its earnings, if any. See "--Indemnification
Arrangements" and "Management--Employment Agreements and Arrangements with
Certain Officers and Directors."
Further, the Company may recognize a charge to earnings associated with
the Meadows Repurchase resulting from 250,838 shares of the Company Class A
Common Stock to be issued in the Spin-Off to Mr. Sillerman. See "Certain
Relationships and Related Transactions." The amount of such charge would be
equal to the fair value of the Company Class A Common Stock to be received by
Mr. Sillerman at the time of the Meadows Repurchase.
FUTURE ACQUISITIONS
The Company expects to pursue additional acquisitions of live
entertainment businesses in the future. Future acquisitions by the Company
could result in (a) potentially dilutive issuance of equity securities, (b)
the incurrence of substantial additional indebtedness and/or (c) the
amortization of
16
<PAGE>
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--Future Acquisitions."
EXPANSION STRATEGY; NEED FOR ADDITIONAL FUNDS
The Company expects to pursue additional acquisitions of live
entertainment 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. Each acquisition may also be subject to the prior
approval of the Company's lenders. Any debt financing would require payments
of principal and interest and would adversely impact the Company's cash flow.
Additional financing for future acquisitions may be unavailable and,
depending on the terms of the proposed acquisitions and financing, may be
restricted by the terms of the Credit Facility and the Indenture. See
"--Financing Matters," "--Restrictions Imposed by the Company's Indebtedness"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources." Furthermore, future
acquisitions may result in potentially dilutive issuances of equity
securities as well as charges to operations relating to interest expense or
the recognition and amortization of goodwill; these charges would increase
the Company's losses or reduce or eliminate its earnings, if any.
Acquisitions also involve numerous risks, including difficulties in the
assimilation of operations, technologies, services and products of the
acquired companies and the diversion of management's attention from other
business concerns. If any additional acquisition occurs, the Company's
business, financial condition and results of operations might be materially
adversely affected.
RESTRICTIONS IMPOSED BY THE COMPANY'S INDEBTEDNESS
The indenture governing the Notes (the "Indenture") and the Credit
Facility 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 other indebtedness, pay
dividends, make certain investments or acquisitions, repurchase or redeem
capital stock, engage in mergers or consolidations, or engage in certain
transactions with subsidiaries and affiliates and otherwise restrict
corporate activities. These restrictions may adversely affect the Company's
ability to finance its future operations or capital needs or to engage in
other business activities that may be in the interest of the Company. In
addition, the Indenture and the Credit Facility require the Company to
maintain compliance with certain financial ratios, such as a maximum total
leverage ratio, a maximum senior leverage ratio, a minimum fixed charges
ratio, a minimum pro forma interest expense ratio and a minimum debt service
ratio. The Company's ability to comply with these ratios and limits may be
affected by events beyond its 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 Credit Facility. Such an
event of default could permit the lenders to declare all borrowings
outstanding to be due and payable, to require the Company to apply all of its
available cash to repay its borrowings or to prevent the Company from making
debt service payments on certain portions of its outstanding indebtedness. If
the Company were unable to repay any borrowings when due, the lenders could
proceed against their collateral. The Credit Facility requires the Company
and its subsidiaries to grant the lenders thereunder a continuing security
interest in all of their tangible assets and in the capital stock of the
guaranteeing subsidiaries. If the Company's indebtedness were to be
accelerated, there can be no assurance that the assets of the Company would
be sufficient to repay its indebtedness in full.
Upon the occurrence of a Change of Control (as defined in the Indenture
and the Credit Facility), the Company will be required to offer to repurchase
the outstanding Notes and to repay the amounts outstanding under the Credit
Facility. There can be no assurance that the Company will be able to obtain
17
<PAGE>
a waiver of these provisions or that sufficient funds will be available at
the time of any Change of Control to refinance its indebtedness. The failure
to either obtain waivers or refinance its indebtedness will result in a
material adverse effect to the Company's business, results of operations and
financial condition. See "--Substantial Leverage," "Principal Stockholders of
the Company" and "Description of Indebtedness."
WORKING CAPITAL ADJUSTMENTS AND REPAYMENT OF ADVANCES
Pursuant to the Distribution Agreement, the Company must pay SFX
Broadcasting any net negative Working Capital at the time of consummation of
the SFX Merger. Alternatively, SFX Broadcasting mustpay to the Company any
net positive Working Capital. As of December 31, 1997, the Company estimates
that Working Capital to be received by the Company would have been
approximately $3.0 million (excluding the Series E Adjustment). The actual
amount of Working Capital as of the closing of the SFX Merger is likely to
differ substantially from the amount as of December 31, 1997, and will be a
function of, among other things, the operating results of SFX Broadcasting
through the date of the SFX Merger, the actual cost of consummating the SFX
Merger and the related transactions. SFX Broadcasting will also incur certain
other significant expenses prior to the consummation of the SFX Merger that
could reduce Working Capital, including the payment of dividends and interest
on SFX Broadcasting's debt and the Settlement Amount. Moreover, Working
Capital will be reduced by at least $2.1 million pursuant to the Series E
Adjustment. If the Company is required to make Working Capital payments to
SFX Broadcasting, there can be no assurance that the Company will have the
funds to do so or that it will have sufficient funds to conduct its
operations after making the required payments. See "--Financing Matters,"
"Agreements Relating to the Spin-Off--Distribution Agreement" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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,
Howard J. Tytel and Thomas P. Benson. Although many of these individuals
generally have greater experience in the radio broadcasting business than the
live entertainment industry, they do have significant expertise in selecting,
negotiating and financing acquisitions and in operating and managing public
companies. In addition, most of the Company's directors and executive
officers are also currently acting as directors and executive officers of SFX
Broadcasting. Until the consummation of the SFX Merger, these directors and
executive officers can be anticipated to expend substantial time and effort
in managing the business of SFX Broadcasting (which may detract from their
performance with respect to the Company). If the SFX Merger is not
consummated, there can be no assurance that the Company will be able to
retain the services of these directors and executive officers. The Company
has entered into an employment agreement with Mr. Becker and has reached
agreements in principle with Messrs. Sillerman, Ferrel, Tytel, and Benson to
enter into employment agreements which will become effective upon
consummation of the SFX Merger. See "The Spin-Off" and "Management."
Messrs. Sillerman and Tytel are also officers and directors of, and have
an aggregate equity interest of approximately 8.8% in The Marquee Group, Inc.
("Marquee"), a company involved in various aspects of the sports, news and
other entertainment industries, and own a substantial equity interest in
Triathlon, a company that owns and operates radio stations. In addition, they
provide consulting services to both companies through an affiliated entity.
Messrs. Sillerman and Tytel devote time to both Marquee and Triathlon, and
the amount of time they continue to devote to those companies could detract
from their duties as officers and directors of the Company. However, neither
Mr. Sillerman nor Mr. Tytel has an employment agreement with Marquee or
Triathlon, and they do not anticipate devoting significant amounts of time to
Marquee or Triathlon. See "--Potential Conflicts of Interest."
Furthermore, the operations of each of the Acquired Businesses are local
in nature and depend to a significant degree on the continued services of
between one to three individuals at each business. See "Management" and
"Certain Relationships and Related Transactions." The loss of any of these
individual's services could have a material adverse effect on the Company's
business, financial condition and results of operations.
18
<PAGE>
POTENTIAL CONFLICTS OF INTEREST
Marquee is a publicly-traded company that, among other things, acts as
booking agent for tours and appearances for musicians and other entertainers.
Messrs. Sillerman and Tytel have an aggregate equity interest of
approximately 8.8% in Marquee; Mr. Sillerman is the chairman of its board of
directors, and Mr. Tytel is one of its directors. 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, 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 with events in which Marquee is
involved. See "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, provides
financial consulting services to Marquee and Triathlon. TSC's services are
provided by certain directors, officers and employees of the Company who are
not separately compensated for their services by TSC. Messrs. Sillerman and
Tytel have substantial equity interests in Triathlon. In any transaction,
arrangement or competition with Marquee or Triathlon, 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, Marquee and Triathlon, on
the other hand. See "Certain Relationships and Related
Transactions--Triathlon Fees."
In addition, prior to the consummation of the SFX Merger, Mr. Sillerman
and other members of the Company's management team will have management
obligations to both SFX Broadcasting and the Company that may cause them to
have conflicts of interest. See "Management" and "Certain Relationships and
Related Transactions--Potential Conflicts of Interest."
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 the February 25, 2000, to acquire
the Company's then existing motor sports line of business (or, if that line
of business has been sold, the Company's then existing theatrical line of
business) at its then fair market value. Mr. Becker's option may present a
conflict of interest in his role as a director of the Company. See "--Control
of Motor Sports and Theatrical Businesses" and "Management."
CONTROL OF MOTOR SPORTS AND THEATRICAL BUSINESSES
Pursuant to the employment agreement entered into between Brian Becker and
the Company in connection with the PACE acquisition, Mr. Becker has the
option, exercisable within 15 days after February 25, 2000 to acquire the
Company's then existing motor sports line of business (or, if that line of
business has previously been sold, the Company's then existing theatrical
line of business) at its then fair market value. Mr. Becker's exercise of
this option could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, during the period
between February 25, 1999 and February 25, 2000, Mr. Becker also has a right
of first refusal under certain circumstances to acquire the theatrical or
motor sports line of business at a price equal to 95% of the proposed
purchase price. Mr. Becker's right of first refusal may have the effect of
discouraging potential bidders for such lines of businesses from negotiating
with the Company. See "Management--Employment Agreements and Arrangements
with Certain Officers and Directors." On a pro forma basis giving effect to
the Recent Acquisitions, specialized motor sports would have comprised
approximately 6%, and theater would have comprised approximately 16%, of the
Company's total net revenues for the year ended December 31, 1997.
BGP RIGHT OF FIRST REFUSAL
The Company has agreed that it will not sell all, or substantially all, of
BGP's assets prior to February 24, 2001 without offering the BGP sellers the
opportunity to purchase the assets on the same terms as those included in any
bona fide offer received by the Company from any third party. BGP's right of
first refusal may have the effect of discouraging potential bidders from
negotiating with the Company.
19
<PAGE>
CONTROL OF CONCERTS
After the consummation of the Spin-Off or the SFX Merger, the senior
management of Concerts may have the right pursuant to their employment
agreements (a) to purchase the outstanding capital stock of Concerts (a
subsidiary of the Company holding a significant amount of the assets of the
Company) for Fair Market Value (as defined in their employment agreements) or
(b) to receive a cash payment equal to 15% of the amount by which the Fair
Market Value of Concerts exceeds the fixed payment portion of the cash
purchase price of the acquisition of Concerts, plus 20% interest thereon. The
senior management of Concerts and SFX Broadcasting have reached an agreement
in principle to waive any of the above rights in connection with the
Spin-Off, the SFX Merger and related transactions; however, there can be no
assurance that the rights will be waived on terms acceptable to SFX
Broadcasting and the Company or at all. In addition, although the Company is
in the process of negotiating amendments to these agreements, these and
certain other rights described in the agreements may continue to apply to
transactions after, or unrelated to, the Spin-Off or the SFX Merger. See
"Certain Relationships and Related Transactions--Delsener/Slater Employment
Agreements."
CONTROL BY MANAGEMENT; STOCK ISSUED TO MANAGEMENT
At the time of completion of the Spin-Off, and after the grant of
additional shares as described in "Management--Employment Agreements and
Arrangements with Certain Officers and Directors" and "Certain Relationships
and Related Transactions--Issuance of Stock to Holders of SFX Broadcasting's
Options and SARs," it is anticipated that Mr. Sillerman will beneficially own
approximately 46.1% of the total voting power of the Company Common Stock,
and that all directors and executive officers together will beneficially own
approximately 52.5% of the total voting power of the Company 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 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,
including transactions in which the holders of Company Class A Common Stock
might otherwise receive a premium for their shares. See "--Anti-Takeover
Effects," "Management," "Principal Stockholders of the Company" and
"Description of Capital Stock."
At the time of completion of the Spin-Off, it is anticipated that Mr.
Sillerman will beneficially own 1,524,168 shares of Company Class B Common
Stock representing approximately 42.4% of the total voting power of the
Company Common Stock, which will allow him to exert substantial control in
the election of directors. Each share of Company Class B Common Stock
automatically converts into a share of Company Class A Common Stock upon (i)
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 (ii) upon the death of Mr. Sillerman, in the
case of any shares of Company Class B Common Stock held by Mr. Sillerman or
any Affiliate of Mr. Sillerman. The terms of the Certificate of Incorporation
contemplate that, absent an event of automatic conversion, the shares of
Company Class B Common Stock held by Mr. Sillerman could be transferred to a
third-party without losing their special voting rights.
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 can,
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 of any music concert,
theatrical show or motor sports event. In addition, decreased attendance, a
change in
20
<PAGE>
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 and the Acquired
Businesses' 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.
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--The Company's Live Entertainment Activities--Venue Operations."
SEASONALITY
The Company's operations and revenues are largely seasonal in nature, with
generally higher revenue generated in the second and third quarters of the
year. For example, on a pro forma basis for the 1997 Acquisitions, the
Company generated approximately 68% of its revenues in the second and third
quarters for the twelve months ending December 31, 1997. The Company's
outdoor venues are primarily utilized in the summer months and do not
generate substantial revenue in the late fall, winter and early spring.
Similarly, the musical concerts that the Company promotes largely occur in
the second and third quarters. To the extent that the Company's entertainment
marketing and consulting relate to musical concerts, they also predominantly
generate revenues in the second and third quarters. Therefore, the
seasonality of the Company's business causes (and 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 Recent Acquisitions, such as motor
sports (which is winter-seasonal) and Touring Broadway Shows (which typically
tour between September and May). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
COMPETITION
Competition in the live entertainment industry is intense, and competition
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 Acquired Businesses 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. 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.
21
<PAGE>
REGULATORY MATTERS
The business of the Company is not generally subject to material
governmental regulation. However, if the Company seeks to acquire or
construct new venue operations, its ability to do so will be subject to
extensive local, state and federal governmental licensing, approval and
permit requirements, including, among other things, approvals of state and
local land-use and environmental authorities, building permits, zoning
permits and liquor licenses. Significant acquisitions may also be subject to
the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended. Other types of licenses, approvals and permits from governmental
or quasi-governmental agencies might also be required for other opportunities
that the Company may pursue in the future. There can be no assurance that the
Company will be able to obtain the licenses, approvals and permits it may
require from time to time in order to operate its business.
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.
FRAUDULENT CONVEYANCE
The Board of Directors of SFX Broadcasting does not intend to consummate
the Spin-Off unless it is satisfied that SFX Broadcasting is solvent before
and will be solvent following the Spin-Off and that the Spin-Off is otherwise
permissible under applicable law. There is no certainty, however, that a
court would find the facts relied on and the judgments made by the Board of
Directors of SFX Broadcasting to be binding on creditors of SFX Broadcasting
or that a court would reach the same conclusions as the Board of Directors of
SFX Broadcasting in determining that SFX Broadcasting is solvent at the time
of, and after giving effect to, the Spin-Off. If a court in a lawsuit filed
by an unpaid creditor or representative of unpaid creditors, such as a
trustee in bankruptcy, were to find that, at the time the Spin-Off is
consummated or after giving effect thereto, SFX Broadcasting (a) was
insolvent, (b) was rendered insolvent by reason of the Spin-Off, (c) was
engaged in a business or transaction for which the remaining assets of SFX
Broadcasting constituted unreasonably small capital or (d) intended to incur,
or believed it would incur, debts beyond its ability to pay as the debts
matured, then the court might void the Spin-Off (in whole or in part) as a
fraudulent conveyance and require SFX Broadcasting's stockholders to return
the shares of Company distributed in the Spin-Off (in whole or in part) to
SFX Broadcasting or require the Company to fund certain liabilities of SFX
Broadcasting for the benefit of SFX Broadcasting's creditors. If the assets
of the Company were recovered as fraudulent transfers by a creditor or
trustee of SFX Broadcasting, the relative priority of right to payment
between any financing and any fraudulent transfer claimant would be unclear,
and the Company could be rendered insolvent. In addition, under applicable
corporate law, a corporation generally makes distributions to its
stockholders only out of its surplus (net assets minus capital) and not out
of capital. The foregoing consequences would also apply were a court to find
that the Spin-Off was not made out of SFX Broadcasting's surplus.
Indebtedness of the Company was incurred to finance the Recent Acquisitions,
to refinance certain indebtedness of the Company and the Recent Acquisitions,
to pay related fees and expenses, and for general corporate purposes.
Management believes
22
<PAGE>
that the indebtedness of the Company incurred in the Financing was incurred
for proper purposes and in good faith, and that, based on present forecasts
and other financial information, after the consummation of the Spin-Off, the
Company will be solvent, will have sufficient capital for carrying on its
business and will be able to pay its debts as they mature.
The Company believes that, (a) SFX Broadcasting and the Company will be
solvent at the time of the Spin-Off, (b) the Company was solvent at the time
of the Financing and (c) the Spin-Off will be made entirely out of SFX
Broadcasting surplus in accordance with applicable law. However, the Company
cannot predict what standard a court might apply in evaluating these matters,
and it is possible that the court would disagree with the Company's
conclusions.
ANTI-TAKEOVER EFFECTS
The Amended and Restated Certificate of Incorporation of the Company (the
"Company Certificate"), the By-laws of the Company and the Delaware General
Corporation Law (the "DGCL") contain several provisions that could have the
effect of delaying, deferring or preventing a change of control of the
Company in a transaction not approved by the Board. The Company Certificate
provides for the issuance of shares of Company Class B Common Stock (with 10
votes per share in most matters), and the holders of these shares will
generally be able to prevent a change of control of the Company if they so
desire. In addition, the Company Certificate authorizes the Board to issue up
to 25,000,000 shares of preferred stock in one or more series and to fix the
number of shares and the relative designations and powers, preferences, and
rights, and qualifications, limitations, and restrictions thereof, without
further vote or action by the stockholders. Issuances of preferred stock
could, under certain circumstances, have the effect of delaying or preventing
a change in control of the Company and may adversely affect the rights of
holders of the Company Common Stock. Furthermore, the Company is subject to
the anti-takeover provisions of Section 203 of the DGCL, which prohibit the
Company from engaging in a "business combination" with an "interested
stockholder" for three years after the date of the transaction in which the
person became an interested stockholder (unless the business combination is
approved in a prescribed manner). The application of Section 203 could also
have the effect of delaying or preventing a change in control of the Company.
The Board has also adopted certain other programs, plans and agreements with
the Company's management and/or employees that may make a change of control
more expensive. See "Management," "Principal Stockholders of the Company" and
"Description of Capital Stock."
LIMITED MARKET FOR COMPANY CLASS A COMMON STOCK; POTENTIAL VOLATILITY OF
STOCK PRICE
Although the Company Class A Common Stock has been approved for quotation
on the Nasdaq National Market, there can be no assurance that those shares
will be initially listed on the Nasdaq National Market or elsewhere or will
continue to be listed in the future. While a when-issued trading market has
developed in the Company Class A Common Stock, there can be no assurance that
trading would be sustained or that the volume would be sufficient for trading
to occur with any frequency. As a result, it could be difficult to make
purchases or sales of Company Class A Common Stock in the market at any
particular time. In addition, until the Company Class A Common Stock is fully
distributed and an orderly market develops, the prices at which Company Class
A Common Stock trades may fluctuate significantly. There can be no assurance
as to the prices at which Company Class A Common Stock will trade before or
after the Spin-Off. See "Listing and Trading of Company Class A Common Stock"
and "Shares Eligible for Future Sale."
In addition, as a result of the Spin-Off, stockholders of SFX Broadcasting
will acquire approximately 14,550,000 shares of Company Common Stock that are
freely tradeable without restrictions or further registration under the
Securities Act, except that any shares held by "affiliates" of the Company
within the meaning of the Securities Act will be subject to the resale
limitations of Rule 144 promulgated under the Securities Act. Because the
Spin-Off is being made to stockholders of SFX Broadcasting, who will not make
an affirmative decision to invest in the Company Class A Common Stock, there
can be no assurance that some or all of these shareholders will not sell the
shares of Company Class A Common Stock into the market shortly after the
Spin-Off. Such trading could increase the volatility of, and adversely affect
the market price of, the Company Class A Common Stock. See "Listing and
Trading of Company Class A Common Stock" and "Shares Eligible for Future
Sale."
23
<PAGE>
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 $1,112.2 million 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. In the case of an unprofitable event, a
promoter will sometimes renegotiate a lower guarantee in order to mitigate
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 11.7%. 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 had 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 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
24
<PAGE>
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 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.
25
<PAGE>
BUSINESS
GENERAL
The Company is a leading promoter and producer of, and operator of venues
for, live entertainment events. The Company believes that it owns and/or
operates the largest network of venues used principally for music concerts
and other live entertainment events in the United States, with 39 venues
either directly owned or operated under lease or exclusive booking
arrangements in 21 of the top 50 markets, including 9 amphitheaters in 6 of
the top 10 markets. Through its large number of venues, its strong market
presence and the long operating histories of the Company and the businesses
acquired pursuant to the 1997 Acquisitions and the Recent Acquisitions, the
Company operates an integrated franchise that promotes and produces a broad
variety of live entertainment events locally, regionally and nationally.
During 1997, approximately 25 million people attended 9,100 events promoted
and/or produced by the Company and the Acquired Businesses, including
approximately 3,880 music concerts, 4,850 theatrical shows and 188
specialized motor sports events. These events included: (a) music concerts
featuring artists such as The Rolling Stones, Phish, Fleetwood Mac, Ozzy
Osbourne and Alanis Morissette, (b) music festivals such as the George Strait
Country Music Festival, (c) touring theatrical productions such as The
Phantom of the Opera, Jekyll & Hyde, Rent and The Magic of David Copperfield
and (d) specialized motor sports events, such as Truck Fest and American
Motorcycle Association Supercross racing events.
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. 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 (a) creates tours for music concert, theatrical,
specialized motor sports and other events, (b) develops and manages Touring
Broadway Shows and (c) develops specialized motor sports and other live
entertainment events. In connection with its live entertainment events, the
Company also derives related revenue streams, including from the sale of
corporate sponsorships and advertising, the sale of concessions and the
merchandising of a broad range of products. On a pro forma basis giving
effect to the 1997 Acquisitions and the Recent Acquisitions, the Company's
music and ancillary businesses would have comprised approximately 78%;
theater would have comprised approximately 16%; and specialized motor sports
would have comprised approximately 6% of the Company's total net revenues for
the year ended December 31, 1997.
SFX MERGER AND THE SPIN-OFF
SFX Broadcasting was formed in 1992 principally to acquire and operate
radio broadcasting stations. SFX Broadcasting currently operates in two lines
of business: radio broadcasting and live entertainment. In August 1997, SFX
Broadcasting agreed to merge its radio business with a subsidiary of SFX
Buyer and to spin-off the Company to certain stockholders of SFX Broadcasting
on a pro-rata basis. In connection with the Spin-Off, SFX Broadcasting (a)
has contributed its concert and other live entertainment operations to the
Company and (b) intends to distribute all of the outstanding shares of
Company Common Stock to the holders of common stock, Series D preferred
stock, interests in director deferred stock ownership plan and certain
warrants of SFX Broadcasting as of the close of business on April 20, 1998.
SFX Broadcasting has indicated that it intends to distribute such shares on
or about April 27, 1998. The receipt of shares by stockholders of SFX
Broadcasting pursuant to the Spin-Off will be a taxable transaction. See "The
Spin-Off" and "Agreements Relating to the Spin-Off."
1997 ACQUISITIONS
The Company was formed as a wholly-owned subsidiary of SFX Broadcasting in
December 1997 as the parent company of Concerts. Concerts was formed by SFX
Broadcasting in January of 1997 to acquire and hold SFX Broadcasting's live
entertainment operations.
Delsener/Slater
In January 1997, Concerts acquired Delsener/Slater, a leading concert
promotion company, for an aggregate consideration of approximately $27.6
million, including $2.9 million for working capital and the
26
<PAGE>
present value of deferred payments of $3.0 million to be paid without
interest over five years and $1.0 million to be paid without interest over
ten years. 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 for $900,000 in cash, 250,838 shares of SFX
Broadcasting Class A common stock with a value of approximately $7.5 million
and the assumption of approximately $15.4 million in debt. 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 for $53.9 million in cash, $2.0
million payable over five years, shares of SFX Broadcasting Class A common
stock issued and issuable over a two year period with a value of
approximately $4.0 million and the assumption of approximately $1.6 million
of debt. 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.
RECENT ACQUISITIONS
In February and March of 1998, the Company completed its acquisitions of
PACE, Contemporary, BGP, Network, Concert/Southern and certain related
entities. The aggregate purchase price of the Recent Acquisitions was
approximately $442.1 million in cash including repaid debt and payments for
working capital, $7.8 million in assumed debt and the agreement to issue, or
the issuance of securities convertible into, an aggregate of approximately
4.2 million shares of Company Class A Common Stock. 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 are filed as exhibits hereto and are incorporated herein by
reference. See "Additional Information."
PACE
On February 25, 1998, the Company acquired all of the outstanding capital
stock of PACE for a total purchase price of $109.5 million in cash, the
repayment of $20.6 million of debt and the agreement to issue upon the
consummation of the Spin-Off 1.5 million shares of Company Class A Common
Stock. PACE is one of the largest diversified promoters and producers of live
entertainment in the United States, having what the Company believes to be
the largest distribution network in each of its music concerts, theatrical
shows and motor sports events business segments. As part of its distribution
network for music concerts, PACE owns interests in and manages the largest
network of amphitheaters in the United States. During 1997, more than 15
million people attended approximately 5,700 events produced or presented by
PACE. These events included: (a) music concerts featuring artists such as Rod
Stewart, Jimmy Buffett and Ozzy Osbourne; (b) theatrical shows such as The
Phantom of the Opera, Jekyll & Hyde, Rent and The Magic of David Copperfield;
and (c) specialized motor sports events featuring AMA Supercross racing,
monster trucks, demolition derbies and thrill acts. In 1997, PACE's music
division, PACE Music, presented 491 amphitheater events in the United States,
and 348 non-amphitheater events in over 40 markets. Its recently formed
touring division, PACE Touring, produces national tours of music events,
having produced two national music tours in 1997. In 1997, PACE's theatrical
division, PACE Theatrical, (a) presented approximately 300 weeks of theater
in over 30 markets, including 31 subscription markets with
27
<PAGE>
approximately 220,000 subscribers, and (b) produced or had significant
investments in the production of 19 Broadway Shows and Touring Broadway
Shows. In 1997, PACE Motor Sports presented over 188 events in over 70
markets. In connection with the acquisition of PACE, the Company has obtained
100% of Pavilion Partners, a partnership that owns interests in 10 of the 41
venues owned by the Company, by acquiring one-third of Pavilion Partners
through the acquisition of PACE and the remaining two-thirds of Pavilion
Partners from YM Corp. ("Sony") and The Westside Amphitheater Corporation and
Charlotte Amphitheater Corporation, (collectively "Blockbuster"), for a
combined consideration of $90.6 million (comprised of cash of $41.4 million,
the repayment of $43.1 million of debt related to the two-thirds interest and
the assumption of $6.1 million of debt related to a capital lease).
Under certain circumstances, the Company may be required to sell either
its motor sports or theatrical lines of business. See "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. The Company is currently negotiating with the third party to waive
this restrictive provision; however, it is possible that the Company will be
unable to obtain the waiver. In management's view, this provision will not
materially affect the business or prospects of the Company.
Contemporary
On February 27, 1998, the Company acquired 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 for approximately $72.8 million in cash, a payment for working
capital of $9.9 million, and the issuance of preferred stock of the Company
which, upon consummation of the Spin-Off, will convert into 1,402,850 shares
of Company Class A Common Stock. Contemporary is a vertically-integrated live
entertainment and special event promoter and producer, venue operator and
consumer marketer. Contemporary is also the leading promoter, producer and
tour developer of Christian performers (including Amy Grant and Michael W.
Smith) and is a major promoter and producer of comedy tours (including those
of Jerry Seinfeld, Tim Allen, Chris Rock and HBO's Def Comedy Jam).
Contemporary (through its Capital Tickets subsidiary) sells tickets for its
own events and events at its venues through a wide distribution of retail
outlets and a state-of-art interactive voice response phone system (operated
by its Dialtix affiliate) that permits automated ticket orders and credit
card payment. In addition to the venues controlled by Contemporary, clients
of Capital Tickets and Dialtix include the Kiel Center, a 20,000 seat arena
in St. Louis, Missouri (home arena of the National Hockey League's St. Louis
Blues), and Trans World Dome, a 60,000 seat stadium in St. Louis, Missouri
(home stadium of the National Football League's St. Louis Rams).
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.
BGP
On February 24, 1998, the Company acquired BGP for 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 options to purchase 562,640 shares of Company Class A Common
Stock upon consummation of the Spin-Off. BGP is one of the oldest promoters
and producers of live entertainment in the United States and is the principal
promoter of live entertainment in the San Francisco Bay area. During 1997,
more than 2.3 million people attended approximately 1,450 events
28
<PAGE>
promoted and/or produced by BGP. Events recently promoted or produced by BGP
include: (a) music concerts featuring artists such as Alanis Morissette,
Bruce Springsteen, Dave Matthews, Gloria Estefan, James Taylor, Jimmy
Buffett, Metallica, Neil Diamond, Phish and The Who; and (b) theatrical shows
such as Lord of the Dance and The Magic of David Copperfield. In 1997, BGP
promoted (a) 124 amphitheater events and (b) 1,199 non-amphitheater events in
over 20 markets. Divisions of BGP also produce and promote national gymnastic
and ice-skating tours and events as well as major corporate events for San
Francisco and Silicon Valley corporate customers. In 1997, BGP presented a
total of 133 gymnastic, ice-skating and major corporate events for clients
such as Adobe Systems, Charles Schwab, Banana Republic, Oracle, PowerBar,
Sterling Software and Excite. BGP also acts as a talent manager for national
acts including the Neville Brothers, the Gin Blossoms, Taj Mahal and Cracker.
Network
On February 27, 1998, the Company acquired Album Network, Inc., SJS and
The Network 40 for a total purchase price of $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 $2.5 million and
the issuance upon the Spin-Off of 750,188 shares of Company Class A Common
Stock upon consummation of the Spin-Off. The $2.5 million purchase of the
office building and related property consists of cash of $700,000 and the
assumption of debt of $1.8 million. 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. Each magazine is focused on research and insight common
to a specific contemporary radio format. These publications, Album Network,
Network 40, Urban Network, Virtually Alternative, Totally Adult, AggroActive
and Educated Guess, derive revenue from advertising sales and subscriptions.
Network also publishes The Yellow Pages of Rock, which is a reference book
popular with people and companies doing business in the broadcast music
industry. Network is currently developing a consumer music magazine that will
be distributed free to customers at music retail locations. Network also
provides radio airplay and music retail research services to record labels,
artist managers, retailers and radio broadcasters. Network gathers its
information directly from nearly 1,100 radio programmers and product buyers
and, in 1996, had more than 300 clients for these services. Annual fees
during this period ranged from $2,500 to $250,000 per corporate client.
Network and SJS are both creators and distributors of network radio
special events and live concert programming for over 400 music radio stations
in the top 200 United States radio markets. Additionally, SJS is an
independent creator, producer and distributor of music related programming,
services and research. SJS produces eight daily radio "show prep" services
that stations use to supplement in-house content production. In 1996, SJS
delivered these services to approximately 1,100 radio stations. Together,
Network and SJS barter or exchange these programs and services to radio
broadcasters for commercial inventory or airtime, which is in turn sold by
SJS to national network advertisers. Network also provides consulting and
entertainment marketing services to corporate clients with music business
interests.
Concert/Southern
On March 4, 1998, the Company acquired Concert/Southern for a total cash
purchase price of $16.9 million (including a working capital payment of
$300,000). Concert/Southern is a promoter of live entertainment in the
Atlanta metropolitan area. During 1997, more than 555,000 people attended
approximately 370 events promoted or produced by Concert/Southern. These
events included concerts featuring artists such as Celine Dion, James Taylor,
Alanis Morissette, ZZ Top, Bruce Springsteen, Bob Dylan, Harry Connick, Jr.
and Gregg Allman, in addition to a week-long engagement of the Broadway Show
Stomp. Concert/Southern also owns the rights to the Music Midtown Festival in
downtown Atlanta. This three day multi-stage music festival presents over 80
bands, and in 1997 drew approximately 200,000 people to the downtown Atlanta
area. Concert/Southern is currently developing a Music Midtown Festival for
June 1998 in Charlotte, North Carolina and has plans to export this festival
to other sites in future years.
THE COMPANY'S LIVE ENTERTAINMENT ACTIVITIES
The Company is engaged in (a) the booking, promotion and production of
live entertainment events and tours, (b) the ownership and/or operation of
concert and other entertainment venues and (c) the sale of corporate
sponsorships and advertising and provision of marketing and consulting
services to third parties.
29
<PAGE>
Booking and Promotion
The Company books and promotes music concert, theatrical, 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 Recent 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. In addition, the Company's Capital Tickets retail
distribution outlets and Dialtix interactive, voice-response automated phone
ticket order system are currently operating in three markets. The Company
believes that expanding the markets where it can utilize its own ticketing
sources will permit the Company to promote its live entertainment events more
effectively. The following table identifies artists whose events were
recently promoted by the Company or the Acquired Businesses:
<TABLE>
<CAPTION>
<S> <C> <C>
Aerosmith Elton John Phil Collins
Alabama Fleetwood Mac* Pink Floyd
Alanis Morissette James Taylor Phish
Bette Midler Jerry Seinfeld* R.E.M.
Billy Joel Jimmy Buffett Rod Stewart
Brooks & Dunn John Secada 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.
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 (a) the creation of tours for music concert, theatrical,
specialized motor sports and other live entertainment events, (b) the
development and management of Touring Broadway Shows and (c) 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.
30
<PAGE>
The Touring Broadway Show production and promotion industry is highly
fragmented. The Company believes it is the largest of six multiple-market
promoters of Touring Broadway Shows in the United States, and that the
remainder of the industry is made up of single-market promoters. The Company
competes with other producers and promoters to obtain presentation
arrangements with venues and performing arts organizations in various
markets, including in markets that have more than one venue suitable for
presenting a Touring Broadway Show. The Company's competitors, some of whom
have also been partners of PACE 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 promoters. On a pro
forma basis giving effect to the Recent Acquisitions, the Company would have
had a producing interest or investment in the following shows for 1997 and/or
1998:
<TABLE>
<CAPTION>
SHOW TITLE TYPE THE COMPANY'S INVOLVEMENT
- ------------------------------ ---------------------- -----------------------------
<S> <C> <C>
Big Touring Production
Damn Yankees Touring Production
David Copperfield Touring Production
Death Trap Touring Production
Funny Girl Touring Production
Harmony Development Production
Jekyll & Hyde Broadway Production
Kiss of the Spiderwoman Touring Production
Man of La Mancha Touring Production
Smokey Joe's Cafe Touring Production
The Sound of Music Touring Production
West Side Story Touring Production
A Chorus Line Touring (US & UK) Investment
Annie Broadway Investment
Carousel Touring Investment
Cirque Ingenieux Touring Investment
Grease 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.
31
<PAGE>
The Company currently sells subscription series for its Touring Broadway
Shows in the following 31 of the approximately 60 markets that maintain
active touring schedules:
<TABLE>
<CAPTION>
<S> <C> <C>
Atlanta, GA Long Beach, CA Palm Beach, FL
Austin, TX Louisville, KY Phoenix, AZ
Baltimore, MD Miami, FL Pittsburgh, PA
Chicago, IL Milwaukee, WI Portland, OR
Cincinnati, OH Minneapolis, MN San Antonio, TX
Columbus, OH Myrtle Beach, SC Seattle, WA
Dallas, TX Nashville, TN Tampa, FL
Ft. Lauderdale, FL New Orleans, LA Ottawa, Canada
Green Bay, WI Omaha, NE Edmonton, Canada
Houston, TX Orange County, CA
Indianapolis, IN Orlando, FL
</TABLE>
Subscriptions historically have covered two-thirds of PACE's break-even
point for Touring Broadway Shows. In 1997, PACE had approximately 220,000
subscribers for its Touring Broadway Shows.
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 188 events in over 70 markets in 1997. The Company's two
major specialized motor sports competitors produce approximately 40 and 55
events each year, respectively. 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--Control of Motor Sports and
Theatrical Businesses."
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 their 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 owns and/or operates the largest network
of venues used principally for music concerts and other live entertainment
events in the United States, with 39 venues either directly owned or operated
under lease or exclusive booking arrangements in 21 of the top 50 markets,
including 9 amphitheaters in 6 of the top 10 markets. The following chart
sets forth certain information with respect to the venues that are owned
and/or operated by the Company:
32
<PAGE>
<TABLE>
<CAPTION>
TOTAL
TOTAL AVG. NO. OF SEATS
MARKET TYPE OF THE COMPANY'S SEATING ATTENDANCE EVENTS SOLD IN
MARKET AND VENUE RANK(1) VENUE INTEREST CAPACITY IN 1997 IN 1997 1997
- ------------------------ -------- -------------- -------------------- ----------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
New York--Northern New
Jersey--Long Island:
PNC Bank ArtsCenter
(formerly Garden
State Arts Center)
(Holmdel, NJ).......... 1 amphitheater 22-year lease 17,500(2) 6,456 57 368,004
(expires October 31,
2017)
Jones Beach Marine
Amphitheater
(Wantagh, NY).......... amphitheater 10-year license 14,400(2) 7,992 45 359,653
agreement (expires
December 31, 1999)
Roseland Theater ....... theater exclusive booking 3,200 2,614 41 107,174
agent
Westbury Music Fair 2,870
(Westbury, NY)......... theater 43-year lease 2,198 148 325,348
(expires December
31, 2034)
Los Angeles--Riverside--
Orange County:
Glen Helen Blockbuster
Pavilion
(San Bernardino, CA) . 2 amphitheater 50% partnership 25,000(3) 7,736 15 116,033
interest in 25-year
lease (expires July
1, 2018)
Irvine Meadows
Amphitheater
(Irvine, CA)........... amphitheater 50% partnership 15,500 9,852 11 108,369
interest in 20-year
lease (expires
February 28, 2017)
San Francisco--Oakland--
San Jose:
Shoreline Amphitheater . 5 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 lease 8,500 6,191 9 55,718
(expires October 31,
1998)
Warfield Theatre........ theater 10-year lease 2,250 1,677 77 129,129
(expires May 31,
2008)
Filmore Auditorium...... theater 10-year lease 1,249 1,051 180 189,103
(expires August 31,
2007)
Punchline Comedy Club .
club 5-year lease 175 97 422 41,138
(expires September
15, 2001)
Philadelphia--Wilmington--
Atlantic City:
Blockbuster/SONY Music
Entertainment
Centre on the
Waterfront............. 6 amphitheater 31-year lease 25,000 8,973 54 484,528
(expires February 9,
2025)
33
<PAGE>
TOTAL
TOTAL AVG. NO. OF SEATS
MARKET TYPE OF THE COMPANY'S SEATING ATTENDANCE EVENTS SOLD IN
MARKET AND VENUE RANK(1) VENUE INTEREST CAPACITY IN 1997 IN 1997 1997
- ------------------------ -------- -------------- -------------------- ----------- ------------ --------- ---------
Dallas--Ft. Worth:
Starplex Amphitheater .. 9 amphitheater 32.5% partnership 20,500 8,799 35 307,981
interest in 31 year
lease (expires
December 31, 2028)
Houston--Galveston--
Brazoria:
Cynthia Woods Mitchell
Pavilion............... 10 amphitheater 15-year management 13,000 8,381 35 293,350
contract (expires
December 31, 2009
Bayou Place
Performance Hall....... theater 50% partnership 2,800 3,223 18 58,019
interest in 10-year
lease (expires
December 31, 2007)
Atlanta:
Lakewood Amphitheater .
12 amphitheater 32.5% partnership 19,000 9,257 32 296,225
interest in 35-year
lease (expires
January 1, 2019)
Chastain Park
Amphitheater........... amphitheater 10-year lease 7,000 5,777 28 161,755
(expires December
31, 2000)
Roxy Theater............ theater 7-year lease 1,600 848 102 86,498
(expires March 31,
2004)
Cotton Club............. theater 5-year lease 650 403 151 60,829
(expires June 12,
2000)
St. Louis:
Riverport
Amphitheater........... 17 amphitheater facility owned 21,000 10,531 42 442,302
American Theater........ theater 10-year lease 2,000 1,510 24 36,236
(expires July 31,
2004)
Westport Playhouse...... theater 1-year lease 1,100 880 15 13,196
(expires May 31,
1998)
Phoenix--Mesa:
Desert Sky Blockbuster
Pavilion(2)............ 18 amphitheater 60-year lease 19,900 9,179 23 211,114
(expires June 30,
2049)
Pittsburgh:
Star Lake
Amphitheater........... 19 amphitheater 45-year lease 22,500 12,361 42 519,182
(expires December
31, 2034)
Kansas City:
Sandstone Amphitheater
(Kansas City, KS)......
24 amphitheater 10-year lease 18,000 8,109 32 259,488
(expires December
31, 2002)
Starlight Theater....... theater annual exclusive 9,000 3,772 9 33,948
booking agent
contract for 1998
(renewal under
negotiation)
34
<PAGE>
TOTAL
TOTAL AVG. NO. OF SEATS
MARKET TYPE OF THE COMPANY'S SEATING ATTENDANCE EVENTS SOLD IN
MARKET AND VENUE RANK(1) VENUE INTEREST CAPACITY IN 1997 IN 1997 1997
- ------------------------ -------- -------------- -------------------- ----------- ------------ --------- ---------
Memorial Hall........... theater 1998 contract 3,000 1,910 11 21,014
(renewal under
negotiation)
Sacramento--Yolo:
Punchline Comedy Club .
26 club 9-year lease 245 355 90 31,834
(expires December
17, 1999)
Indianapolis:
Deer Creek Music
Center................. 28 amphitheater owned 21,000 11,348 42 476,617
Murat Centre............ theater and 50-year lease 2,700 1,412 144 211,920
ballroom (expires August 31,
2045)
Columbus:
Polaris Amphitheater ... 30 amphitheater owned 20,000 7,732 39 301,555
Charlotte--Gastonia--
Rock Hill:
Charlotte Blockbuster
Pavilion............... 32 amphitheater owned 18,000 8,592 34 292,135
Hartford:
Meadows Music Theater .
36 amphitheater facility owned; land 25,000 9,807 26 254,982
leased for 37 years
(expires September
13, 2034)
Rochester:
Finger Lakes
Amphitheater........... 39 amphitheater co-promotion 12,700 6,123 15 91,845
agreement
Nashville:
Starwood Amphitheater .. 41 amphitheater 50% ownership 17,000 8,208 25 205,204
Oklahoma City:
Zoo Amphitheater........ 43 amphitheater year-to-year 9,000 6,412 4 25,648
exclusive booking
agent
Raleigh--Durham--
Chapel Hill:
Walnut Creek
Amphitheater........... 50 amphitheater 66 2/3% partnership 20,000 10,498 40 419,919
interest in 40-year
lease (expires
October 31, 2030)
West Palm Beach--
Boca Raton:
SONY Music/Blockbuster
Coral Sky
Amphitheater........... 50 amphitheater 75% partnership 20,000 11,244 26 292,340
interest in 10-year
lease (expires
January 4, 2005)
Reno:
Reno Hilton ............
Amphitheater........... 119 amphitheater operating agreement
(renewal under
negotiation) 8,500 3,420 19 64,983
</TABLE>
- ------------
(1) Based on the July 1994 population of metropolitan statistical areas as
set forth in the 1996 Statistical Abstracts of the United States. Does
not include venues where the Company sells subscriptions for Touring
Broadway Shows.
(2) Assumes completion of current expansion projects, which are anticipated
to be completed by Summer 1998.
(3) Additional seating of approximately 40,000 is available for certain
events.
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
35
<PAGE>
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.
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 Recent Acquisitions will likely (a) attract a
larger number of major corporate sponsors and (b) 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 (a) its relationships with advertisers will enable it to
better utilize available advertising space and (b) 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 their live entertainment operations,
including (a) local, regional and national live marketing programs and (b)
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 including at malls and
college campuses. For example, Contemporary (one of the Acquired Businesses)
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 top-rated 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 U.S. 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.
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 gathers its information directly from nearly
1,100 radio programmers and product buyers and in 1996 had more than 300
clients for these services. Annual fees from these services during this
period have ranged from $2,500 to $250,000 per corporate client.
The Company, through Network (one of the Acquired Businesses), 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. In 1996, Network
delivered these services to approximately 1,100 radio stations in exchange
for commercial inventory or airtime, which in turn was sold to national
network advertisers. Network also provides consulting and entertainment
marketing services to corporate clients with music business interests.
36
<PAGE>
OPERATING STRATEGY
The Company's principal objectives are (a) to maximize revenue and cash
flow growth opportunities by being a leading promoter and producer of live
entertainment events and (b) to own and/or operate 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 enable it to (a) 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, (b) sell additional products and maximize numerous other
related revenue sources, (c) position itself to produce national tours by
leading music performers in order to capture a greater percentage of revenues
from those tours and (d) encourage wider use by performers of the Company's
venues by providing centralized access to a nationwide network of venues. The
Company believes that it owns and/or operates the largest network of venues
used principally for music concerts and other live entertainment events in
the United States, with 39 venues either directly owned or operated under
lease or exclusive booking arrangements in 21 of the top 50 markets,
including 9 amphitheaters in 6 of the top 10 markets.
Maximize Related 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. These related revenues comprised approximately
19% of the Company's total revenues for the year ended December 31, 1997.
Management believes that these related revenue sources generally have higher
margins than promotion and production revenues and include, among others, (a)
the sale of corporate sponsorship, naming and other rights, concessions,
merchandise, parking and other products and services and (b) 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 (a) its production of musical concert tours and themed events
(such as regional music festivals) and (b) 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 its
existing businesses and the Acquired Businesses. The Company believes that it
can utilize the best business practices of the respective Acquired Businesses
on a national scale. For example, the Atlanta-based regional Music Midtown
Festival, created and promoted by Concert/Southern (one of the Acquired
Businesses), is a highly successful music festival concept that drew
approximately 200,000 attendees in 1997; the Company believes that it can use
the event as a model for other markets. In addition, the Company believes
that the radio industry trade publications of Network (another of the
Acquired Businesses) 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.
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
37
<PAGE>
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 (a) season ticket packages that include amenities such as
preferred seating, VIP parking, waiter service, private club and/or "upscale"
concession menus, (b) subscription series packages allowing customers to
purchase tickets for a set of performances and (c) preferred seating, such as
box seating and VIP seating areas, which typically generate higher revenues
per seat. Moreover, the market research and audience demographics databases
that the Company acquired through certain of the Recent Acquisitions, 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 (a) implementing a
nationally coordinated booking system (for contracting for and scheduling
acts), while continuing to utilize the substantial local expertise of the
Acquired Businesses, (b) establishing a centralized marketing team to exploit
ancillary revenue streams on local, regional and national levels, including
from sponsorship, advertising and merchandising opportunities, and (c)
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 will be better able to coordinate
negotiations with performer 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 (a) amphitheater and other live entertainment
venues and (b) local and regional promoters and producers of music concert,
theatrical, specialized motor sports and other live entertainment events. The
Company may also pursue acquisitions of other related or complementary venues
or businesses.
PROPERTIES
The Company's executive offices are located at 650 Madison Avenue, 16th
Floor, New York, New York 10022. Pursuant to the Distribution Agreement, SFX
Broadcasting has agreed to transfer certain leases relating to its offices to
the Company prior to the Spin-Off. In addition to the properties described in
"--The Company's Live Entertainment Activities--Venue Operations," the
Company leases office space in New York, New York; Austin and Houston, Texas;
Atlanta, Georgia; Chicago, Illinois; Indianapolis, Indiana; Miami, Florida;
Gaithersburg, Maryland; Santa Monica, California; Seattle, Washington;
London, England; and St. Louis, Missouri and owns office buildings in Burbank
and San Francisco, California. These properties are generally leased for
terms of 1 to 10 years. See "Agreements Relating to the Spin-Off."
38
<PAGE>
EMPLOYEES
As of March 31, 1998, the Company had approximately 950 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. Pursuant to the SFX Merger Agreement, the Company
has agreed to assume all obligations arising under any employment agreements
or arrangements between SFX Broadcasting or any of its subsidiaries and the
employees identified in the merger agreement. These employees include the
members of senior management and all other employees currently employed in
SFX Broadcasting's corporate headquarters in New York. 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."
LITIGATION
Although the Company is involved in several 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.
POTENTIAL CONFLICTS OF INTEREST
Marquee is a publicly-traded company that, among other things, acts as
booking agent for tours and appearances for musicians and other entertainers.
Messrs. Sillerman and Tytel have an aggregate equity interest of
approximately 8.8% in Marquee; Mr. Sillerman is the chairman of its board of
directors, and Mr. Tytel is one of its directors. 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, 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 the independent committees 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 with
events in which Marquee is involved. See "Certain Relationships and Related
Transactions--Potential Conflicts of Interest."
TSC, an entity controlled by Mr. Sillerman and in which Mr. Tytel also has
an equity interest, provides financial consulting services to Marquee and
Triathlon. TSC's services are provided by certain directors, officers and
employees of the Company who are not separately compensated for their
services by TSC. Messrs. Sillerman and Tytel have substantial equity
interests in Triathlon. In any transaction, arrangement or competition with
Marquee or Triathlon, 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, Marquee and Triathlon, on the other hand. See "Certain
Relationships and Related Transactions--Triathlon Fees."
In addition, prior to the consummation of the SFX Merger, Mr. Sillerman
and other members of the Company's management team will have management
obligations to both SFX Broadcasting and the Company that may cause them to
have conflicts of interest. See "Management" and "Certain Relationships and
Related Transactions--Potential Conflicts of Interest."
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 the second anniversary of the
consummation of the PACE Acquisition, to purchase the Company's then existing
motor sports line of business (or, if that line of business has been sold,
the Company's then existing theatrical line of business) at its then fair
market value. Mr. Becker's option may present a conflict of interest in his
role as a director of the Company. See "Management--Employment Agreements and
Arrangements with Certain Officers and Directors."
39
<PAGE>
SEASONALITY
The Company's operations and revenues are largely seasonal in nature, with
generally higher revenue generated in the second and third quarters of the
year. For example, on a pro forma basis for the 1997 Acquisitions, the
Company generated approximately 68% of its revenues in the second and third
quarters for the twelve months ended December 31, 1997. The Company's outdoor
venues are primarily utilized in the summer months and do not generate
substantial revenue in the late fall, winter and early spring. Similarly, the
musical concerts that the Company promotes largely occur in the second and
third quarters. To the extent that the Company's entertainment marketing and
consulting relate to musical concerts, they also predominantly generate
revenues in the second and third quarters. Therefore, the seasonality of the
Company's business causes (and 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 Recent Acquisitions, such as motor sports (which
is winter-seasonal) and Touring Broadway Shows (which typically tour between
September and May). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
COMPETITION
Competition in the live entertainment industry is intense, and competition
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 Acquired Businesses 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. 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.
REGULATORY MATTERS
The business of the Company is not generally subject to material
governmental regulation. However, if the Company seeks to acquire or
construct new venue operations, its ability to do so will be subject to
extensive local, state and federal governmental licensing, approval and
permit requirements, including, among other things, approvals of state and
local land-use and environmental authorities, building permits, zoning
permits and liquor licenses. Significant acquisitions may also be subject to
the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended. Other types of licenses, approvals and permits from governmental
or quasi-governmental agencies might also be required for other opportunities
that the Company may pursue in the future. There can be no assurance that the
Company will be able to obtain the licenses, approvals and permits it may
require from time to time in order to operate its business.
FORWARD-LOOKING STATEMENTS
Many of the statements, estimates, predictions and projections contained
in this "Business" section of the Prospectus, in addition to certain
statements contained elsewhere in this Prospectus, are "forward-looking
statements" within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act, although those sections do not apply to this
offering. These forward-looking statements are prospective, involving risks
and uncertainties. While these forward-looking statements, and any
assumptions on which they are based, are made in good faith and reflect the
Company's current
40
<PAGE>
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 derive anticipated benefits from the Recent Acquisitions; failure
to raise additional financing; working capital adjustments; 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 under "Risk
Factors" or elsewhere in this Prospectus. Stockholders 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 of this Prospectus or to reflect the occurrence
of unanticipated events.
41
<PAGE>
THE SPIN-OFF
BACKGROUND AND REASONS FOR THE SPIN-OFF
SFX Broadcasting was formed in 1992 to acquire, own and operate radio
stations. SFX Broadcasting's strategy was to enhance its stations' financial
performance and exploit the changing regulatory environment (which was
evolving to allow companies to own more radio stations) by acquiring stations
at attractive prices. When SFX Broadcasting completed its initial public
offering of common stock in 1993, it became one of only a few publicly traded
companies solely devoted to owning and operating radio stations. SFX
Broadcasting continued to grow after its initial public offering, from a
company that owned or operated 10 stations in six markets to a company that
currently owns or programs 74 stations in 19 markets.
Despite escalating acquisition prices, SFX Broadcasting succeeded in its
acquisition strategy by identifying markets and radio stations with
significant growth potential and by employing management's expertise in
operating radio stations to improve financial performance. In addition,
management developed and assembled clusters of radio stations that, when
combined in contiguous regions, could justify the increased acquisition
prices the market demanded.
Over time, however, identifying attractive acquisition opportunities
became increasingly difficult. In late 1996, SFX Broadcasting began to
explore opportunities in other entertainment-related industries where
management could employ its expertise and where significant growth
opportunities might exist. Management concluded that the live entertainment
industry offers attractive acquisition opportunities because it, like the
radio industry in 1993, is highly fragmented and consists of mostly local or
regional companies. As a result, SFX Broadcasting began investing in the live
entertainment industry in early 1997, while continuing to pursue radio
station acquisitions and tax-free exchanges of radio stations that would be
likely to increase SFX Broadcasting's broadcast cash flow.
Despite its continuing activity in the radio industry, SFX Broadcasting
explored the option of maximizing stockholder value on a shorter time horizon
through the sale or merger of SFX Broadcasting under appropriate
circumstances. During August 1997, management discussed proposals with
various potential acquirors.
After negotiations with the potential acquirors, the board of directors of
SFX Broadcasting determined that the SFX Merger was superior to the other
proposals SFX Broadcasting had received because (a) it offered the highest
value to the holders of SFX Broadcasting's Class A common stock, (b) it would
permit SFX Broadcasting to spin off the concert and live entertainment
business to its stockholders, thereby allowing the stockholders to continue
to participate in the opportunities presented by that business, and (c) SFX
Buyer was willing to permit the transaction to be structured in a manner that
would allow the holders of SFX Broadcasting's Class A common stock to
effectively have a separate class vote on the transaction. On August 24,
1997, SFX Broadcasting executed the SFX Merger Agreement with SFX Buyer.
On January 15, 1998, the board of directors of SFX Broadcasting approved
the Spin-Off, as contemplated by the Distribution Agreement, and approved the
Distribution Agreement and the Tax Sharing Agreement, together with the
transactions contemplated by those agreements.
Consistent with SFX Broadcasting's determination that the concert and live
entertainment business offers attractive acquisition opportunities, the
Company completed its acquisitions of PACE, Contemporary, BGP, Network,
Concert/Southern and certain related entities. See "Business--Recent
Acquisitions" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
In February 1998, SFX Broadcasting obtained consents under the Indenture
governing certain of its Notes and the certificate of designations of its
Series E preferred stock that were required to consummate the Spin-Off. In
addition, on March 26, 1998, SFX Broadcasting's stockholders approved the SFX
Merger and certain amendments to the certificate of incorporation of SFX
Broadcasting to permit the SFX Merger and the Spin-Off as currently
contemplated. The Board of Directors of SFX Broadcasting has
42
<PAGE>
determined that holders of record of SFX Broadcasting's common stock, Series
D preferred stock and interests in SFX Broadcasting's director deferred stock
ownership plan as of the close of business on April 20, 1998 will be entitled
to receive Company Common Stock in the Spin-Off. SFX Broadcasting has
indicated that it intends to distribute such shares on April 27, 1998.
SFX Broadcasting's board believes that the Spin-Off, together with the SFX
Merger, will accomplish a number of important business objectives. The
Spin-Off and SFX Merger will allow SFX Broadcasting's stockholders to realize
a significant premium for SFX Broadcasting's existing radio broadcasting
business, while at the same time permitting those stockholders to continue
their participation in the Entertainment Business. The Spin-Off will enable
the Company to have its own publicly traded equity security to finance its
own growth opportunities. By distributing the Company Common Stock to SFX
Broadcasting's stockholders, SFX Broadcasting's board of directors believes
that there will be a greater potential for increasing the long-term value of
the investment of SFX Broadcasting's stockholders in the Entertainment
Business. SFX Broadcasting's board of directors believes that the Spin-Off
will enable investors to better evaluate the performance, investment
characteristics and the future prospects of the Entertainment Business,
enhancing the likelihood that it will achieve appropriate market recognition
of its performance and potential.
MANNER OF EFFECTING THE SPIN-OFF
Prior to the Spin-Off, the Company will amend and restate its certificate
of incorporation to, among other things, increase its authorized capital
stock and will issue to SFX Broadcasting, in exchange for the issued and
outstanding shares of stock of the Company then held by SFX Broadcasting, the
number of shares of the Company's Common Stock necessary to consummate the
Spin-Off. The Spin-Off will be a dividend distribution to the holders of
record at the close of business on the Spin-Off Record Date of the
outstanding shares of SFX Broadcasting's common stock, Series D preferred
stock, interests in SFX Broadcasting's director deferred stock ownership plan
and certain warrants to acquire SFX Broadcasting's common stock and will be
made as follows:
o holders of SFX Broadcasting's Class A common stock will receive one
share of Company Class A Common Stock per share held;
o holders of SFX Broadcasting's Class B common stock will receive one
share of Company Class B Common Stock per share held;
o holders of SFX Broadcasting's Series D preferred stock will receive the
number of shares of Company Class A Common Stock obtained by
multiplying the number of shares held by 1.0987 (rounded down to the
next whole share);
o SFX Broadcasting will place in escrow with the Escrow Agent an
aggregate of approximately 639,289 shares of Company Class A Common
Stock for delivery to the holders of the warrants granted by SFX
Broadcasting to Sillerman Communications Management Corporation (the
"SCMC Warrants") and to the underwriters of MMR's initial public
offering (the "IPO Warrants"and, together with the SCMC Warrants, the
"Warrants"), upon exercise of the Warrants (see "Certain Relationships
and Related Transactions--Company Common Stock to Be Received in the
Spin-Off"); and
o Messrs. Dugan, Kramer and O'Grady will receive an aggregate of 2,766
shares of Company Class A Common Stock as adjustments to their
interests under SFX Broadcasting's director deferred stock ownership
plan.
See "Description of Capital Stock" for a description of Company Class A
Common Stock and Company Class B Common Stock. Fractional shares of Company
Common Stock will not be delivered in the Spin-Off.
The distribution of shares of Company Common Stock is expected to occur on
or about April 27, 1998 (the "Spin-Off Distribution Date"). However, the
Spin-Off may be abandoned at any time before the Spin-Off Distribution Date
by, and in the sole discretion of, SFX Broadcasting's board of directors. All
shares of Company Common Stock will be fully paid, nonassessable and free of
preemptive rights.
43
<PAGE>
On the Spin-Off Distribution Date, SFX Broadcasting will deposit with
Chase Mellon Shareholder Services, L.L.C., as the Distribution Agent,
certificates representing the aggregate number of shares of Company Class A
Common Stock and Company Class B Common Stock issuable to holders of SFX
Broadcasting's common stock, Series D preferred stock and interests in SFX
Broadcasting's director deferred stock ownership plan (approximately
14,550,000 shares of Company Class A Common Stock and 1,047,037 shares of
Company Class B Common Stock). SFX Broadcasting will instruct the
Distribution Agent to distribute the Company Common Stock to holders of SFX
Broadcasting's common stock, Series D preferred stock and interests in SFX
Broadcasting's director deferred stock ownership plan in accordance with the
terms of the Distribution Agreement as promptly as practicable following the
Spin-Off Distribution Date. Any shares deposited with the Distribution Agent
but not required to be distributed to holders of SFX Broadcasting's common
stock and Series D preferred stock will be returned to the Company and
subsequently canceled.
On the Spin-Off Distribution Date, SFX Broadcasting will also deposit with
Chase Mellon Shareholder Services, L.L.C., as Escrow Agent, certificates
representing the aggregate number of shares of Company Class A Common Stock
that the holders of Warrants would have been entitled to received as a result
of their ownership of SFX Broadcasting's Class A common stock if they had
exercised all of the Warrants immediately prior to the Spin-Off Record Date.
Thereafter, upon exercise of each Warrant, the Escrow Agent will deliver to
the holder of that Warrant the number of shares of Company Class A Common
Stock to which the holder is entitled. Any shares deposited with the Escrow
Agent but not required to be distributed to holders of Warrants will be
returned to the Company and subsequently canceled.
The receipt of shares of Company Common Stock in the Spin-Off will be
taxable to the recipients of shares. See "Certain Federal Income Tax
Consequences." Following the Spin-Off and other transactions described in
this Prospectus, approximately 81 million shares of Company Class A Common
Stock (including 2 million shares to be reserved for issuance pursuant to the
Company's 1998 restricted stock and stock option plan), 8 million shares of
Company Class B Common Stock and 25 million shares of the Company preferred
stock will remain unissued.
The Spin-Off will be accounted for by the Company based on the historical
cost of related assets. SFX Broadcasting will record the Spin-Off as a
nonmonetary distribution to stockholders, also at historical cost.
NO HOLDER OF ANY CLASS OR SERIES OF SFX BROADCASTING'S STOCK WILL BE
REQUIRED TO PAY ANY CASH OR OTHER CONSIDERATION FOR THE SHARES OF COMPANY
COMMON STOCK TO BE RECEIVED IN THE SPIN-OFF OR TO SURRENDER OR EXCHANGE
SHARES OF SFX BROADCASTING'S STOCK (OTHER THAN IN REGARD TO THE EXCHANGE AS
PART OF THE SFX MERGER) OR TO TAKE ANY OTHER ACTION IN ORDER TO RECEIVE
COMPANY COMMON STOCK.
REGULATORY MATTERS
No material United States federal or state regulatory approvals are
required in connection with the Spin-Off that have not been obtained.
44
<PAGE>
AGREEMENTS RELATING TO THE SPIN-OFF
For the purpose of effecting the Spin-Off and governing certain of the
relationships between the Company and SFX Broadcasting after the Spin-Off,
the Company, SFX Broadcasting and SFX Buyer have entered or will enter into
the various agreements described below. The material features of the
Distribution Agreement, the tax sharing agreement to be entered into among
the Company, SFX Broadcasting and SFX Buyer (the "Tax Sharing Agreement") and
the employee benefits and compensation allocation agreement to be entered
into among the Company, SFX Broadcasting and SFX Buyer (the "Employee
Benefits Agreement"), are summarized below. These agreements have been filed
with the Securities and Exchange Commission (the "SEC") as exhibits to the
Company's Registration Statement on Form S-1, File No. 333-43287 (as amended,
the "Registration Statement") and the following descriptions are qualified in
their entirety by reference to the actual agreements.
DISTRIBUTION AGREEMENT
Manner of Effecting the Spin-Off
The Distribution Agreement provides for the distribution of shares of
Company Common Stock to the holders of record on the Spin-Off Record Date of
SFX Broadcasting's common stock, Series D preferred stock, interests in SFX
Broadcasting's director deferred stock ownership plan and, upon exercise, the
Warrants, as described in "The Spin-Off--Manner of Effecting the Spin-Off."
Transfer and Assumption of Assets and Obligations
The Distribution Agreement provides that, at the time of the Spin-Off, the
Company will assume (a) certain of SFX Broadcasting's leases and employment
agreements, (b) debt and liabilities incurred by the Company or its
subsidiaries after the date of the SFX Merger Agreement in connection with
acquisitions and capital expenditures, (c) liabilities under an airplane
lease, (d) liabilities under an agreement pursuant to which TSC, a consulting
company of which Mr. Sillerman is the Chairman of the Board of Directors and
Chief Executive Officer, and of which Mr. Tytel is the Executive Vice
President, General Counsel and a Director, provides services to Triathlon and
the right to receive fees for such services provided to Triathlon and (e) any
other debt and liabilities that the Company deems appropriate. SFX
Broadcasting is obligated to use its commercially reasonable efforts to
release the Company and its subsidiaries from all other debt and accrued
liabilities prior to the effective time of the SFX Merger.
The Company will be entitled to all of SFX Broadcasting's accounts
receivable relating to SFX Broadcasting's live entertainment business. SFX
Broadcasting will transfer to the Company, prior to the Spin-Off:
o airplane leases;
o fees payable by Triathlon for services provided by TSC;
o two real estate leases and assets located on the leased property;
o a note receivable relating to the sale of SFX Broadcasting's radio
stations operating in Myrtle Beach;
o the employment agreements of certain employees of SFX Broadcasting; and
o all other assets used primarily by the Company.
The Company will assume all of SFX Broadcasting's and its subsidiaries'
obligations accruing after the date of the Spin-Off under the above
agreements and in connection with the transfer of assets and employees.
Transferred Employees
SFX Broadcasting's senior management and certain other employees of SFX
Broadcasting will devote as much time as they deem reasonably necessary to
conduct the operations of the Company, while continuing to serve in their
present capacities with, and consistent with their obligations to, SFX
Broadcasting. At the time of consummation of the SFX Merger, the Company will
assume all obligations
45
<PAGE>
arising under any employment agreement or arrangement between SFX
Broadcasting or any of its subsidiaries and the employees who are transferred
to the Company other than rights, if any, under those employment agreements
to receive options after a change of control and all existing rights of
indemnification. Messrs. Dugan, Kramer and O'Grady have indicated that, if
the SFX Merger Agreement is terminated, they will promptly resign from their
position as directors of the Company, and the Board will appoint three new
independent directors to serve until the next annual meeting of the Company's
stockholders. See "Management."
Working Capital
Pursuant to the Distribution Agreement (and as required by the SFX Merger
Agreement), the Company and SFX Broadcasting have agreed to allocate funds
between them for working capital. If the Spin-Off occurs prior to the
consummation of the SFX Merger, then, immediately after the Spin-Off, SFX
Broadcasting's management will allocate working capital between the Company
and SFX Broadcasting, and SFX Broadcasting will pay to the Company any
positive amount allocated to the Company. In any event, at least five
business days before the consummation of the SFX Merger, SFX Broadcasting
must provide the Company with a good faith estimate of Working Capital (as
defined below) as of the date of consummation of the SFX Merger (the
"Estimated Working Capital"). If the Estimated Working Capital is a positive
number, then SFX Broadcasting must pay to the Company an amount equal to the
Estimated Working Capital at the time of consummation of the SFX Merger. On
the other hand, if the Estimated Working Capital is a negative number, then
the Company must pay to SFX Broadcasting an amount equal to the Estimated
Working Capital at the time of consummation of the SFX Merger.
As soon as practicable (and in any event within ninety days) after the SFX
Merger is consummated, SFX Broadcasting must deliver to the Company an
audited statement of Working Capital as of the date of consummation of the
SFX Merger. If the Company does not object to SFX Broadcasting's Working
Capital statement within fifteen days following delivery thereof, then the
Working Capital reflected on SFX Broadcasting's Working Capital statement
will be the "Final Working Capital." If the Company does so object, then the
issues in dispute will be submitted to a major national accounting firm for
resolution and to determine the "Final Working Capital."
On the third business day after the Final Working Capital is determined,
SFX Broadcasting or the Company, as the case may be, must pay to the other an
amount equal to the Final Working Capital, less the Estimated Working Capital
previously paid, together with interest on the absolute value of the
difference at an annual rate of 10% beginning on the date of consummation of
the SFX Merger and ending on the date of payment of the amount (the "Working
Capital Adjustment Amount"). However, if the Company notifies SFX
Broadcasting prior to the payment date that it wishes to have all or any
portion of the Final Working Capital (the "SFX Merger Consideration
Adjustment") treated as an adjustment to the consideration payable in
connection with the SFX Merger, then the consideration payable in connection
with the SFX Merger will be increased by an amount equal to the quotient of
the SFX Merger Consideration Adjustment divided by the fully diluted number
of shares of SFX Broadcasting's common stock outstanding immediately prior to
the consummation of the SFX Merger, and SFX Broadcasting must promptly
distribute (a) the appropriate amount to the appropriate holders, immediately
prior to the consummation of the SFX Merger, of SFX Broadcasting's common
stock and Series D preferred stock, (b) upon exercise, the appropriate amount
to holders of options, warrants and unit purchase options of SFX Broadcasting
unexercised immediately prior to the consummation of the SFX Merger and (c)
the appropriate amount to holders of options, warrants and unit purchase
options of SFX Broadcasting who exercised their securities on and after the
consummation of the SFX Merger and prior to the final payment date. If the
Company elects to treat any portion of the Final Working Capital as an SFX
Merger Consideration Adjustment, then the Company must pay SFX Broadcasting
the difference, if any, between the SFX Merger Consideration Adjustment and
the Working Capital Adjustment Amount so that the aggregate net amount to be
paid or received (as the case may be) by SFX Broadcasting is equal to the
amount that would have been paid or received if the SFX Merger Consideration
Adjustment had not been made.
"Working Capital" means the sum of all current assets of SFX Broadcasting
and its consolidated subsidiaries minus the sum of all current liabilities of
SFX Broadcasting and its consolidated subsidiaries, as of the point in time
immediately prior to the consummation of the SFX Merger, adjusted (without
duplication) by:
46
<PAGE>
(a) increasing Working Capital by 50% (up to $1.0 million) of all fees
and expenses incurred by SFX Broadcasting in connection with
acquiring consents from holders of SFX Broadcasting's Series E
preferred stock and certain of its outstanding notes in connection
with the transactions contemplated by the SFX Merger Agreement;
(b) increasing (if a positive number) or decreasing (if a negative
number) Working Capital by the product of (A) $75.00 (or any other
amount payable to holders of SFX Broadcasting's Class A common
stock) and (B) the difference between 15,589,083 less the sum of
the fully diluted number of shares of SFX Broadcasting common
stock outstanding immediately prior to the time of consummation of
the SFX Merger (excluding up to 250,838 shares of SFX
Broadcasting's common stock subject to a right of repurchase
granted by SFX Broadcasting in connection with an acquisition);
(c) reducing Working Capital by the difference between $84,554,649
less the sum of (A) the aggregate exercise price of all options,
warrants and unit purchase options of SFX Broadcasting outstanding
immediately prior to the SFX Merger consummation plus (B) the
aggregate exercise price of all warrants underlying unit purchase
options of SFX Broadcasting outstanding immediately prior to the
SFX Merger consummation plus (c) the aggregate base price of all
SARs of SFX Broadcasting outstanding immediately prior to the SFX
Merger consummation;
(d) reducing Working Capital by the product of (A) $42 and (B) up to
250,838 shares of SFX Broadcasting's common stock subject to a
right of repurchase by SFX Broadcasting granted in connection with
an acquisition (see "Certain Relationships and Related
Transactions--Meadows Repurchase");
(e) increasing Working Capital by all permitted radio-related capital
expenditures paid by SFX Broadcasting and its subsidiaries after
June 30, 1997 and immediately prior to the SFX Merger
consummation;
(f) decreasing Working Capital by all accrued capital expenditures of
SFX Broadcasting as of immediately prior to the SFX Merger
consummation (to the extent not reflected in current liabilities);
(g) increasing Working Capital by accrued but not yet payable
dividends;
(h) except as required by clause (i) below, excluding from Working
Capital any liabilities attributable to indebtedness of SFX
Broadcasting;
(i) excluding from Working Capital any liabilities included in clauses
(i) through (iv) of clause (k) below;
(j) reducing Working Capital by unpaid costs, fees and expenses of SFX
Broadcasting arising out of, based on or that will arise from the
transactions contemplated by the SFX Merger Agreement (other than
as a result of actions taken by SFX Buyer Sub) (including amounts
relating to the termination of any employees, broker fees, legal
fees, accounting fees, advisory fees and fees incurred in
connection with third party consents, waivers and amendments of
creditors or holders of SFX Broadcasting's preferred stock);
(k) reducing Working Capital by the amount of SFX Broadcasting's
Excess Debt (as defined below), if a positive number, or
increasing Working Capital by the amount of the Excess Debt, if a
negative number. "Excess Debt" means, as of immediately prior to
the consummation of the SFX Merger, the difference between the sum
of the following and $899.7 million:
47
<PAGE>
(i) the difference between (A) indebtedness of SFX Broadcasting
and its subsidiaries, less (B) the difference between $70.0
million and any amounts (other than the reimbursement of
expenses) actually received by SFX Broadcasting and its
consolidated subsidiaries after August 24, 1997, under
agreements relating to the sale or local marketing arrangement
(the local marketing payments may not exceed $30,000 per
month) of its WVGO-FM and the sale or local marketing
arrangement of its Jackson/Biloxi radio stations, less (c) any
indebtedness incurred to finance acquisitions approved by
Buyer of stock of or substantially all of the assets of radio
stations, less (D) interest accrued as of immediately prior to
the consummation of the SFX Merger that is not then due and
payable,
(ii) the aggregate merger consideration payable to holders of SFX
Broadcasting's Series C preferred stock (which SFX
Broadcasting anticipates will be $2.0 million),
(iii) the aggregate liquidation preference amount of SFX
Broadcasting's Series E preferred stock, and
(iv) environmental costs or liabilities accrued and not paid after
June 30, 1997, to the extent they exceed $100,000 in the
aggregate;
(l) reducing Working Capital by the difference between (i) 142,032
times the higher of (A) the average of the last sales price of SFX
Broadcasting's Series E preferred stock during the 15 business
days ending on the date of consummation of the SFX Merger, or (B)
the average of the last sales price of SFX Broadcasting's Series E
preferred stock during the 15 business days preceding February 9,
1998 ($115.08), and (ii) $14,203,200 (the "Series E Adjustment");
and
(m) reducing Working Capital by the difference between (i) the
aggregate amount to be paid pursuant to the Memorandum of
Understanding dated March 17, 1998, relating to the shareholder
litigation in connection with the SFX Merger, and (ii) any amounts
to be paid by SFX Broadcasting's director and officer insurance
policy (the "Settlement Amount").
Working Capital will not include any asset transferred to the Company or
any of its subsidiaries, any liability assumed by the Company or any
liability to which none of SFX Broadcasting or any of its subsidiaries is a
party immediately after the consummation of the SFX Merger. Any computation
of Working Capital should assume that the Spin-Off has been consummated. As
of December 31, 1997, Working Capital payable by SFX Broadcasting to the
Company would have been approximately $3.0 million (excluding the Series E
Adjustment). The actual amount of Working Capital as of the closing of the
SFX Merger is likely to differ substantially from the amount in existence as
of December 31, and will be a function of, among other things, the operating
results of SFX Broadcasting through the date of the SFX Merger, the actual
cost of consummating the SFX Merger and the related transactions and other
obligations of SFX Broadcasting, including the payment of dividends and
interest on SFX Broadcasting's debt, and the Settlement Amount. Moreover,
Working Capital will be reduced by at least $2.1 million pursuant to the
Series E Adjustment. See "Risk Factors--Working Capital Adjustments and
Repayment of Advances" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital
Resources--Spin-Off."
Acquisitions and Capital Improvements
SFX Broadcasting and the Company have agreed that the Company may, from
time to time, (a) acquire additional businesses engaged in the same line of
business as the Company or (b) make capital improvements on assets owned or
leased by it or its subsidiaries. In each case, SFX Broadcasting must loan
the Company the funds with which to consummate the acquisitions and capital
improvements. However, all amounts so borrowed by the Company must be repaid
on the date of the Spin-Off. SFX Broadcasting may increase the borrowing
availability under its credit agreement for these purposes, and must use its
best efforts to obtain any required or desirable waivers, consents or
modifications under any financing or other agreement of SFX Broadcasting in
connection with the acquisitions or capital improvements.
In February 1998, the Company reimbursed SFX Broadcasting approximately
$25.3 million for consent fees, capital expenditures, and other acquisition
related fees paid by SFX Broadcasting on behalf of the Company.
48
<PAGE>
Release and Indemnification
Pursuant to the Distribution Agreement, SFX Broadcasting has agreed to
release the Company and its subsidiaries and affiliates (other than SFX
Broadcasting and its subsidiaries) and all persons who at any time prior to
the Spin-Off Distribution Date were stockholders, directors, agents or
employees of the Company or its subsidiaries from any and all claims arising
from any acts or events occurring or failing to occur or any conditions
existing on or before the Spin-Off Distribution Date (other than claims
arising from transactions contemplated by the Distribution Agreement, the SFX
Merger Agreement and certain related agreements). Similarly, the Company has
agreed to release SFX Broadcasting, its affiliates (other than the Company
and its subsidiaries) and all persons who at any time prior to the date of
the Spin-Off were stockholders, directors, agents or employees of SFX
Broadcasting or its subsidiaries from any and all claims arising from any
acts or events occurring or failing to occur or any conditions existing on or
before the date of the Spin-Off (other than claims arising from transactions
contemplated by the Distribution Agreement, the SFX Merger Agreement and
certain related agreements).
The Distribution Agreement requires the Company to indemnify, defend and
hold SFX Broadcasting and its subsidiaries (other than the Company and its
subsidiaries) and each of its directors, officers, employees and agents
harmless from and against any liabilities (other than income tax liabilities)
to which SFX Broadcasting or any of its subsidiaries (other than the Company
and its subsidiaries) may be or become subject that (a) relate to the assets,
business, operations, debts or liabilities of the Company and its
subsidiaries (including liabilities to be assumed by the Company as
contemplated in the Distribution Agreement and any liabilities arising under
certain guarantees of SFX Broadcasting in connection with the Recent
Acquisitions), whether arising prior to, concurrent with or after the
Spin-Off or (b) result from a breach by the Company or its subsidiaries of
any representation, warranty, or covenant contained in the Distribution
Agreement or any related agreements.
The Distribution Agreement requires SFX Broadcasting to indemnify, defend
and hold the Company and its subsidiaries and each of its directors,
officers, employees and agents harmless from and against any liabilities
(other than income tax liabilities) to which the Company and its subsidiaries
may be or become subject that (a) relate to the assets, business, operations,
debts or liabilities of SFX Broadcasting or its subsidiaries (other than the
Company and its subsidiaries), whether arising prior to, concurrent with or
after the Spin-Off or (b) result from a breach by SFX Broadcasting or its
subsidiaries (other than the Company) of any representation, warranty, or
covenant contained in the Distribution Agreement or any related agreements.
The release and indemnification obligations contained in the Distribution
Agreement will survive the Spin-Off for a period of six years (and thereafter
as to any claims for indemnification asserted prior to the expiration of that
period).
Registration Statement and Consent Solicitation Documents
The Company has represented to SFX Broadcasting that the Registration
Statement and the consent solicitation documents sent to the holders of
certain of SFX Broadcasting's securities did not, at the time it became
effective or was mailed, contain any untrue statement of a material fact or
omit to state a material fact required to be stated in order to make the
statements in the Registration Statement and the consent solicitation
documents, in light of the circumstances under which they were made, not
misleading.
Related Agreements
SFX Broadcasting and the Company have agreed that any tax sharing
agreement to which they are parties must be terminated as of the effective
date of the Spin-Off. In addition, the Distribution Agreement requires SFX
Broadcasting and the Company to enter into the Tax Sharing Agreement and
Employee Benefits Agreement (as described below) on or before the date of the
Spin-Off.
Use of Names; Intellectual Property
At the closing of the SFX Merger, SFX Broadcasting will assign to the
Company or its designee the name "SFX," together with all causes of action
and the right to recover for past infringements of that name. As soon as
commercially practicable, but no later than six months from the consummation
of the SFX Merger, SFX Broadcasting must cease all use of the name "SFX" or
other trademarks, trade names or their identifiers owned by, licensed to, or
transferred pursuant to the Distribution Agreement to the Company.
49
<PAGE>
Conditions to the Spin-Off
Pursuant to the Distribution Agreement, the obligations of the Company and
SFX Broadcasting to consummate the Spin-Off will be subject to the
fulfillment or waiver of each of the following conditions:
o SFX Broadcasting's board of directors must be satisfied that SFX
Broadcasting's surplus (as defined under Delaware law) would be
sufficient to permit the Spin-Off under Delaware law and must formally
approve the Spin-Off;
o the Registration Statement must be declared effective by the SEC, and
no stop order may be issued or pending with respect thereto;
o the Company Class A Common Stock must be accepted for listing or
trading, subject to official notice of issuance, on a national exchange
or The Nasdaq Stock Market;
o all necessary third party consents to the Spin-Off must be obtained;
o the necessary stockholder approvals must be obtained to consummate the
Spin-Off as presently contemplated;
o there must not be in effect any temporary restraining order,
preliminary or permanent injunction or other order issued by any court
of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Spin-Off;
o the Company and SFX Broadcasting must enter into the Tax Sharing
Agreement and the Employee Benefits Agreement; and
o each of the covenants and provisions in the Distribution Agreement
required to be performed or complied with prior to the Spin-Off must be
performed or complied with.
SFX Broadcasting's board of directors is entitled to waive any of the
above conditions prior to the Spin-Off.
Expenses of Spin-Off
Pursuant to the Distribution Agreement, all fees and expenses incurred in
connection with the Spin-Off will be paid by the party incurring them.
Termination of the SFX Merger Agreement
If the SFX Merger Agreement is terminated in accordance with its terms for
any reason, the boards of directors of SFX Broadcasting and the Company will
each appoint a committee of independent directors (none of whom will serve on
both boards of directors) to negotiate in good faith with respect to all
matters that they deem necessary to effectuate the separation of the affairs
of SFX Broadcasting and the Company, including the employment of employees to
be transferred to the Company pursuant to the Distribution Agreement. No
adjustments will be made to the initial allocation of working capital between
SFX Broadcasting and the Company if the SFX Merger Agreement is terminated in
accordance with its terms.
Amendment or Modification
SFX Broadcasting and the Company can only amend the Distribution Agreement
by written agreement with the consent of SFX Buyer (which may not be
unreasonably withheld).
Termination
The Distribution Agreement may be terminated and the Spin-Off abandoned at
any time before the date of the Spin-Off by, and in the sole discretion of,
SFX Broadcasting. In the event of such a termination, no party will have any
liability to any other party.
TAX SHARING AGREEMENT
Prior to the Spin-Off, SFX Broadcasting and the Company will enter into
the Tax Sharing Agreement. Under the Tax Sharing Agreement, the Company will
agree to pay to SFX Broadcasting the
50
<PAGE>
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 such income taxes result from 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 Common Stock distributed on the date of the Spin-Off over the tax
basis of that stock. The Company believes that the value of the Company
Common Stock for tax purposes will be determined by no later than the first
trading date following the date the stock is distributed in the Spin-Off.
Increases or decreases in the value of the Company Common Stock subsequent to
such date will not affect the tax liability. If the Company Common Stock had
a value of approximately $15 per share at the time of the Spin-Off,
management believes that no material indemnification payment would be
required. Such indemnification obligation would be approximately $4.0 million
at $16 per share and would increase by approximately $7.7 million for each
$1.00 increase above the per share valuation of $16. If the Company Common
Stock was valued at $28.50 per share (the last sales price of the Company
Class A Common Stock (trading on a when-issued basis) on the over the counter
market on April 9, 1998), management estimates that the Company would have
been required to pay approximately $101.0 million pursuant to such
indemnification obligation. The Company intends to use a substantial amount
of the net proceeds from the Offering to make such payment, although there
can be no assurance that the Offering will be consummated, and expects that
such payment will be due on or about June 15, 1998. Such payment will not
result in any corresponding increase in the Company's assets or cash flows
and, therefore, stockholders will experience substantial dilution. See "Risk
Factors--Indemnification Arrangements" and "--Financing Matters."
EMPLOYEE BENEFITS AGREEMENT
Prior to the Spin-Off, SFX Broadcasting and the Company will enter into an
Employee Benefits Agreement. Pursuant to the Employee Benefits Agreement, SFX
Broadcasting and the Company will agree to take all actions necessary or
appropriate so that, as of the Spin-Off or as soon as administratively
feasible thereafter (but, in any event, prior to the later of June 1, 1998
and the date of the SFX Merger), the Company and its subsidiaries will no
longer be participating employers and sponsors of the 401(k), health, group
term life insurance, long term disability insurance and cafeteria plans
maintained by SFX Broadcasting (collectively, the "SFX Employee Benefit
Plans"). The Employee Benefits Agreement will also provide for the treatment
of the benefits under the SFX Employee Benefit Plans of employees being
transferred from SFX Broadcasting to the Company or who are otherwise
employed by the Company upon the Spin-Off. With respect to employees
transferred from SFX Broadcasting to the Company or who are otherwise
employed by the Company upon the Spin-Off, SFX Broadcasting will have sole
responsibility for retaining and discharging any claims that are incurred on
or prior to the date of their transfer (or, if later, when they cease to be
participants) under SFX Employee Benefit Plans that are not 401(k) plans. On
or prior to the Spin-Off, the Company will continue to pay premiums and
contributions under the SFX Employee Benefit Plans in accordance with its
past practices and procedures, except that any premiums and contributions for
the month in which the Spin-Off occurs and any month thereafter that
employees of the Company continue to participate in the plans shall be paid
as soon as practicable after that month and pro-rated. To the extent the
account balances under the 401(k) plan maintained by SFX Broadcasting of
employees being transferred from SFX Broadcasting to the Company or who are
otherwise employed by the Company upon the Spin-Off are not distributed, SFX
Broadcasting and the Company must take all actions necessary or appropriate
to effect their transfer to a 401(k) plan established by the Company.
51
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth the material federal income tax
consequences of the Spin-Off and the SFX Merger applicable to stockholders
that hold their shares as capital assets within the meaning of Section 1221
of the Internal Revenue Code of 1986, as amended (the "Tax Code"). However,
the discussion does not address all federal income tax considerations that
may be relevant to particular stockholders in light of their specific
circumstances, such as stockholders who are dealers in securities, foreign
persons or stockholders who acquired their shares in connection with stock
options or stock purchase warrants. Each stockholder is urged to consult the
holder's own tax adviser to determine the tax consequences to the holder of
the SFX Merger and the Spin-Off in light of the holder's particular
circumstances, including the applicability and effect of federal, state,
local and foreign income and other tax laws and possible changes in those tax
laws (which may have retroactive effect).
Subject to the possible recharacterization discussed below, the receipt of
Company Common Stock as a result of the Spin-Off should be taxable to the
recipient as a distribution from SFX Broadcasting under Section 301 of the
Tax Code. The amount of the distribution for federal income tax purposes and
the basis for determining gain or loss on a subsequent disposition of the
Company Common Stock would be the fair market value of the Company Common
Stock at the time of the Spin-Off, and a stockholder's holding period for
Company Common Stock received in the Spin-Off will begin on the day following
the Spin-Off.
The receipt of the Company Common Stock should be taxable to the holders
of shares of SFX Broadcasting's stock as a dividend to the extent of SFX
Broadcasting's current or accumulated earnings and profits (determined as of
the end of SFX Broadcasting's taxable year, which will occur on the date of
the SFX Merger). Any amount of Company Common Stock that exceeds the
above-mentioned earnings and profits of SFX Broadcasting would first be
treated as a non-taxable return of capital to the extent of each
stockholder's tax basis in shares of SFX Broadcasting's stock, and the
stockholder's tax basis in the stock would be reduced accordingly (but not
below zero). To the extent that the amount of Company Common Stock were to
exceed the stockholder's tax basis in shares of SFX Broadcasting's stock, the
excess would be treated as long-term or short-term capital gain from the sale
or exchange of shares of SFX Broadcasting's stock, depending on the period
the stockholder held the shares of SFX Broadcasting's stock. Although SFX
Broadcasting does not currently have accumulated earnings and profits, it is
possible that there may be earnings and profits for the year of the SFX
Merger, because the Spin-Off might give rise to taxable gain to SFX
Broadcasting. There can be no assurance, therefore, that there will be no
current or accumulated earnings and profits, and thus it is possible that all
or a portion of the value of the Company Common Stock could give rise to
ordinary income.
With respect to corporate stockholders, the portion of the Company Common
Stock, if any, that is a taxable dividend under the foregoing rules generally
should be eligible for the 70% dividends received deduction. However, a
corporate stockholder's ability to use the dividends received deduction is
subject to several limitations, including those relating to "debt financed
portfolio stock" under Section 246A of the Tax Code and certain holding
period requirements. In addition, even if the dividends received deduction is
fully available, a portion of the Company Common Stock distribution may
constitute an "extraordinary dividend," which is subject to the provisions of
Section 1059 of the Tax Code.
The receipt by an SFX Broadcasting stockholder of cash pursuant to the SFX
Merger (or cash pursuant to the exercise of dissenters' rights of appraisal)
will be a taxable event for the stockholder. A stockholder will generally
recognize capital gain or loss for federal income tax purposes equal to the
difference between (a) the amount of cash received and (b) the tax basis in
the shares of SFX Broadcasting's stock surrendered in exchange therefor
(generally, the amount paid for the shares of SFX Broadcasting's stock,
subject to downward adjustment as described herein as a result of the
Spin-Off). The gain or loss will be long-term capital gain or loss if the
stockholder's holding period for the surrendered shares is more than one year
at the time of consummation of the SFX Merger. Under recently enacted
legislation, individuals whose holding period for shares of SFX
Broadcasting's stock exceeds 18 months will, in general, be subject to no
more than a 20% tax on any gain, while individuals whose holding period for
shares of SFX Broadcasting's stock is more than one year but not more than 18
months will, in general,
52
<PAGE>
be subject to no more than a 28% tax on any gain. If an SFX Broadcasting
stockholder owns more than one block of shares of SFX Broadcasting's stock,
the cash received must be allocated ratably among the blocks in the
proportion that the number of shares of SFX Broadcasting's stock in a
particular block bears to the total number of shares of SFX Broadcasting's
stock owned by the stockholder.
Although, as stated above, the receipt by an SFX Broadcasting stockholder
of cash and Company Common Stock should be treated as if only the cash
payment was received as payment for the shares of SFX Broadcasting's stock,
while the receipt of Company Common Stock is taxable to the recipient as a
distribution from SFX Broadcasting under Section 301 of the Tax Code, and
although SFX Broadcasting will report the transaction in a manner consistent
with this characterization, it is possible that the Internal Revenue Service
might contend that the transaction should be treated as an exchange of shares
of SFX Broadcasting's stock for both cash and Company Common Stock. Under
this treatment, a stockholder will generally recognize capital gain or loss
for federal income tax purposes equal to the difference between (a) the fair
market value at the time of consummation of the SFX Merger of the Company
Common Stock received plus the amount of cash received and (b) the tax basis
in the shares of SFX Broadcasting's stock surrendered in exchange therefor
(without adjustment for any portion of the distribution of Company Common
Stock that would have constituted a return of capital, if the distribution
were respected as such). As discussed above, the gain or loss will be
long-term capital gain or loss if the stockholder's holding period for the
surrendered shares is more than one year at the time of consummation of the
SFX Merger. Under this characterization, if SFX Broadcasting has no current
or accumulated earnings and profits for the taxable year that includes the
SFX Merger, the amount of capital gain recognized by stockholders should be
the same whether the Spin-Off is treated as a distribution to stockholders,
or as part of the sale price received as payment for the shares of SFX
Broadcasting's stock. By contrast, if SFX Broadcasting does have earnings and
profits for that taxable year, such a characterization will generally
decrease the amount of tax payable by an individual (by converting ordinary
income to capital gain) and increase the amount of tax payable by a
corporation (by converting dividend income potentially eligible for a
dividends received deduction to capital gain).
A stockholder may be subject to information reporting and to backup
withholding at a rate of 31% of amounts paid to the stockholder, unless the
stockholder provides proof of an applicable exemption or a correct taxpayer
identification number, and otherwise complies with applicable requirements of
the backup withholding rules.
THE DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS BASED
ON EXISTING LAW AS OF THE DATE OF THIS PROSPECTUS. STOCKHOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISERS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO
THEM OF THE SPIN-OFF AND THE SFX MERGER (INCLUDING THE APPLICABILITY AND
EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS).
53
<PAGE>
LISTING AND TRADING OF COMPANY CLASS A COMMON STOCK
The Company Class A Common Stock has been approved for quotation on the
Nasdaq National Market under the symbol "SFXE." Since February 18, 1998, the
Company Class A Common Stock has traded on a when-issued basis (one in which
shares can be traded before certificates are actually available or issued) on
the over-the-counter market under the symbol "SFXAV." However, such trading
prices may not necessarily be indicative of the trading price of Company
Class A Common Stock subsequent to the Spin-Off. See "Risk Factors--Limited
Market for Company Class A Common Stock; Potential Volatility of Stock
Price." The Company Class B Common Stock is not expected to be publicly
traded.
The following table sets forth the high and the low closing bid
information for the shares of Company Class A Common Stock (trading on a
when-issued basis) as reported on the over-the-counter market. Bid quotations
reflect interdealer prices, without retail mark-up, mark-down or commissions,
and may not represent actual transactions.
<TABLE>
<CAPTION>
CLASS A COMMON
STOCK
------------------
YEAR ENDING DECEMBER 31, 1998 HIGH LOW
- ---------------------------------------- -------- --------
<S> <C> <C>
First Quarter (since February 18, 1998) $25.75 $18.50
Second Quarter (through April 9, 1998) . 29.50 24.36
</TABLE>
On April 9, 1998, the last reported sales price of the Company Class A
Common Stock on the over-the-counter market was $28.50 per share.
DIVIDEND POLICY
The Company has no present plans to declare any dividends on Company
Common Stock. The terms of the Indenture and Credit Facility restrict the
Company's ability to pay dividends on Company Common Stock in the future. The
decision to declare a dividend and the amount thereof, if any, will be in the
sole discretion of the Board.
54
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1997, (a) the
historical capitalization of the Company, (b) the pro forma capitalization of
the Company to reflect the Financing and the Recent Acquisitions and Spin-Off
and (c) the pro forma capitalization of the Company to reflect the Offering
(assuming a public offering price of $28.50 per share), the Financing, the
Recent Acquisitions, the Spin-Off, the SFX Merger and the issuance of the
stock described under "Management--Employment Agreements and Arrangements
with Certain Officers and Directors" and "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX Broadcasting's Options and
SARs." This information should be read in conjunction with the financial
statements and the related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------
(IN THOUSANDS)
PRO FORMA FOR
THE OFFERING,
FINANCING,
RECENT
PRO FORMA FOR ACQUISITIONS,
THE FINANCING, SPIN-OFF AND
RECENT SFX
ACQUISITIONS AND MERGER(1)
ACTUAL SPIN-OFF (UNAUDITED)
---------- ---------------- ---------------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS..................................... $ 5,979 $ 52,728 $ 79,228
========== ================ ===============
DEBT:
Notes ........................................................ -- $350,000 $350,000
Credit Facility .............................................. -- 150,000 150,000
Other long-term debt.......................................... 16,178 34,924 34,925
---------- ---------------- ---------------
Total debt .................................................. $ 16,178 $534,924 $534,925
---------- ---------------- ---------------
TEMPORARY EQUITY(2): -- 16,500 16,500
STOCKHOLDERS' EQUITY(3):
Preferred Stock, $.01 par value, 1,000 shares authorized,
none issued and outstanding as of December 31, 1997 actual
and pro forma(4) ............................................ -- -- --
Class A Common Stock, $.01 par value, 1,000 shares
authorized, issued and outstanding as of December 31, 1997
actual, approximately 18,850,000 issued and outstanding pro
forma for the Financing, Recent Acquisitions, Spin-Off and
SFX Merger and approximately 23,850,000 issued and
outstanding pro forma for the Offering, the Financing,
Recent Acquisitions, Spin-Off and SFX Merger(5).............. -- 189 239
Class B Common Stock, $.01 par value, 1,000 shares
authorized, issued and outstanding as of December 31, 1997
actual and approximately 1,700,000 shares issued and
outstanding pro forma for Offering, Financing, Recent
Acquisitions, Spin-Off and SFX Merger(5)..................... -- 17 17
Additional paid-in capital ................................... 98,330 122,790 149,240
Retained earnings(6) ......................................... 3,814 3,814 3,814
---------- ---------------- ---------------
Total stockholders' equity .................................. $102,144 $126,810 $153,310
---------- ---------------- ---------------
Total capitalization......................................... $118,322 $678,234 $704,735
========== ================ ===============
</TABLE>
- ------------
(1) The Distribution Agreement provides that SFX Broadcasting will transfer
any positive Working Capital in existence at the closing of the SFX
Merger to the Company, and that if Working Capital is negative at that
time, the Company will pay the amount of such shortfall to SFX
Broadcasting. As of December 31, 1997 the amount of positive Working
Capital would have been approximately $3.0 million (excluding the
Series E Adjustment) and such amount is reflected in the cash to be
acquired by the Company pursuant to the Distribution Agreement. The
actual amount of Working Capital as of the closing of the SFX Merger is
likely to differ substantially from the amount in existence on December
31, 1997, and will be a function of, among other things, the operating
results of SFX Broadcasting through the date of the SFX Merger, the
actual cost of consummating the SFX Merger and the related transactions
and other obligations of SFX Broadcasting, including the payment of
dividends and interest on SFX Broadcasting's debt. See "Risk
Factors--Working Capital Adjustments and Repayment of Advances."
Includes the issuance of stock pursuant to the anticipated employment
agreements and the stock issued to the holders of SFX Broadcasting
options. See "Management--Employment Agreements and Arrangements with
Certain Officers and Directors" and "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX Broadcasting's
Options and SARs."
55
<PAGE>
(2) The PACE agreement provides that each PACE seller shall have a Fifth
Year Put 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 Company 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 Fifth Year Put Option rights are not assignable by the PACE
sellers. The maximum amount payable under the Fifth Year Put Option
($16.5 million) has been presented as temporary equity on the pro forma
balance sheet.
(3) SFX Broadcasting has indicated that it will recapitalize the Company
prior to the consummation of the Spin-Off which will allow for, among
other things, an increase in the number of authorized shares of Company
Common Stock.
(4) In February 1998, the Company amended its certificate of incorporation
to increase the number of authorized shares of preferred stock to
25,000,000 and issued 10 shares of preferred stock in connection with
the Contemporary acquisition. See "Description of Capital
Stock--Preferred Stock."
(5) Assumes that (a) an aggregate of 4,216,680 shares of Company Class A
Common Stock are issued pursuant to the Recent Acquisitions, (b) an
aggregate of 793,633 shares of Company Class A Common Stock are issued
to the holders of stock options and SARs issued by SFX Broadcasting (c)
an aggregate of 90,000 shares of Company Class A Common Stock and
650,000 shares of Company Class B Common Stock are issued pursuant to
certain anticipated employment agreements and (d) 5,000,000 shares of
Company Class A Common Stock are issued pusuant to the Offering. See
"Management--Employment Agreements and Arrangements with Certain
Officers and Directors" and "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX Broadcasting's
Options and SARs."
(6) Retained earnings on a pro forma basis for the Financing, the Recent
Acquisitions, the Spin-Off and the SFX Merger have not been adjusted
for future charges to earnings which 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--Future Charges to Earnings."
56
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following financial statements (the "Unaudited Pro Forma Condensed
Combined Financial Statements") and notes thereto contain forward-looking
statements that involve risks and uncertainties. The actual results of the
Company may differ materially from those discussed herein for the reasons
identified herein. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements that may be
made to reflect any future events or circumstances.
In the opinion of management, all adjustments necessary to fairly present
this pro forma information have been made. The Unaudited Pro Forma Condensed
Combined Financial Statements are based upon, and should be read in
conjunction with, the historical financial statements of the Company and the
1997 Acquisitions and Recent Acquisitions and the respective notes to such
financial statements included herein. The pro forma information is based upon
tentative allocations of purchase price for the Recent Acquisitions, 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 Unaudited Pro Forma Condensed Combined Balance Sheet at December 31,
1997 is presented as if the Company had completed the Financing, the Recent
Acquisitions, the Spin-Off, the Offering and the SFX Merger as of December
31, 1997.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1997 is presented as if the Company had completed the
1997 Acquisitions, the Financing, the Recent Acquisitions, the Spin-Off, the
Offering and the SFX Merger as of January 1, 1997.
The Unaudited Pro Forma Condensed Combined Financial Statements have been
prepared assuming that the approximately 4.2 million shares of the Company
Class A Common Stock will be issued in connection with certain of the Recent
Acquisitions and have been valued by the parties at $13.33 per share for
purposes of calculating the consideration given for the Recent Acquisitions.
Such valuation is based upon certain financial projections developed jointly
by the Company and the sellers and may not reflect the actual trading price.
In addition, the agreements relating to the Recent Acquisitions provide
for certain other purchase price adjustments and future contingent payments
in certain circumstances. See "Risk Factors--Future Contingent Payments" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The pro forma financial statements do not include the effect of certain
immaterial acquisitions. No adjustments have been made to the Pro Forma
Condensed Combined Statement of Operations relating to charges to earnings
that are non-recurring and related to the transactions presented. See "Risk
Factors--Future Charges to Earnings."
57
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1997
(in thousands)
<TABLE>
<CAPTION>
PRO FORMA FOR THE RECENT
ACQUISITIONS
--------------------------
PACE
SFX AND
ENTERTAINMENT PAVILION CONTEMPORARY
(ACTUAL) ACQUISITIONS ACQUISITION
I II III
------------- ------------ ------------
<S> <C> <C> <C>
ASSETS:
Current assets ..... $ 11,220 $(152,098) $(63,107)
Property and
equipment, net..... 59,685 83,278 25,000
Intangible assets,
net................ 60,306 129,387 76,019
Other assets........ 15,731 38,114 755
------------- ------------ ------------
TOTAL ASSETS........ $146,942 $ 98,681 $ 38,667
============= ============ ============
LIABILITIES &
STOCKHOLDERS'
EQUITY:
Current
liabilities........ $ 21,514 $ 56,705 $ 14,397
Deferred taxes...... 2,817 970 --
Credit Facility..... -- -- --
Notes............... -- -- --
Other long-term
debt (including
current portion) .. 16,178 16,985 --
Other liabilities .. 4,289 1,479 5,570
------------- ------------ ------------
Total liabilities .. $ 44,798 $ 76,139 $ 19,967
Minority interest .. -- 2,542 --
Temporary equity ... -- 16,500 --
Stockholders'
equity............. 102,144 3,500 18,700
------------- ------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS'
EQUITY............. $146,942 $ 98,681 $ 38,667
============= ============ ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA FOR THE
PRO FORMA OFFERING, FINANCING,
CONCERT/ ADJUSTMENTS FOR THE RECENT
BGP NETWORK SOUTHERN PRO FORMA THE FINANCING ACQUISITIONS,
ACQUISITION ACQUISITION ACQUISITION ADJUSTMENTS AND THE OFFERING THE SPIN-OFF AND
IV V VI VII VIII THE SFX MERGER
----------- ----------- ----------- ----------- ---------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets ..... $(57,798) $(50,279) $(15,661) $ 2,966 (a) $ 500,000 (a) $159,243
(42,500)(b) 26,500 (b)
Property and
equipment, net..... 20,000 3,519 1,000 -- -- 192,482
Intangible assets,
net................ 50,866 65,781 14,961 10,000 (d) -- 431,820
24,500 (b)
Other assets........ 4,100 316 298 (976)(c) -- 52,125
(6,213)(e)
----------- ----------- ----------- ----------- ---------------- --------------------
TOTAL ASSETS........ $ 17,168 $ 19,337 $ 598 $(12,223) $ 526,500 $835,670
=========== =========== =========== =========== ================ ====================
LIABILITIES &
STOCKHOLDERS'
EQUITY:
Current
liabilities........ $ 7,051 $ 7,521 $ 598 $ (6,213)(e) $ -- $101,573
Deferred taxes...... 2,617 54 -- 10,000 (d) 16,458
Credit Facility..... -- -- -- -- 150,000 (a) 150,000
Notes............... -- -- -- -- 350,000 (a) 350,000
Other long-term
debt (including
current portion) .. -- 1,762 -- -- -- 34,925
Other liabilities .. -- -- -- -- -- 11,338
----------- ----------- ----------- ----------- ---------------- --------------------
Total liabilities .. $ 9,668 $ 9,337 $ 598 $ 3,787 $ 500,000 $664,294
Minority interest .. -- -- -- (976)(c) -- 1,566
Temporary equity ... -- -- -- -- -- 16,500
Stockholders'
equity............. 7,500 10,000 -- 2,966 (a) 132,500 (b) 153,310
(18,000)(b) (101,000)(b)
(5,000)(b)
----------- ----------- ----------- ----------- ---------------- --------------------
TOTAL LIABILITIES &
STOCKHOLDERS'
EQUITY............. $ 17,168 $ 19,337 $ 598 $(12,223) $ 526,500 $835,670
=========== =========== =========== =========== ================ ====================
</TABLE>
58
<PAGE>
I. Reflects the consolidated historical balance sheet of the Company adjusted
to reflect the contribution by SFX Broadcasting to the Company's capital
primarily to complete the Recent Acquisitions. Only includes working capital
associated with the live business.
II. PACE AND PAVILION ACQUISITIONS
Reflects the PACE acquisition and the separate acquisitions of the
remaining two partners' interests in Pavilion Partners.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 (IN THOUSANDS)
----------------------------------------------------------
PACE PAVILION PRO FORMA PACE
AS REPORTED AS REPORTED ADJUSTMENTS TOTAL
------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets............................. $51,107 $21,058 $(109,500)(a) $(152,098)
(20,556)(a)
(9,752)(b)
(4,171)(b)
(27,500)(c)
(43,126)(e)
(13,675)(f)
(6,343)(f)
10,360 (g)
Property and equipment, net................ -- 59,291 5,000 (a) 83,278
9,103 (b)
27,500 (c)
(17,616)(d)
Intangible assets, net..................... 17,633 -- 111,754 (a) 129,387
Other assets............................... 29,426 12,675 9,752 (b) 38,114
(3,987)(d)
(9,752)(d)
------------- ------------- --------------- ------------
Total Assets............................... $98,166 $93,024 $ (92,509) $ 98,681
============= ============= =============== ============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities........................ $42,485 $11,134 $ 2,000 (b) $ 56,705
2,932 (b)
(1,846)(d)
Deferred taxes............................. 970 -- -- 970
Long-term debt (including current
portion).................................. 34,231 57,376 (20,556)(a) 16,985
6,624 (a)
(7,906)(d)
(43,126)(e)
(13,675)(f)
(6,343)(f)
10,360 (g)
Other liability............................ -- 1,479 -- 1,479
------------- ------------- --------------- ------------
Total Liabilities.......................... $77,686 $69,989 $ (71,536) $ 76,139
Minority interest.......................... 1,110 1,432 -- 2,542
Temporary Equity........................... 2,983 -- 16,500 (a) 16,500
(2,983)(a)
Stockholders' Equity....................... 16,387 21,603 (16,387)(a) 3,500
20,000 (a)
(16,500)(a)
(21,603)(d)
------------- ------------- --------------- ------------
Total Liabilities & Stockholders' Equity .. $98,166 $93,024 $ (92,509) $ 98,681
============= ============= =============== ============
</TABLE>
(Footnotes on following page)
59
<PAGE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) To reflect the PACE acquisition for $109,500,000 in cash, the issuance
of 1,500,000 shares of Company Class A Common Stock valued by the
parties at $20,000,000, the repayment of debt of $20,556,000, the
assumption of a capital lease and notes payable of $6,624,000, the
related increase in the fair value allocated to fixed assets of
$5,000,000; the related excess of the purchase price paid over the fair
value of net tangible assets of $111,754,000 and the elimination of
$2,983,000 of Temporary Equity and stockholder's equity of $16,387,000.
Pursuant to the terms of the PACE agreement, additional consideration
is required to be paid by the Company if the deemed value of the
Company Class A Common Stock is below $13.33 per share at the time of
the Spin-Off under certain circumstances.
The PACE agreement further provides that each PACE seller shall have a
Fifth Year Put 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 Company Class A Common Stock
(500,000 shares) received by such PACE seller 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 PACE sellers. The maximum
amount payable under the Fifth Year Put Options ($16,500,000) has been
presented as temporary equity on the pro forma balance sheet.
(b) To reflect the acquisition of an additional 33.33% indirect interest in
Pavilion Partners from Viacom Inc. and certain of its affiliates
("Blockbuster") for $4,171,000 in cash, the assumption of $2,932,000 in
current liabilities and the granting of naming rights of three venues
for a two-year period with an estimated value of $2,000,000, which will
be recognized as income over such two-year period, and the related
increase in the fair value allocated to fixed assets of $9,103,000.
Also reflects the purchase of a note receivable from Blockbuster, due
from Pavilion Partners, including accrued interest of $9,752,000. The
note is eliminated in consolidation with the acquisition of Sony's
interest in Pavilion Partners, as described below.
(c) To reflect the acquisition of an additional 33.33% indirect interest in
Pavilion Partners from YM Corp. ("Sony") for $27,500,000 in cash.
(d) To eliminate PACE's equity method investment in Pavilion Partners due
to the Company's acquisition of 100% of Pavilion Partners and to
eliminate Pavilion Partners' historical equity. Also reflects the
elimination of the $7,906,000 intercompany notes receivable and accrued
interest of $1,846,000 acquired from Blockbuster.
(e) To reflect the repayment of Pavilion Partners' third party debt at the
closing of the Pavilion Partners acquisition.
(f) To reflect the pay down of debt prior to acquisition of $13,675,000 of
PACE's debt and $6,343,000 of Pavilion Partners' debt.
(g) To reflect cash placed in escrow from the purchase price of the PACE
Acquisition to retire an Amphitheater loan in July 1998.
III. 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.
60
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 (IN THOUSANDS)
-------------------------------------------------------------
RIVERPORT
CONTEMPORARY AMPHITHEATER PRO FORMA CONTEMPORARY
AS REPORTED PARTNERS ADJUSTMENTS ACQUISITION
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets........................... $19,311 $ 284 $ (72,800) (a) $(63,107)
(9,902) (b)
Property and equipment, net.............. 2,813 11,189 10,998 (a) 25,000
Intangible assets, net................... -- -- 66,117 (a) 76,019
9,902 (b)
Other assets............................. 6,192 -- (5,437) (a) 755
-------------- -------------- -------------- --------------
Total Assets............................. $28,316 $11,473 $ (1,122) $ 38,667
============== ============== ============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities...................... $14,240 $ 157 $ -- $ 14,397
Other long-term debt (including current
portion)................................ 1,814 443 (2,257) (a) --
Other Liabilities........................ 5,570 -- -- 5,570
Total Liabilities........................ 21,624 600 (2,257) 19,967
Stockholders' Equity..................... 6,692 10,873 18,700 (a) 18,700
(17,565)(a)
-------------- -------------- -------------- --------------
Total Liabilities & Stockholders'
Equity.................................. $28,316 $11,473 $ (1,122) $ 38,667
============== ============== ============== ==============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) To reflect the Contemporary acquisition for $72,800,000 in cash,
including the additional acquisition of the remaining 50% interest in
the Riverport Amphitheater Partners and the issuance of 1,402,851
shares of the Company Class A Common Stock valued by the parties at
$18,700,000, the related increase in the fair value allocated to fixed
assets of $10,998,000, the related excess of the purchase price paid
over the fair value of net tangible assets of $66,117,000, and the
adjustment to eliminate $2,257,000 of notes payable, and stockholders'
equity of $17,565,000, and to reflect the elimination of
Contemporary's $5,437,000 equity investment in Riverport Amphitheather
Partners. Pursuant to the Contemporary agreement, the Company has
eliminated Contemporary's historical stockholders' equity and replaced
it with the value of the equity securities issued by the Company in
connection with the Contemporary acquisition.
Pursuant to the acquisition agreement, ten shares of preferred stock of
the Company were issued to the sellers. Such preferred stock is to be
converted into 1,402,851 shares of Company Class A Common Stock upon
consummation of the Spin-Off or, if the Spin-Off shall not have occurred
prior to July 1, 1998, such preferred stock is to be redeemed at its fair
market value, but in no event less than $18,700,000. In addition, pursuant
to the terms of the Contemporary agreement, the Company has agreed to make
certain payments to any Contemporary sellers that own shares of Company
Class A Common Stock on February 24, 2000 if the average trading price of
such stock on the 20-day period ending on such period is less than $13.33
per share.
(b) To reflect a net working capital adjustment of $9,902,000.
61
<PAGE>
IV. BGP ACQUISITION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 (IN THOUSANDS)
--------------------------------------------
PRO FORMA BGP
AS REPORTED ADJUSTMENTS ACQUISITION
------------- -------------- -------------
<S> <C> <C> <C>
ASSETS:
Current assets........................... $14,966 $(60,750)(a) $(57,798)
(12,014)(b)
Property and equipment, net.............. 8,905 11,095 (a) 20,000
Intangible assets, net .................. 1,430 49,436 (a) 50,866
Other assets............................. 4,100 -- 4,100
------------- -------------- -------------
Total Assets............................. $29,401 $(12,233) $ 17,168
============= ============== =============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities...................... $ 7,051 $ -- $ 7,051
Deferred taxes .......................... 2,617 -- 2,617
Other long-term debt (including current
portion)................................ 12,014 (12,014)(b) --
------------- -------------- -------------
Total Liabilities........................ 21,682 (12,014) 9,668
Stockholders' Equity..................... 7,719 (7,719)(a) 7,500
7,500 (a)
------------- -------------- -------------
Total Liabilities & Stockholders'
Equity.................................. $29,401 $(12,233) $ 17,168
============= ============== =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) To reflect the BGP acquisition for $60,750,000 in cash and the issuance
of 563,000 shares of Company Class A Common Stock valued at $7,500,000,
the related increase in fair value allocated to fixed assets of
$11,095,000 and the related excess of the purchase price paid over the
fair value of net tangible assets of $49,436,000, and the elimination
of $7,719,000 of stockholders' equity.
(b) To reflect the repayment of BGP's long-term debt.
62
<PAGE>
V. NETWORK ACQUISITION
The Network acquisition consists of the separate acquisitions of Network
Magazine and SJS.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 (IN THOUSANDS)
----------------------------------------------------------
NETWORK
MAGAZINE SJS PRO FORMA NETWORK
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets........................... $ 2,977 $3,340 $(52,000)(a) $(50,279)
(3,022)(b)
(1,574)(c)
Property and equipment, net.............. 307 352 341 (a) 3,519
757 (b)
1,762 (c)
Intangible assets, net................... -- -- 63,516 (a) 65,781
2,265 (b)
Other assets............................. 292 24 -- 316
------------- ------------- -------------- -------------
Total Assets............................. $ 3,576 $3,716 $ 12,045 $ 19,337
============= ============= ============== =============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities...................... $ 3,371 $4,150 -- $ 7,521
Deferred taxes........................... 54 -- -- 54
Long-term debt (including current
portion)................................ 1,574 -- (1,574) (c) 1,762
------------- ------------- -------------- -------------
1,762 (c)
Total Liabilities........................ 4,999 4,150 188 9,337
Stockholders' Equity..................... (1,423) (434) 1,857 (a) 10,000
10,000 (a)
------------- ------------- -------------- -------------
Total Liabilities & Stockholders'
Equity.................................. $ 3,576 $3,716 $ 12,045 $ 19,337
============= ============= ============== =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) To reflect the Network acquisition for $52,000,000 in cash and the
issuance of 750,188 shares of Company Class A Common Stock valued by
the parties at $10,000,000, the related increase in fair value
allocated to fixed assets of $341,000, and the related excess of the
purchase price paid over the fair value of net tangible assets of
$63,516,000, and the elimination of stockholders' deficiency of
$1,857,000.
(b) To reflect a net working capital adjustment of $1,765,000, costs to
purchase an office building of $757,000 and reimbursed sellers costs of
$500,000.
(c) To reflect the repayment of Network's long-term debt at closing and
assumption of a mortgage of $1,762,000.
63
<PAGE>
VI. CONCERT/SOUTHERN ACQUISITION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 (IN THOUSANDS)
--------------------------------------------
CONCERT/
PRO FORMA SOUTHERN
AS REPORTED ADJUSTMENTS ACQUISITION
------------- -------------- -------------
<S> <C> <C> <C>
ASSETS:
Current assets........................... $1,247 $(16,635)(a) $(15,661)
(273)(b)
Property and equipment, net.............. 342 658 (a) 1,000
Intangible assets, net................... -- 14,688 (a) 14,961
273 (b)
Other assets............................. 896 (598)(a) 298
------------- -------------- -------------
Total Assets............................. $2,485 $ (1,887) $ 598
============= ============== =============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities...................... $ 598 $ -- $ 598
------------- -------------- -------------
Total Liabilities........................ 598 -- 598
Stockholders' Equity..................... 1,887 (1,887)(a) --
------------- -------------- -------------
Total Liabilities & Stockholders'
Equity.................................. $2,485 $ (1,887) $ 598
============= ============== =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) To reflect the Concert/Southern acquisition for $16,635,000 in cash;
the related increase in fair value allocated to fixed assets of
$658,000, the related excess of the purchase price paid over the fair
value of net tangible assets of $14,688,000; the adjustments to
eliminate, stockholders' equity of $1,887,000 and a $598,000 investment
in a non-entertainment affiliated entity not acquired by the Company.
Pursuant to the Concert/Southern agreement, the Company eliminated
Concert/Southern's historical combined stockholders' equity and
replaced it with the value of the equity securities to be issued by the
Company in connection with the Concert/Southern acquisition.
(b) To reflect a net working capital adjustment of $273,000.
VII. PRO FORMA ADJUSTMENTS
(a) The Distribution Agreement provides that SFX Broadcasting will pay any
positive Working Capital in existence at the closing of the SFX Merger
to the Company, and that if Working Capital is negative at that time,
the Company will pay the amount of such shortfall to SFX Broadcasting.
As of December 31, 1997 the amount of positive Working Capital would
have been $2,966,000 (excluding the Series E Adjustment) and such
amount is reflected in the cash to be acquired by the Company pursuant
to the Distribution Agreement. The actual amount of Working Capital as
of the closing of the SFX Merger is likely to differ substantially from
the amount in existence on December 31, 1997, and will be a function
of, among other things, the operating results of SFX Broadcasting
through the date of the SFX Merger and, actual cost of consummating the
SFX Merger and the related transactions. SFX Broadcasting will also
incur certain other significant expenses prior to the consummation of
the SFX Merger that could reduce Working Capital, including the payment
of dividends and interest on SFX Broadcasting's debt and the amount of
any settlement paid by SFX Broadcasting in connection with the SFX
Merger shareholder litigation. Moreover, Working Capital will be
reduced by at least $2.1 million pursuant to the Series E Adjustment.
(b) To reflect estimated costs associated with the Recent Acquisitions and
the Financing and the related transactions. Consists of approximately
(i) $6.0 million in fees and expenses in connection with the Recent
Acquisitions, (ii) $18.0 million in fees in connection with the
Spin-Off, the consent solicitations and other required consents and
(iii) $18.5 million of fees and expenses in connection with the
Financing. The information relataing 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 the Offering, the Financing, the Recent Acquisitions, the
Spin-Off and the SFX Merger.
64
<PAGE>
(c) To reflect the consolidation of GSAC Partners (the entity which
operates the PNC Bank Arts Center) following the acquisition of the
remaining 50% ownership interest in GSAC currently owned by Pavilion
Partners.
(d) To reflect deferred taxes associated with differences between the book
and tax bases of assets and liabilities acquired.
(e) To eliminate acquisition cost paid by SFX Broadcasting prior to
December 31, 1997 and subsequently reimbursed by the Company.
VIII. PRO FORMA ADJUSTMENTS FOR THE FINANCING AND THE OFFERING
(a) Represents borrowings to finance the Recent Acquisitions including the
Notes and borrowings under the Credit Facility.
(b) To reflect the net proceeds of the Offering of $132.5 million and the
assumption of the obligation to pay $101.0 million of certain taxes
resulting from the Spin-Off pursuant to the Tax Sharing Agreement and
$5.0 million of change of control payments under the employment
agreements of Messrs. Sillerman, Ferrel and Benson assumed by the
Company pursuant to the Distribution Agreement.
65
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA FOR THE 1997
ACQUISITIONS
----------------------
SFX
ENTERTAINMENT PRO FORMA
(ACTUAL) ADJUSTMENTS
I II PRO FORMA
------------- ----------- ---------
<S> <C> <C> <C>
Revenue...................... $96,144 $14,243 $110,387
Operating expenses........... 83,417 13,293 96,710
Depreciation & amortization . 5,431 1,402 6,833
Corporate expenses (1)....... 2,206 -- 2,206
------------- ----------- ---------
Operating income (loss) ..... $ 5,090 $ (452) $ 4,638
Interest expense............. 1,590 171 1,761
Other (income) expenses ..... (295) (1) (296)
Equity (income) loss from
investments................. (509) -- (509)
------------- ----------- ---------
Income/(loss) before income
tax expense................. $ 4,304 $ (622) $ 3,682
Income tax expense
(benefit)................... 490 -- 490
------------- ----------- ---------
Net income (loss)............ $ 3,814 $ (622) $ 3,192
============= =========== =========
Accretion on temporary
equity .....................
Net loss applicable to
common shares ..............
Net loss per common share ...
Weighted average common
shares outstanding (2)(3) ..
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA FOR THE RECENT ACQUISITIONS
---------------------------------------------------------------------------- PRO FORMA FOR
PACE THE OFFERING, THE
AND CONCERT/ FINANCING, THE
PAVILION CONTEMPORARY BGP NETWORK SOUTHERN PRO FORMA RECENT ACQUISITIONS,
ACQUISITIONS ACQUISITION ACQUISITION ACQUISITION ACQUISITION ADJUSTMENTS THE SPIN-OFF,
III IV V VI VII VIII AND THE SFX MERGER
------------ ------------ ----------- ----------- ----------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $275,800 $103,300 $105,553 $28,322 $14,797 $ -- $638,159
Operating expenses...... 251,950 91,220 96,630 19,577 12,520 -- 568,607
Depreciation &
amortization........... 6,030 1,320 1,027 351 79 23,699 (a) 39,339
Corporate expenses (1).. -- -- -- -- -- 2,000 (b) 4,206
------------ ------------ ----------- ----------- ----------- ----------- --------------------
Operating income (loss). $ 17,820 $ 10,760 $ 7,896 $ 8,394 $ 2,198 $(25,699) $ 26,007
Interest expense........ 6,772 266 917 195 -- (8,150)(c) 47,296
45,535 (c)
Other (income) expenses. 1,357 (357) (270) (78) (60) (862) (d) (566)
Equity (income) loss
from investments....... (7,399) -- -- -- 48 862 (d) (6,998)
------------ ------------ ----------- ----------- ----------- ----------- --------------------
Income/(loss) before
income tax expense..... $ 17,090 $ 10,851 $ 7,249 $ 8,277 $ 2,210 $ 63,084 $(13,725)
Income tax expense
(benefit).............. 3,569 -- 1,687 (127) -- (2,373)(e) 3,500
------------ ------------ ----------- ----------- ----------- ----------- --------------------
Net income (loss)....... $ 13,521 $ 10,851 $ 5,562 $ 8,150 $ 2,210 $(60,711) $(17,225)
============ ============ =========== =========== =========== =========== ====================
Accretion on temporary
equity ................ (3,300)(f) (3,300)
============ ----------- --------------------
Net loss applicable to
common shares ......... $(64,011) $(20,525)
============ =========== ====================
Net loss per common
share.................. $ (0.82)
============ ====================
Weighted average common
shares outstanding
(2)(3)................. 25,550
============ ====================
</TABLE>
- ------------
(1) Net of fees from Triathlon of $1,794,000. These fees will vary, above
the minimum level of $500,000, based on the level of acquisition and
financing activities of Triathlon. Sillerman Communications Management
Corporation ("SCMC") previously assigned its rights to receive fees
payable under this agreement to SFX Broadcasting. Pursuant to the terms
of the Distribution Agreement, SFX Broadcasting assigned its rights to
receive such fees to the Company. Triathlon has previously announced
that it is exploring ways of maximizing stockholder value, including
possible sale to a third party. In the event that Triathlon were
acquired by a third party, there can be no assurance that the agreement
would continue for the remainder of its term.
(2) Includes 500,000 shares of Class A Common Stock to be 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.
(3) Includes 5,000,000 shares presumed to be issued in connection with the
Offering.
66
<PAGE>
NOTES TO PRO FORMA INCOME STATEMENT:
I. Represents 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
$65,346,000 for the Company on an actual basis and a pro forma basis,
respectively. EBITDA is defined as earnings before interest, taxes,
other income, net, equity income (loss) from investments and
depreciation and amortization. Although EBITDA is not a measure of
performance calculated in accordance with GAAP, the Company believes
that EBITDA is accepted by the 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 year ended December 31, 1997 were
$1,005,000, ($73,296,000) and $78,270,000, 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 $77,344,000
for the year ended December 31, 1997. The adjustments include the
expected cost savings in connection with the Recent Acquisitions
associated with the elimination of duplicative staffing and general
and administrative expenses of $5,000,000, and include equity income
from investments of $6,998,000. 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.
II. The Company acquired Delsener/Slater, the Meadows Music Theater and
Sunshine Promotions on January 2, 1997, March 20, 1997 and June 24,
1997, respectively. These adjustments represent the operating results
of the Meadows Music Theater and Sunshine Promotions prior to their
acquisitions by the Company.
III. PACE AND PAVILION ACQUISITIONS
Reflects the PACE acquisition and the separate acquisitions of PACE's two
partners' interests in Pavilion Partners, a partnership that owns certain
amphitheaters operated by PACE.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
----------------------------------------------------------
PACE
AND
PACE PAVILION PRO FORMA PAVILION
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITIONS
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue .............................. $176,168 $98,632 $ 1,000 (a) $275,800
Operating expenses.................... 170,169 83,258 (1,477)(b) 251,950
Depreciation & amortization........... 1,985 4,045 -- 6,030
Other expenses........................ 1,139 -- (1,139)(c) --
------------- ------------- ------------- --------------
Operating income ..................... $ 2,875 $11,329 $ 3,616 $ 17,820
Interest expense...................... 2,384 4,388 -- 6,772
Other expenses........................ 53 1,304 -- 1,357
Equity (income) loss from
investments.......................... (8,134) (1,831) 2,566 (d) (7,399)
------------- ------------- ------------- --------------
Income before income tax expense ..... $ 8,572 $ 7,468 $ 1,050 $ 17,090
Income tax expense ................... 3,569 -- -- 3,569
------------- ------------- ------------- --------------
Net income ........................... $ 5,003 $ 7,468 $ 1,050 $ 13,521
============= ============= ============= ==============
</TABLE>
67
<PAGE>
- ------------
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 of $907,000 of non-recurring costs incurred in connection
with PACE's previously planned initial public offering, which was
canceled. The amount of the pro forma adjustment to eliminate salaries
and bonuses is based on 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 as
should PACE's results be at a similar level to that in these pro forma
statements of operations no bonus would be paid, and the Company would
not be contractually obligated to pay a bonus.
(c) Reflects the elimination of non-recurring restricted stock compensation
to PACE executives.
(d) To eliminate PACE's income from its 33 1/3% equity investment in
Pavilion Partners.
IV. CONTEMPORARY ACQUISITION
Reflects the Contemporary acquisition and the separate acquisition of the
remaining 50% interest in Riverport Amphitheater Partners, a partnership that
owns an amphitheater in St. Louis, Missouri that is operated by Contemporary.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-----------------------------------------------------------
CONTEMPORARY RIVERPORT PRO FORMA CONTEMPORARY
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITION
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue ................................ $89,053 $14,247 $ -- $103,300
Operating expenses...................... 90,820 11,630 (11,230)(a) 91,220
Depreciation & amortization............. 541 779 -- 1,320
-------------- ------------- ------------- --------------
Operating income (loss)................. $(2,308) $ 1,838 $ 11,230 $ 10,760
Interest expense........................ 192 74 -- 266
Other (income) expenses................. (117) (240) -- (357)
Equity (income) from investments ....... (1,002) -- 1,002 (b) --
-------------- ------------- ------------- --------------
Income/(loss) before income tax
expense................................ $(1,381) $ 2,004 $ 10,228 $ 10,851
Income tax expense (benefit)............ -- -- -- --
-------------- ------------- ------------- --------------
Net income (loss)....................... $(1,381) $ 2,004 $ 10,228 $ 10,851
============== ============= ============= ==============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses and
other consulting expenses which will not be paid under 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 as should Contemporary'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.
(b) Reflects the elimination of Contemporary's equity income in Riverport
Amphitheater Partners. Contemporary has acquired its partners' 50%
interest in this venture.
The Contemporary agreement provided for the issuance of shares of
preferred stock of the Company to the sellers. Such preferred stock is to be
converted into 1,402,851 shares of the Company Class A Common Stock upon
consummation of the Spin-Off or, if the Spin-Off shall not have occurred
prior to July 1, 1998, such preferred stock is to be redeemed by the Company
at its fair market value, but in no event less than $18,700,000.
68
<PAGE>
V. BGP ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
---------------------------------------------
PRO FORMA BGP
AS REPORTED (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 as should BGP's results, once acquired by the Company, 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.
VI. NETWORK ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
--------------------------------------------------------------
THE NETWORK
MAGAZINE SJS PRO FORMA NETWORK
AS REPORTED (A) AS REPORTED (A) ADJUSTMENTS ACQUISITIONS
--------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue ................................ $16,274 $14,218 $(2,170)(b) $28,322
Operating expenses...................... 14,651 14,422 (2,170)(b) 19,577
(7,326)(a)
Depreciation & amortization............. 224 127 351
--------------- --------------- ------------- --------------
Operating income (loss)................. $ 1,399 $ (331) $ 7,326 $ 8,394
Interest expense, net................... 159 36 -- 195
Other (income) expenses................. -- (78) -- (78)
--------------- --------------- ------------- --------------
Income/(loss) before income tax
expense................................ $ 1,240 $ (289) $ 7,326 $ 8,277
Income tax expense (benefit) ........... -- (127) -- (127)
--------------- --------------- ------------- --------------
Net income (loss) ...................... $ 1,240 $ (416) $ 7,326 $ 8,150
=============== =============== ============= ==============
</TABLE>
69
<PAGE>
- ------------
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 the Network acquisitions. Accordingly, no
such bonus is reflected in the pro forma statement of operations as
should Network'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.
(b) Reflects the elimination of transactions between Network Magazine and
SJS.
VII. 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 as should
Concert/Southern'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.
(b) Reflects the elimination of equity loss of a non-entertainment
affiliated entity which was not acquired by the Company.
VIII. PRO FORMA ADJUSTMENTS:
(a) Reflects the increase in depreciation and amortization resulting from
the preliminary purchase accounting treatment of the Recent
Acquisitions. The Company amortizes goodwill over 15 years.
(b) To record incremental corporate overhead charges associated with
incremental headquarters personnel and general and administrative
expenses that management estimates will be necessary as a result of the
Recent Acquisitions.
(c) Reflects interest expense associated with the Notes, the Credit
Facility and other debt and deferred compensation costs related to
Recent Acquisitions and elimination of $8,150,000 of historical
interest expense.
(d) To reclassify Delsener/Slater's equity income in the PNC Bank Arts
Center venue following the acquisition of Pavilion Partners which owns
the other 50% equity interest in the venue.
70
<PAGE>
(e) Represents an adjustment to the provision for their state and local
income taxes to reflect an approximate pro forma tax provision of
$3,500,000. The calculation treats all companies to be acquired
pursuant to the Pending Acquisitions as "C" Corporations. The tax
provision reflects the non-deductibility of approximately $17,000,000
of goodwill amortization, and tax savings related to the pro forma
adjustments for the Financing.
(f) Represents the accretion on the Fifth Year Put Option issued to the
PACE sellers in connection with the PACE acquisition.
71
<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 and affiliated companies,
the predecessor of the Company, for each of the four years ended December 31,
1996 and the historical financial statements of the Company for the year
ended December 31, 1997. 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 the notes thereto
of the Company, the 1997 Acquisitions and the Recent Acquisitions included
herein. The financial information has been derived from the audited and
unaudited financial statements of the Company, the 1997 Acquisitions and the
Recent Acquisitions. The pro forma selected data for the year ended December
31, 1997 are 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
PREDECESSOR
------------------------------------------ ----------
1997 (1)
PRO FORMA
1993 1994 1995 1996 1997 (UNAUDITED)
--------- --------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................ $46,526 $92,785 $47,566 $50,362 $ 96,144 $638,159
Operating expenses..................... 45,635 90,598 47,178 50,686 83,417 568,607
Depreciation & amortization............ 762 755 750 747 5,431 39,339
Corporate
expenses (2).......................... -- -- -- -- 2,206 4,206
--------- --------- --------- ---------- ---------- -----------
Operating income (loss)................ $ 129 $ 1,432 $ (362) $(1,071) $ 5,090 $ 26,007
Interest expense....................... (148) (144) (144) (60) (1,590) (47,296)
Other income .......................... 85 138 178 198 295 566
Equity income (loss) from investments -- (9) 488 524 509 6,998
--------- --------- --------- ---------- ---------- -----------
Income (loss) before income taxes ..... $ 66 $ 1,417 $ 160 $ (409) $ 4,304 $(13,725)
Income tax provision .................. (57) (5) (13) (106) (490) (3,500)
--------- --------- --------- ---------- ---------- -----------
Net income (loss)...................... $ 9 $ 1,412 $ 147 $ (515) $ 3,814 $(17,225)
========= ========= ========= ========== ========== ===========
Accretion on temporary equity (3) ..... (3,300)
-----------
Net loss applicable to common shares . $(20,525)
===========
Net loss per common share (4).......... $ (0.82)
===========
Weighted average common shares
outstanding (4)(5).................... 25,550
===========
OTHER OPERATING DATA:
EBITDA (6)............................. $ 891 $ 2,187 $ 388 $ (324) $ 10,521 $ 65,346
========= ========= ========= ========== ========== ===========
Cash flow from:
Operating activities.................. $ 2,959 $ (453) $ 4,214 $ 1,005
Investing activities.................. -- -- (435) (73,296)
Financing activities.................. (477) (216) (1,431) 78,270
</TABLE>
72
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands)
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
PREDECESSOR
-------------------------------------
1993 1994 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current assets.............. $1,823 $4,453 $3,022 $6,191
Property and equipment,
net........................ 4,484 3,728 2,978 2,231
Intangible assets, net ..... -- -- -- --
Total assets................ 6,420 8,222 6,037 8,879
Current liabilities......... 4,356 3,423 3,138 7,973
Long-term debt, including
current portion............ -- 1,830 -- --
Temporary equity(3)......... -- -- -- --
Stockholders' equity........ 6,420 2,969 2,900 907
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1997
PRO FORMA
1997 (UNAUDITED)(7)
--------- ------------
<S> <C> <C>
Current assets.............. $ 11,220 $159,243
Property and equipment,
net........................ 59,685 192,482
Intangible assets, net ..... 60,306 431,820
Total assets................ 146,942 835,670
Current liabilities......... 21,514 101,573
Long-term debt, including
current portion............ 16,178 534,925
Temporary equity(3)......... -- 16,500
Stockholders' equity........ 102,144 153,310
</TABLE>
- ------------
(1) The Unaudited Pro Forma Statement of Operations Data for the year ended
December 31, 1997 are presented as if the Company had completed the
1997 Acquisitions, the Recent Acquisitions, the Financing, the
Spin-Off, the Offering and the SFX Merger as of January 1, 1997.
(2) Corporate expenses are reduced by $1,794,000 for fees earned from
Triathlon for the year ended December 31, 1997. The right to receive
such fees in the future is to be assigned to the Company by SFX
Broadcasting in connection with the Spin-Off. Future fees may vary,
above the minimum fee of $500,000, depending upon the level of
acquisition and financing activities of Triathlon. See "Certain
Relationships and Related Transactions--Triathlon Fees."
(3) The PACE acquisition agreement provides that each PACE seller 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
Company 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 presented as
temporary equity on the pro forma balance sheet. 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 Class A Common Stock to be
issued to the PACE sellers in connection with the Fifth Year Put
Option; these shares are not included in calculating the net loss per
common share.
(5) Reflects the assumed issuance of 5,000,000 shares of Company Class A
Common Stock in connection with the Offering.
(6) "EBITDA" is defined as earnings before interest, taxes, other income,
net, equity income (loss) from investments and depreciation and
amortization. Although EBITDA is not a measure of performance
calculated in accordance with GAAP, the Company believes that EBITDA is
accepted by the 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 effect EBITDA but have not been
reflected herein. Had such adjustments been made, Adjusted EBITDA on a
pro forma basis would have been approximately $77,344,000 for the year
ended December 31, 1997. These adjustments include the elimination of
duplicative staffing and general and administrative expenses of
$5,000,000 and include the Company's pro rata share of income from
investments in subsidiaries accounted for under the equity method of
$6,998,000 for the year ended December 31, 1997. 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.
(7) The Unaudited Pro Forma Balance Sheet Data at December 31, 1997 are
presented as if the Company had completed the Recent Acquisitions, the
Financing, the Spin-Off, the Offering and the SFX Merger as of December
31, 1997.
Retained earnings on a pro forma basis for the Financing, the Recent
Acquisitions, the Spin-Off and the SFX Merger have not been adjusted
for future charges to earnings which will result from the issuance of
stock and options granted to certain executive officers and other
employees of the Company or certain other costs. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Future Charges to
Earnings."
73
<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. The following discussion
contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to the
differences include, but are not limited to, risks and uncertainties relating
to the Company's absence of a combined operating history, its potential
inability to integrate the Acquired Businesses and other risks related to the
Recent Acquisitions, control of the motor sports and theatrical businesses,
future acquisitions, inability to obtain future financings, inability to
successfully implement operating strategies (including the achievement of
cost savings), the Company's expansion strategy, its need for additional
funds, its control of venues, working capital adjustments, control by
management, dependence on key personnel, potential conflicts of interest,
indemnification agreements, seasonality, competition, regulatory matters,
environmental matters, economic conditions and consumer tastes and
availability of artists and events. See "Risk Factors." The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect any future
events or circumstances.
The performance of entertainment companies, such as the Company, is
measured, in part, by their ability to generate EBITDA. "EBITDA" is defined
as earnings before interest, taxes, other income, net equity income (loss)
from investments and depreciation and amortization. Although EBITDA is not a
measure of performance calculated in accordance with GAAP, the Company
believes that EBITDA is accepted by the industry as a generally recognized
measure of performance and is used by analysts who report publicly on the
performance of entertainment companies. Nevertheless, this measure should not
be considered in isolation or as a substitute for operating income, net
income, net cash provided by operating activities or any other measure for
determining the Company's operating performance or liquidity that is
calculated in accordance with GAAP.
The Company's core business is the promotion and production of live
entertainment events, most significantly for concert and other music
performances in venues owned and/or operated by the Company and in
third-party venues. In connection with all of its live entertainment events,
the Company seeks to maximize related revenue streams, including the sale of
corporate sponsorships, the sale of concessions and the merchandising of a
broad range of products. On a pro forma basis giving effect to the 1997
Acquisitions and the Recent Acquisitions, the Company's music and ancillary
businesses comprised approximately 78%, theater comprised approximately 16%
and specialized motor sports comprised approximately 6% of the Company's
total net revenues for the year ended December 31, 1997.
Promotion of events involves booking talent, renting or providing the
event venue, marketing the event to attract ticket buyers and providing for
local services required in the production of the event such as security and
stage hands. Promoters generally receive revenues from the sale of tickets
and sponsorships. When an event is promoted at a venue owned or managed by
the promoter, the promoter also generally receives a percentage of revenues
from concessions, merchandising, parking and premium box seats. The Company
earns promotion revenues principally by promoting (a) music concerts, (b)
Touring Broadway Shows and (c) specialized motor sports events.
Production of events involves developing the event content, hiring
artistic talent and managing the actual production of the event (with the
assistance of the local promoter). Producers generally receive revenues from
guarantees and from profit sharing agreements with promoters, a percentage of
the promoters' ticket sales, merchandising, sponsorships, licensing and the
exploitation of other rights (including intellectual property rights) related
to the production. The Company earns revenues by producing (a) Touring
Broadway Shows, (b) specialized motor events and (c) other proprietary and
non-proprietary entertainment events.
1997 ACQUISITIONS
The Company entered the live entertainment business with SFX
Broadcasting's acquisition of Delsener/Slater, a New York-based concert
promotion company, in January 1997 for aggregate consid-
74
<PAGE>
eration of $27.6 million. Delsener/Slater has long-term leases or is the
exclusive promoter for many of the major concert venues in the New York City
metropolitan area, including the Jones Beach Amphitheater, a 14,000-seat
complex located in Wantagh, New York, and the PNC Bank Arts Center (formerly
known as the Garden State Arts Center), a 17,500-seat complex located in
Holmdel, New Jersey. In March 1997, Delsener/Slater acquired, for aggregate
consideration of $23.8 million, companies which hold a 37-year lease to
operate the Meadows Music Theater, a 25,000-seat indoor/outdoor complex
located in Hartford, Connecticut. In June 1997, SFX Broadcasting acquired
Sunshine Promotions, a concert promoter in the Midwest, and certain other
related companies for an aggregate consideration of $61.5 million. As a
result of the acquisition of Sunshine Promotions, the Company owns the Deer
Creek Music Theater, a 21,000-seat complex located in Indianapolis, Indiana,
the Polaris Amphitheater, a 20,000-seat complex located in Columbus, Ohio,
and has a long-term lease to operate the Murat Centre, a 2,700-seat theater
and 2,200-seat ballroom located in Indianapolis, Indiana. See "Certain
Relationships and Related Transactions--Delsener/Slater Employment
Agreements."
The cash portion of the 1997 Acquistions was financed through capital
contributions from SFX Broadcasting.
RECENT ACQUISITIONS
In February 1998, the Company acquired PACE, Pavilion Partners,
Contemporary, BGP and Network and in March 1998, the Company acquired
Concert/Southern. See "Business--Recent Acquisitions."
Acquisition of PACE
On February 25, 1998, the Company acquired all of the outstanding capital
stock of PACE (the "PACE Acquisition"). In connection with the PACE
Acquisition, the Company acquired 100% of Pavilion Partners, a partnership
that owns interests in 10 venues ("Pavilion"), one-third through the
acquisition of PACE and two-thirds through separate agreements between PACE
and Blockbuster and between PACE and Sony (the acquisition of such two-thirds
interest, the "Pavilion Acquisition"). The total consideration for the PACE
Acquisition was approximately $109.5 million in cash, the repayment of
approximately $20.6 million of debt and the issuance of 1.5 million shares of
Company Class A Common Stock upon consummation of the Spin-Off. The total
consideration for the Pavilion Acquisition was approximately $90.6 million,
comprised of $41.4 million in cash and the repayment of $43.1 million of debt
and the assumption of approximately $6.1 million of debt related to a capital
lease. The purchase price was financed from the proceeds of an offering
exempt from the registration requirements of the Securities Act of the Notes,
which was consummated on February 11, 1998 (the "Note Offering"). In the
event that the Spin-Off has not been consummated on or before July 1, 1998
and each third month thereafter, each selling stockholder in the PACE
Acquisition will have the option to require the Company to pay $13.33 per
share in cash in lieu of each share of the Company Class A Common Stock (the
"PACE Option"). SFX Broadcasting has guaranteed the full and timely
performance of all of the Company's obligations under the agreement relating
to the PACE Acquisition until the shares of Company Class A Common Stock have
been delivered or the PACE Option shall have been exercised by each selling
stockholder in the PACE Acquisition.
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 concepts which are presented by PACE or any of its
affiliates in another venue located in either Atlanta, Georgia or Dallas,
Texas. However, the Company acquired an interest in Chastain Park
Amphitheater, also in Atlanta, in the Concert Southern acquisition described
below. The Company is currently negotiating with the third party to waive
this restrictive provision; however, it is possible that the Company will be
unable to obtain the waiver. In mangement's view, this provision will not
materially affect the business or the prospects of the Company.
75
<PAGE>
Acquisition of Contemporary
On February 27, 1998, the Company acquired Contemporary Group (the
"Contemporary Acquisition"). The Contemporary Acquisition involved the merger
of Contemporary International Productions Corporation with and into the
Company, the acquisition by a wholly-owned subsidiary of the Company of
substantially all of the assets, excluding certain cash and receivables, of
the remaining members of Contemporary and the acquisition of the 50% interest
in the Riverport Amphitheatre Joint Venture not owned by Contemporary. The
total consideration of the Contemporary Acquisition was approximately $72.8
million in cash, a payment for working capital of $9.9 million, and $18.7
million in aggregate liquidation preference of shares of the Company's series
A redeemable convertible preferred stock (the "Series A Preferred Stock")
which, upon consummation of the Spin-Off, will automatically convert into
1,402,850 shares of Company Class A Common Stock. The purchase price was
financed by the borrowings under the Credit Facility and with the proceeds of
the Note Offering.
Acquisition of BGP
On February 24, 1998, the Company, through the Company's wholly-owned
subsidiary, BGP Acquisition, LLC acquired all of the outstanding capital
stock of BGP, for a total consideration of $60.8 million in cash, $12.0
million in repayment of debt, which amount was at least equal to BGP's
working capital (as defined in the acquisition agreement), and options to
purchase 562,640 shares of Company Class A Common Stock (the "BGP
Acquisition"). The options shall become exercisable for no additional
consideration upon consummation of the Spin-Off. The purchase price was
financed from the proceeds of the Note Offering.
Acquisition of Network
On February 27, 1998, the Company and its wholly-owned subsidiary, SFX
Network Group, LLC ("SFX Network") acquired Network (the "Network
Acquisition"). In the Network Acquisition, the Company, through SFX Network,
acquired all of the outstanding capital stock of each of The Album Network,
Inc. and SJS and purchased substantially all of the assets and properties and
assumed substantially all of the liabilities and obligations of The Network
40, Inc. The total purchase price was approximately $52.0 million cash, a
payment for working capital of $1.8 million, reimbursed seller's costs of
$500,000, the purchase of an office building and related property for
approximately $2.5 million and the issuance of approximately 750,188 shares
of Company Class A Common Stock upon consummation of the Spin-Off. In
addition, the purchase price is subject to increase based on actual 1998
EBITDA (as defined in the acquisition agreement) by $4.0 million if such
EBITDA equals or exceeds $9.0 million to $14 million if Network's EBITDA is
greater than $11 million, and is payable in stock, or in certain
circumstances in cash, no later than March 20, 1999. The $2.5 million
purchase of the office building and related property used in connection with
Network's business was comprised of cash of $700,000 and the assumption of
debt of $1.8 million. The purchase price was financed by the borrowings under
the Credit Facility. In connection with the Network Acquisition, the selling
stockholders were reimbursed working capital (as defined in the acquisition
agreement) in excess of $500,000. SFX Broadcasting has guaranteed the payment
to the Network sellers of any such excess working capital.
Acquisition of Concert/Southern
On March 4, 1998, the Company, through its wholly-owned subsidiary,
Concerts, acquired Concert/ Southern Promotions, a promoter of live music
entertainment in the Atlanta metropolitan area, for a total consideration of
$16.9 million (including the payments of the $1.6 million representing the
present value of a deferred purchase obligation and $300,000 for the working
capital adjustment.) The purchase price was financed by the borrowings under
the Credit Facility.
The foregoing descriptions do not purport to be complete descriptions of
the terms of the acquisition agreements and are qualified by reference to the
acquisition agreements, copies of which are attached hereto as exhibits and
incorporated herein by reference. Pursuant to the acquisition agreements and
the agreements related thereto, the Company, (a) under certain circumstances
may be required to repurchase
76
<PAGE>
shares of its Company Class A Common Stock or make additional payments in
connection therewith, (b) has granted certain rights of first refusal certain
of which are exercisable at 95% of the proposed purchase price, and (c) in
connection with the PACE Acquisition, has granted Brian Becker, the Executive
Vice President, a Member of the Office of the Chairman, and a director of the
Company, the option to acquire, after the second anniversary of the
consummation of the PACE Acquisition, the Company's then existing motor
sports line of business (or, if that business has previously been sold, the
Company's then existing theatrical line of business) at its then fair market
value See "Risk Factors--Control of Motor Sports and Theatrical Businesses."
The agreements relating to the Recent Acquisitions provide for certain
other purchase price adjustments and future contingent payments in certain
circumstances, certain of which could be material. There can be no assurance
that the Company will be able to finance the payments. See "Risk
Factors--Risks Related to the Recent Acquisitions" and "--Liquidity and
Capital Resources."
The Recent Acquisitions were accounted for using the purchase method of
accounting, and the intangible assets created in the purchase transactions
will generally be amortized against future earnings over a 15-year period.
The amount of amortization will be substantial and will continue to affect
the Company's operating results in the future. These expenses, however, do
not result in an outflow of cash by the Company and do not impact EBITDA.
SPIN-OFF AND SFX MERGER
SFX Broadcasting was formed in 1992 principally to acquire and operate
radio broadcasting stations. SFX Broadcasting currently operates in two lines
of business: radio broadcasting and live entertainment. In August 1997, SFX
Broadcasting agreed to merge its radio business with a subsidiary of SFX
Buyer and to spin-off the Company to certain stockholders of SFX Broadcasting
on a pro-rata basis. Pursuant to the Merger Agreement, SFX Broadcasting (a)
has contributed its live entertainment businesses to the Company and prior to
the consummation of the SFX Merger (b) intends to distribute all of the
outstanding shares of the Company Common Stock to the holders of common
stock, Series D preferred stock interest in the director deferred stock
ownership plan and certain warrants of SFX Broadcasting as of the close of
business on April 20, 1998. SFX Broadcasting has indicated that it intends to
distribute such shares on or about April 27, 1998. The receipt of shares by
stockholders of SFX Broadcasting pursuant to the Spin-Off will be a taxable
transaction. See "Agreements Relating to the Spin-Off."
RESULTS OF OPERATIONS
General
The Company's operations consist primarily of (a) concert promotion and
venue operation, (b) the promotion and production of theatrical events,
particularly Touring Broadway Shows, and (c) the promotion and production of
motor sports events. The Company and the Acquired Businesses also engage in
various other activities ancillary to their live entertainment businesses.
On a pro forma basis after giving effect to the Recent Acquisitions, the
Offering, the Financing, the Spin-Off and the SFX Merger, the Company's
revenues for the year ended December 31, 1997 would have been $638.1 million.
The pro forma revenue is comprised of $527.8 million from the Recent
Acquisitions, of which the PACE and Pavilion Acquisitions represented 52%.
On a pro forma basis operating expenses for the year ended December 31,
1997 would have been $568.6 million. Operating margins on a pro forma basis
would have been 11%. Pro forma operating expenses do not reflect the
Company's expectation that it will be able to achieve substantial economies
of scale upon completion of the Recent Acquisitions and reductions in
operating expenses as a result of the elimination of duplicative staffing and
general and administrative expenses.
On a pro forma basis the Company's net loss for the year ended December
31, 1997 would have been $17.2 million. Net loss per share, after accretion
of the Fifth Year Put Option issued in connection with the PACE Acquisition,
would have been $0.82 for the period. The pro forma operating results include
the impact of significant non-cash amortization expense arising from the
Recent Acquisitions and interest expense relating to the Financing.
77
<PAGE>
As of December 31, 1997 the Company had net current assets of $159.2
million (included in net current assets is cash and cash equivalents of $79.2
million), property and equipment (principally concert venues) of $192.5
million, intangible assets of $431.8 million and long-term debt of $534.9
million. The long-term debt is comprised of $350.0 million of Notes,
borrowings of $150.0 million under the Credit Facility and other debt
obligations of $34.9 million.
Concert Promotion/Venue Operation
The Company's concert promotion and venue operation business consist
primarily of the promotion of concerts and operation of venues primarily for
use in the presentation of musical events. The Company's primary source of
revenues from its concert promotion activities is from ticket sales at events
promoted by the Company. As a venue operator, the Company's primary sources
of revenue are sponsorships, concessions, parking and other ancillary
services, derived principally from events promoted by the Company.
Revenue from ticket sales is affected primarily by the number of events
the Company promotes, the average ticket price and the number of tickets
sold. The average ticket price depends on the popularity of the artist whom
the Company is promoting, the size and type of venue and the general economic
conditions and consumer tastes in the market where the event is being held.
Revenue and margins are also affected significantly by the type of contract
entered into with the artist or the artist's representative. Generally, the
promoter or venue operator will agree to pay the artist the greater of a
minimum guarantee or a profit sharing payment based on ticket revenue, less
certain show expenses. The promoter or venue operator assumes the financial
risk of ticket sales and is responsible for local production and advertising
of the event. However, in certain instances, the promoter agrees to accept a
fixed fee from the artist for its services, and the artist assumes all
financial risk. When the promoter or venue operator assumes the financial
risk, all revenue and expenses associated with the event are recorded. When
the artist assumes the risk, only the fee is recorded. As a result, operating
margins would be significantly greater for fee-based events as opposed to
events for which the Company assumes the risk of ticket sales, although
profits per event would tend to be lower. Operating margins can vary from
period to period.
The Company's most significant operating expenses are talent fees,
production costs, venue operating expenses (including rent), advertising
costs and insurance expense. The booking of talent in the concert promotion
business generally involves contracts for limited engagements, often
involving a small number of performances. Talent fees depend primarily on the
popularity of the artist, the ticket price that the artist can command at a
particular venue and the expected level of ticket sales. Production costs and
venue operating expenses have substantial fixed cost components and lesser
variable costs primarily related to expected attendance.
Theatrical
The Company's theatrical operations are directed mainly towards the
promotion and production of Touring Broadway Shows, which generate revenues
primarily from ticket sales and sponsorships. The Company may also
participate in ancillary revenues, such as concessions and merchandise sales,
depending on its agreement with a particular local promoter/venue operator.
Revenue from ticket sales is primarily affected by the popularity of the
production and the general economic conditions and consumer tastes in the
particular market and venue where the production is presented. In order to
reduce its dependency on the success of any single touring production, the
Company sells advance annual subscriptions that provide the purchaser with
tickets for all of the shows that the Company intends to tour in the
particular market during the touring season. For the year ended December 31,
1997, on a pro forma basis approximately 34% of ticket sales for Touring
Broadway Shows presented by the Company were sold through advance annual
subscriptions. 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.
78
<PAGE>
The Company also makes minority equity investments in original Broadway
productions, principally as a means to obtain rights for touring shows, and
in certain Touring Broadway Shows. These investments are accounted for using
either the equity method or the cost method of accounting, based on the
relative size of the investment. The Company monitors the recoverability of
these investments on a regular basis, and the Company may be required to take
write-offs if the original production closes or if the Company determines
that the production will not recoup the investment. The timing of any
write-off could adversely affect operating results in a particular quarter.
Motor Sports
The Company's motor sports activities consist principally of the promotion
and production of specialized motor sports, which generate revenues primarily
from ticket sales and sponsorships, as well as merchandising and video rights
associated with producing motor sports events. Ticket prices for these events
are generally lower than for theatrical or music concert events, generally
ranging from $5 to $30 in 1996. Revenue from these sources is primarily
affected by the type of event and the general economic conditions and
consumer tastes in the particular markets and venues where the events are
presented. Event-related revenues received prior to the event date are
initially recorded on the balance sheet as deferred revenue; after the event
occurs, they are recorded on the statement of operations as gross revenue.
Expenses are capitalized on the balance sheet as prepaid expenses until the
event occurs.
Operating expenses associated with motor sports activities include talent,
rent, track preparation costs, security and advertising. These operating
expenses are generally fixed costs that vary based on the type of event and
venue where the event is held.
Under certain circumstances, the Company may be required to sell either
its motor sports or theatrical lines of business. See "Risk Factors--Control
of Motor Sports and Theatrical Businesses."
Other Businesses
The Company's other principal businesses include (a) the production and
distribution of radio industry trade magazines, (b) the production of radio
programming content and show-prep material and (c) the provision of radio air
play and music retail research services. The primary sources of revenues from
these activities include (a) the sale of advertising space in its
publications and the sale of advertising time on radio stations that carry
its syndicated shows, (b) subscription fees for its trade publications and
(c) subscription fees for access to its database of radio play list and
audience data. Revenues generally vary based on the overall advertising
environment and competition.
The Company also provides marketing and consulting services pursuant to
contracts with individual clients for specific projects. Revenues from and
costs related to these services vary based on the type of service being
provided and the incremental associated costs.
Seasonality
The Company's operations and revenues are largely seasonal in nature, with
generally higher revenue generated in the second and third quarters of the
year. For example, on a pro forma basis for the 1997 Acquisitions, the
Company generated approximately 68% of its revenues in the second and third
quarters for the twelve months ended December 31, 1997. The Company's outdoor
venues are primarily utilized in the summer months and do not generate
substantial revenue in the late fall, winter and early spring. Similarly, the
musical concerts that the Company promotes largely occur in the second and
third quarters. To the extent that the Company's entertainment marketing and
consulting relate to musical concerts, they also predominantly generate
revenues in the second and third quarters. Therefore, the seasonality of the
Company's business causes (and 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 Recent Acquisitions, such as motor sports (which
is winter-seasonal) and Touring Broadway Shows (which typically tour between
September and May).
79
<PAGE>
HISTORICAL RESULTS
The following analysis of the historical operations of the Company,
including the 1997 Acquisitions, but excluding the Recent Acquisitions,
includes, for comparative purposes, the historical operations of
Delsener/Slater (the Company's predecessor) for the years ended December 31,
1995 and 1996.
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, concert promotion revenue for the year ended December
31, 1997 would have been $110.4 million.
Concert promotion operating expenses increased by 65% to $83.4 million for
the year ended December 31, 1997, compared to $50.6 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, concert operating expenses would have been $96.7 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
the Meadows lease 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 zero 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 Sillerman Communications Management Corporation,
a private investment company in which Messrs. Sillerman and Tytel have
economic interests, that makes investments in and provides financial
consulting services to companies engaged in the media business ("SCMC"). The
fees will 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 SFX
Broadcasting, and SFX Broadcasting will assign its rights to receive the fees
to the Company, pursuant to the Distribution Agreement. Triathlon has
previously announced that it is exploring ways of maximizing stockholder
value, including a possible sale to a third party. If Triathlon is acquired
by a third party, it is possible that the consulting fees would not continue
for the remainder of the agreement's term. 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 Meadows and Sunshine
Promotions.
Equity income in unconsolidated subsidiaries decreased 3% to $509,000 from
$524,000.
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.
80
<PAGE>
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 from
$488,000, primarily as 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for funds has been for acquisitions, working
capital needs, to make certain payments in connection with the Spin-Off and,
to a lesser extent, capital expenditures. The Company anticipates that its
principal source of funds will be the proceeds from the Offering, remaining
proceeds from the Note Offering, borrowings under the Credit Facility and
cash flows from operations.
Historical Cash Flows
Net cash provided by operations was $1.0 million for the year ended
December 31, 1997.
Net cash used in investing activities for the year ended December 31, 1997
was $73.3 million. Cash used in investing activities in 1997 related
primarily to the acquisitions of Delsener/Slater, Sunshine and Meadows and
capital expenditures.
Net cash provided by financing activities for the year ended December 31,
1997 was $78.3 million. For the year ended December 31, 1997, cash provided
by financing activities related primarily to the funding of the 1997
Acquisitions by the Company.
1997 Acquisitions
In 1997, SFX Broadcasting consummated the acquisitions of Delsener/Slater
($23.6 million in cash plus $4.0 million of deferred payments), certain
companies which own and operate Meadows ($0.9 million
81
<PAGE>
in cash plus shares of SFX Broadcasting's Class A common stock with a value
at that time of approximately $7.5 million and the assumption of
approximately $15.4 million of debt) and Sunshine Promotions ($53.9 million
in cash plus $2.0 million in deferred payments, shares of SFX Broadcasting's
Class A common stock with a value at the time of approximately $4.0 million
and the assumption of $1.6 million of debt). The present value of the future
payments that the Company is required to pay in connection with the 1997
Acquisitions is approximately $6.2 million.
The foregoing includes a note in the original principal amount of $2.0
million, of which approximately $1.6 million is currently outstanding.
Pursuant to the SFX Merger Agreement, the Company is responsible for the
payments owing under the note, which by its terms accelerates upon the change
of control of SFX Broadcasting resulting from the consummation of the SFX
Merger.
Recent Acquisitions
The aggregate purchase price of the Recent Acquisitions was approximately
$442.1 million in cash, including repayment of debt and payments for working
capital, $7.8 million of assumed debt and the issuance of approximately 4.2
million shares of Company Common Stock. In addition, in February 1998, the
Company reimbursed SFX Broadcasting approximately $25.3 million for consent
fees, capital expenditures, and other expenses related to the Recent
Acquisitions, the Financing and the Spin-Off funded by SFX Broadcasting. The
Company financed the Recent Acquisitions with the proceeds of the Note
Offering and $150.0 million in borrowings under the Credit Facility. The
Company incurred approximately $6.0 million in fees and expenses related to
the Recent Acquisitions.
In addition, the agreements relating to the Recent Acquisitions provide
for certain other purchase price adjustments and future contingent payments
under certain circumstances. The Company granted the current owners of PACE
the right to require the Company to repurchase up to one-third of the shares
of stock to be issued to them in the PACE Acquisition during a specified
period beginning five years after the closing date at a price of $33.00 per
share for an estimated maximum obligation of $16.5 million. In certain
circumstances, if the selling price of the Company Class A Common Stock is
less than $13.33 per share, the Company may be required to make an offer to
the sellers to provide an additional cash payment or additional shares of
Company Class A Common Stock, which each seller will have the option of
taking. Pursuant to the terms of the Becker Employment Agreement, during the
period between December 12, 1999 and December 27, 1999, Mr. Becker will have
the option to, among other things, require the Company to purchase any stock
or portion thereof (including vested and unvested options) granted to him by
the Company and/or pay him an amount equal to the present value of the
compensation payable during the remaining term of his employment agreement.
See "Management--Employment Agreements and Arrangements with Certain Officers
and Directors." In addition, in the Contemporary acquisition agreement, the
Company agreed to make payments to any Contemporary sellers who own shares of
Company Class A Common Stock on the second anniversary of the closing of the
Contemporary Acquisition. These payments will be due only if the average
trading price of the Company Class A Common Stock during the 20-day period
ending on the anniversary date is less than $13.33 per share. There can be no
assurance that the average trading price of the Company Class A Common Stock
will be $13.33 per share at that time. In addition, the Company may be
required to issue up to an additional $14.0 million of shares of the Company
Class A Common Stock or, at the Company's option in certain circumstances,
cash, if Network attains certain EBITDA targets (as defined in the Network
acquisition agreement) for the year ended December 31, 1998. No assurance can
be given that the Spin-Off will be completed on or before July 1, 1998 or at
all, or 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. See "Risk Factors--Risks Related to Recent Acquisitions."
Future Acquisitions
The Company intends to pursue additional expansion opportunities and
expects to continue to identify and negotiate with respect to substantial
acquisitions business and related business. The Company is currently
negotiating with respect to certain acquisitions, however, the Company has
not yet entered into definitive agreements with respect to any of these
acquisitions and there can be no assurance that the Company will be able to
consummate any of such acquisitions.
82
<PAGE>
Spin-Off
Pursuant to the Tax Sharing Agreement, the Company will be responsible for
any taxes of SFX Broadcasting, including taxes imposed with respect to income
generated by the Company for periods prior to the Spin-Off and taxes
resulting from gain recognized in the Spin-Off. See "Agreements Relating to
the Spin-Off." The actual amount of the indemnification gain will be based on
the excess of the value of the Company Common Stock distributed in the
Spin-Off over the tax basis of that stock. The Company believes that the
amount of taxes that it will be required to pay in connection with the
Spin-Off will be determined by reference to the trading price of the Company
Common Stock on a date no later than the first trading date following the
Spin-Off. Increases or decreases in the value of the Company Common Stock
subsequent to such date will not affect the tax liability. The Company will
be allowed to offset any gain or income by the net operation losses of SFX
Broadcasting (including net operating losses generated in the current year
prior to the Spin-Off) which are available to offset such gain or income. If
the Company Common Stock had a value of approximately $15 per share at the
time of the Spin-Off, management believes that no material indemnification
payment would be required. Such indemnification obligation would be
approximately $4.0 million and would increase by approximately $7.7 million
for each $1.00 increase above the per share valuation of $16. If the Company
Common Stock was valued at $28.50 per share (the last sales price of the
Company Class A Common Stock (trading on a when-issued basis) on the over the
counter market on April 9, 1998), management estimates that the Company would
have been required to pay approximately $101.0 million pursuant to such
indemnification obligation. The Company intends to use a substantial portion
of the proceeds from the Offering to make such payment, although there can be
no assurance that the Offering will be consummated, and expects that such
indemnity payment will be due on or about June 15, 1998. Such payment will
not result in any corresponding increase in the Company's assets or cash
flows and, therefore, stockholders will experience substantial dilution.
The Company also expects to incur approximately $18.0 million in fees and
expenses in connection with the Spin-Off which the Company anticipates
funding from its cash on hand. In addition, pursuant to the SFX Merger
Agreement, the Company has agreed to assume SFX Broadcasting's obligations
under the employment agreements of certain employees and senior management,
including the obligation to make change of control payments to Messrs.
Sillerman, Ferrel and Benson aggregating approximately $3.3 million, $1.5
million and $0.2 million, respectively. The assumed obligations will also
include the duty to indemnify Messrs. Sillerman and Ferrel for one-half of
any excise taxes that may be assessed against them in connection with the
change of control payments. It is also anticipated that Mr. Sillerman's
employment agreement with the Company will provide for certain indemnities
relating to the SFX Merger. See "Certain Relationships and Related
Transactions--Assumption of Employment Agreements; Certain Change of Control
Payments" and "--Indemnification of Mr. Sillerman." In addition, pursuant to
the Distribution Agreement, the Company will be required to indemnify SFX
Broadcasting and each of its directors, officers and employees for any losses
relating to the Company's assets and liabilities.
In addition, pursuant to the Distribution Agreement, the Company will
assume certain obligations of SFX Broadcasting, including two real estate
leases on its executive offices. Such leases provide for annual rent of
approximately $1.4 million. See "Agreements Relating to the
Spin-Off--Distribution Agreement."
Working Capital
As required by the Distribution Agreement, by the time of the Spin-Off,
SFX Broadcasting will contribute to the Company all of its concert and other
live entertainment assets. At that time, the Company will assume all of SFX
Broadcasting's liabilities relating to the live entertainment businesses,
along with certain other liabilities. Immediately after the Spin-Off, SFX
Broadcasting will contribute to the Company an allocation of working capital
in an amount estimated by SFX Broadcasting's management to be consistent with
the proper operation of SFX Broadcasting. At the time of the SFX Merger, SFX
Broadcasting will pay its positive Working Capital (if any) to the Company.
If Working Capital is negative, then the Company must pay the amount of the
shortfall to SFX Broadcasting. As of December 31, 1997, the Company estimates
that Working Capital to be received by the Company would
83
<PAGE>
have been approximately $3.0 million (excluding the Series E Adjustment and
the tax liability on the Spin-Off). The actual amount of Working Capital as
of the closing of the SFX Merger is likely to differ substantially from the
amount as of December 31, 1997, and will be a function of, among other
things, the operating results of SFX Broadcasting through the date of the SFX
Merger, the actual cost of consummating the SFX Merger and the related
transactions. SFX Broadcasting will also incur certain other significant
expenses prior to the consummation of the SFX Merger that could reduce
Working Capital, including the payment of interests and dividends on SFX
Broadcasting's debt, and the Settlement Amount. Working Capital will also be
reduced by at least $2.1 million pursuant to the Series E Adjustment. In
addition, prior to or at the time of the Spin-Off, the Company must repay
sums advanced to it by SFX Broadcasting for certain acquisitions or capital
expenditures after August 24, 1997 and which have not been repaid. In
February 1998, the Company reimbursed SFX Broadcasting approximately $25.3
million for consent fees, capital expenditures and other acquisition related
fees previously funded by SFX Broadcasting. The Company intends to repay
these amounts from the proceeds of the Financing. SFX Broadcasting may
advance additional amounts to the Company for these purposes before the
consummation of the Spin-Off. See "Risk Factors--Working Capital Adjustments
and Repayment of Advances" and "Agreements Relating to the
Spin-Off--Distribution Agreement."
Interest on Notes and Borrowings Under the Credit Facility
On February 11, 1998, the Company completed the private placement of
$350.0 million of 9 1/8% Senior Subordinated Notes. Interest is payable on
the Notes on February 1 and August 1 of each year. In addition, the Company
borrowed $150.0 million under the Credit Facility at an interest rate of
approximately 8.07%. See "--Sources of Liquidity."
The degree to which the Company is leveraged will have material
consequences to the Company. The Company's ability to obtain additional
financing in the future for acquisitions, working capital, capital
expenditures, general corporate or other purposes are subject to the
covenants contained in the instruments governing its indebtedness. A
substantial portion of the Company's cash flow from operations will be
required to be used to pay principal and interest on its debt and will not be
available for other purposes. The Indenture and the credit agreement with
respect to the Credit Facility (the "Credit Agreement") contain restrictive
financial and operating covenants, and the failure by the Company to comply
with those covenants would result in an event of default under the applicable
instruments, which in turn would permit acceleration of the debt under the
instruments (and in some cases acceleration of debt under other instruments
that contain cross-default or cross-acceleration provisions). The Company
will be more vulnerable to economic downturns and could also be limited in
its ability to withstand competitive pressures and in its flexibility in
reacting to changes in its industry and general economic conditions. These
consequences are not exhaustive; the Company's indebtedness could also have
other adverse consequences. See "Risk Factors--Substantial Leverage."
The Company's ability to make scheduled payments of principal of, to pay
interest on or to refinance its debt depends on its future financial
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond its
control, as well as the success of the businesses to be acquired and the
integration of these businesses into the Company's operations. There can be
no assurance that the Company will be able to make planned borrowings
(including under the Credit Facility), that the Company's business will
generate sufficient cash flow from operations, or that future borrowings will
be available in an amount to enable the Company to service its debt and to
make necessary capital or other expenditures. The Company may be required to
refinance a portion of the principal amount of its indebtedness prior to
their respective maturities. There can be no assurance that the Company will
be able to raise additional capital through the sale of securities, the
disposition of assets or otherwise for any refinancing. See "Risk Factors."
Capital Expenditures
Capital expenditures totaled $2.1 million in the year ended December 31,
1997. Capital expenditures in 1997 included cash paid for expansion and
renovations at the Jones Beach Amphitheater, improvements at other venues and
computer and other operating equipment. The Company expects that capital
84
<PAGE>
expenditures in fiscal year 1998 will be substantially higher than current
levels, due to the planned capital expenditures of approximately $29.0
million for 1998 at existing venues (including $17.0 million initially
planned for the expansion and renovation of the Jones Beach Amphitheater and
$12.0 million planned for the expansion and renovation of the PNC Bank Arts
Center) and capital expenditures requirements of the Acquired Businesses,
including $12.0 million for the construction of a new amphitheater serving
the Seattle, Washington market. The Company plans to fund its remaining
capital expenditures for 1998 (approximately $29.0 million as of the date of
this Prospectus) from its cash on hand.
Future Charges to Earnings
The Company anticipates entering into employment agreements with certain
of its executive officers before the Spin-Off. In connection with these
agreements, the Board, on the recommendation of its Compensation Committee,
agreed to sell to the executive officers an aggregate of 650,000 shares of
Company Class B Common Stock and 90,000 shares of Company Class A Common
Stock at a purchase price of $2.00 per share. The shares will be issued on or
about the Spin-Off Distribution Date. The Company will record a non-cash
compensation charge at the date of the sale equal to the fair market value of
the shares less the aggregate purchase price paid for such shares. See
"Management--Employment Agreements and Arrangements with Certain Officers and
Directors."
In addition, the Board, on the recommendation of its Compensation
Committee, also has approved the issuance of stock options exercisable for an
aggregate of 252,500 shares of Company 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 the three-year
exercise period to the extent that the fair value of the underlying the
Company Class A Common Stock exceeds the exercise price less the aggregate
purchase price. Further, the Company may recognize a charge to earnings
associated with the Meadows Repurchase resulting from 250,838 shares of the
Company Class A Common Stock to be issued in the Spin-Off to Mr. Sillerman.
See "Certain Relationships and Related Transactions." The amount of such
charge would be equal to the fair value of the Company Class A Common Stock
to be received by Mr. Sillerman at the time of the Meadows Repurchase.
The consummation of the Recent Acquisitions and other future acquisitions
will also result in substantial charges to earnings relating to interest
expense and the recognition and amortization of goodwill. As of December 31,
1997, the Company's goodwill was approximately $60.3 million. This balance
will substantially increase in 1998 due to the Recent Acquisitions. Goodwill
is being amortized using the straight line method over 15 years.
Year 2000 Compliance
The Company has addressed the risks associated with Year 2000 compliance
with respect to its accounting and financial reporting systems and is in the
process of installing new accounting and reporting systems. These systems are
expected to provide better reporting, to allow for more detailed analysis, to
handle both the Recent and the 1997 Acquisitions and to be Year 2000
compliant. The Company anticipates that the cost of implementing these
systems will be approximately $2.0 million. The Company is in the process of
examining Year 2000 compliance issues with respect to its vendors and does
not anticipate that it will be subject to a material impact in this area.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("FAS 131"), which is effective for years
beginning after December 15, 1997. FAS 131 establishes standards for the way
that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. FAS 131 is effective for
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements in 1998. Management has
not yet completed its review of FAS 131 but its adoption will not have a
material effect on the Company's statement of position or revenues, only on
the composition of its reportable segments.
85
<PAGE>
Sources of Liquidity
As of December 31, 1997, the Company's cash and cash equivalents totaled
$5.9 million. As a subsidiary of SFX Broadcasting, the Company has incurred
and, as a stand-alone entity, will continue to incur substantial amounts of
indebtedness. In February of 1998, the Company received net proceeds of
$339.5 million from its private placement of the Notes and borrowed $150.0
million under the Credit Facility pursuant to the Financing. The proceeds
from the Financing were used to consummate the Recent Acquisitions, including
the cash purchase price, debt repayments, and working capital payments of
approximately $442.1 million, and to pay approximately $6.0 million of
certain fees and expenses related to the Recent Acquisitions. The Company's
cash and cash equivalents as of April 13, 1998 were approximately $60.0
million. On a pro forma basis, after giving effect to the Offering, the
Recent Acquisitions, the Spin-Off, the Financing and the SFX Merger, the
Company's working capital would have been approximately $57.7 million at
December 31, 1997. There can be no assurance that the Offering will be
consummated as presently contemplated or at all.
As of December 31, 1997, the Company's consolidated indebtedness would
have been approximately $534.9 million on a pro forma basis giving effect to
the Spin-Off, the Recent Acquisitions, the Financing and the SFX Merger
(assuming that the Spin-Off and the SFX Merger occur on the terms currently
contemplated). The total amount of the Company's indebtedness could increase
substantially if the Spin-Off does not occur on the terms currently
contemplated as described above. In addition, the Company may incur
indebtedness from time to time to finance acquisitions, for capital
expenditures or for other purposes. See "Risk Factors--Substantial Leverage."
The Credit Facility consists of a $150.0 million seven year reducing
revolving facility (the "Revolver") and a $150.0 million eight year term loan
(the "Term Loan"). The Company's ability to make significant borrowings under
the Credit Agreement will depend upon its ability to increase cash flows or
to acquire assets from its existing operations which generate significant
cash flows. Loans outstanding under the Credit Facility will bear interest,
at the Company's option, at 1.875 to 2.375 percentage points over LIBOR or
the greater of the Federal Funds rate plus 0.50% or BNY's prime rate. The
interest rate spreads on the Term Loan and the Revolver will be adjusted
based on the Company's Total Leverage Ratio (as defined in the Credit
Agreement). The Company will pay a per annum commitment fee on unused
availability under the Revolver of 0.50% to the extent that the Company's
Leverage Ratio is greater than or equal to 4.0 to 1.0, and 0.375% if such
ratio is less than 4.0 to 1.0 and a per annum letter of credit fee equal to
the Applicable LIBOR Margin (as defined in the Credit Agreement) for the
Revolver then in effect. The Revolver and Term Loan contain provisions
providing that, at its option and subject to certain conditions, the Company
may increase the amount of either the Revolver or Term Loan by $50.0 million.
The Revolver and Term Loan contain usual and customary covenants, including
limitations on (a) line of business, (b) additional indebtedness, (c) liens,
(d) acquisitions, (e) asset sales, (f) dividends, repurchases of stock and
other cash distributions, (g) total leverage, (h) senior leverage and (i)
ratios of Operating Cash Flow (as defined in the Credit Agreement) to pro
forma interest expense, debt service and fixed charges. The Company's
obligations under the Revolver and Term Loan are by substantially all of its
assets, including property, stock of subsidiaries and accounts receivable and
guaranteed by the Company's subsidiaries.
The Company will require additional financing in order to make all of the
payments described above, including the anticipated tax indemnification
obligation to SFX Broadcasting (approximately $101.0 million based on the
trading price (on a when-issued basis) of the Company Class A Common Stock on
April 9, 1998), planned capital expenditures (approximately $29.0 million),
certain change of control payments to executive officers ($5.0 million). The
Company intends to finance certain of these payments with the net proceeds of
approximately $132.5 million (approximately $152.4 million if the
underwriters' over-allotment option is exercised in full) from the Offering;
however, there can be no assurance that the Company will be able to complete
the Offering or obtain alternative financing on acceptable terms or at all.
If completed, the Offering will be dilutive to the ownership interests of the
Company's then-existing stockholders and the trading price of the Company
Class A Common Stock may be adversely affected. In addition, the Company
intends to pursue additional expansion opportunities and expects to continue
to identify and negotiate acquisitions in the live entertainment business.
The Company is currently
86
<PAGE>
negotiating with respect to certain acquisitions which the Company intends to
fund from its cash on hand, borrowings under the Credit Agreement, the
proceeds from the Offering or through additional financings. However, the
Company has not entered into any definitive agreements with respect to any of
these acquisitions and there can be no assurance that the Company will be
able to consummate such acquisitions. See "Risk Factors--Expansion Strategy;
Need for Additional Funds."
Furthermore, certain agreements of the Company, including the Distribution
Agreement, the Tax Sharing Agreement, certain employment agreements and the
agreements relating to the Recent Acquisitions provide for tax and other
indemnities, purchase price adjustments and future contingent payments in
certain circumstances. There can be no assurance that the Company will have
sufficient sources of funds to make such payments should they come due. In
addition, consistent with its operating strategy, the Company intends to
pursue additional expansion opportunities and expects to continue to identify
and negotiate with respect to substantial acquisitions in the live
entertainment business. See "Risk Factors--Risks Related to Recent
Acquisitions," "--Restrictions Imposed by the Company's Indebtedness,"
"--Substantial Leverage" and "--Working Capital Adjustments and Repayment of
Advances," "Certain Relationships and Related Party
Transactions--Indemnification of Mr. Sillerman" and "Description of
Indebtedness."
87
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to the Company's Certificate of Incorporation and By-laws, the
business of the Company is managed by the Board. The Board will conduct its
business through meetings of the board and its committees. The standing
committees of the Board are described below.
The By-laws of the Company authorize the Board to fix the number of
directors from time to time. The initial number of directors of the Company
is ten. 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 Class A Common Stock will be 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 Company Class A
Common Stock entitled to one vote.
Currently, the Board consists of the individuals who are currently serving
as directors of SFX Broadcasting and Brian Becker who was appointed to the
Board upon the consummation of the PACE Acquisition. All of the individuals
who currently serve as directors of SFX Broadcasting will cease to be
directors of SFX Broadcasting at the time of the consummation of the SFX
Merger. If the SFX Merger Agreement is terminated, Messrs. Dugan, Kramer and
O'Grady have indicated that they will promptly resign from their positions as
directors of the Company, and the Board will appoint three new independent
directors, to serve until the next annual meeting of the stockholders of the
Company. The directors of the Company will hold office until the next annual
meeting of stockholders of the Company or until their successors are duly
elected and qualified.
All of the executive officers of the Company other than Mr. Becker (the
"Executive Officers") are currently responsible for the management of SFX
Broadcasting. It is anticipated that such Executive Officers will enter into
five year employment agreements with the Company that will be similar to
their existing employment agreements with SFX Broadcasting (except that Mr.
Armstrong will no longer serve as an executive officer of the Company,
effective as of September 1, 1998, in order to continue to pursue a career in
radio broadcasting). See "--Employment Agreements and Arrangements with
Certain Officers and Directors." These employment agreements will become
effective immediately at the time of consummation of the SFX Merger. During
the period following the Spin-Off and prior to the consummation of the SFX
Merger, the Executive Officers who currently serve as officers of SFX
Broadcasting will continue to devote as much time as they deem necessary to
conduct the operations of the Company consistent with their obligations to
SFX Broadcasting. If the Merger Agreement is terminated for any reason, such
Executive Officers will continue to perform services to both SFX Broadcasting
and the Company until SFX Broadcasting is able to hire suitable replacements
for these Executive Officers. If the SFX Merger Agreement is terminated, SFX
Broadcasting intends to seek another buyer for the radio broadcasting
business.
The Company and Messrs. Sillerman, Ferrel, Tytel and Benson have reached
agreements in principle that they will continue to serve as officers and
directors of the Company. See "Risk Factors--Dependence on Key Personnel."
The following table sets forth information as to the Directors and the
Executive Officers of the Company:
88
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR OF SFX AGE AS OF
POSITION(S) HELD WITH SFX POSITION(S) HELD WITH SFX BROADCASTING DECEMBER 31,
NAME ENTERTAINMENT BROADCASTING SINCE 1997
- ---------------------------- ---------------------------- ---------------------------- --------------- --------------
<S> <C> <C> <C> <C>
Robert F.X. Sillerman .......Director, Executive Director and Executive 1992 49
Chairman and Member of Chairman
the Office of the Chairman
Michael G. Ferrel ...........Director, President, Chief Director, President and 1996 48
Executive Office and Chief Executive Officer
Member of the Office of the
Chairman
Brian Becker ................Director, Executive Vice None -- 41
President and Member of the
Office of the Chairman
Howard J. Tytel .............Director, Executive Vice Director, Executive Vice 1993 50
President, General Counsel, President, General Counsel,
and Secretary and Secretary
Thomas P. Benson ............Director, Vice President and Director and Chief Financial 1996 35
Chief Financial Officer Officer
Richard A. Liese ............Director, Vice President and Director, Vice President and 1995 47
Assistant General Counsel Assistant General Counsel
D. Geoffrey Armstrong(1) ....Director and Executive Vice Director, Chief Operating 1993 40
President Officer and Executive Vice
President
James F. O'Grady, Jr. .......Director Director 1993 69
Paul Kramer .................Director Director 1993 65
Edward F. Dugan .............Director Director 1996 63
</TABLE>
- ------------
(1) While Mr. Armstrong will remain as a director of the Company, it is
anticipated that, effective as of September 1, 1998, he will no longer
serve as an executive officer of the Company in order to continue to
pursue a career in radio broadcasting.
ROBERT F.X. SILLERMAN has served as the Executive Chairman of SFX
Broadcasting since July 1, 1995, and from 1992 through June 30, 1995, he
served as Chairman of the Board of Directors and Chief Executive Officer of
SFX 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 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 been the President, Chief Executive Officer and a
Director of SFX Broadcasting since November 22, 1996. Mr. Ferrel served as
President and Chief Operating Officer of MMR, a wholly-owned subsidiary of
SFX Broadcasting , 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 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.
89
<PAGE>
HOWARD J. TYTEL has been a Director, General Counsel, Executive Vice
President and Secretary of SFX Broadcasting since 1992. 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.
Since 1993, Mr. Tytel has been Of Counsel to the law firm of Baker &
McKenzie, which currently represents SFX Broadcasting, the Company and other
entities with which Messrs. Sillerman and Tytel are affiliated, on various
matters.
THOMAS P. BENSON has been the Chief Financial Officer and a Director of
SFX Broadcasting since November 22, 1996. Mr. Benson became the Vice
President of Financial Affairs of SFX 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 been a Director, Vice President and Associate General
Counsel of SFX Broadcasting since 1995. 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 been the Chief Operating Officer and an
Executive Vice President of SFX Broadcasting since November 22, 1996 and has
served as a Director of SFX Broadcasting since 1993. Mr. Armstrong became the
Chief Operating Officer of SFX Broadcasting in June 1996 and the Chief
Financial Officer, Executive Vice President and Treasurer of SFX Broadcasting
in April 1995. Mr. Armstrong was Vice President, Chief Financial Officer and
Treasurer of SFX Broadcasting from 1992 until March 1995. He had been
Executive Vice President and Chief Financial Officer of Capstar, a
predecessor of SFX Broadcasting, since 1989. From 1988 to 1989, Mr. Armstrong
was the Chief Executive Officer of Sterling Communications Corporation.
JAMES F. O'GRADY, JR. 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 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, and from 1987 to 1992 was Ernst & Young's designated
Broadcasting Industry Specialist.
EDWARD F. 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.
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.
90
<PAGE>
Compensation Committee
The Compensation Committee will review and make 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 SFX Broadcasting or the Company.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is comprised of Messrs. Kramer, O'Grady and
Dugan. The Board has approved the issuance of shares of Company Class A
Common Stock to holders as of the Spin-Off Record Date of stock options or
SARs of SFX Broadcasting , whether or not vested. 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 SFX Broadcasting's Class A common stock. In
connection with this issuance, Messrs. Kramer, O'Grady and Dugan will receive
13,000, 13,000 and 3,000 shares of Company Class A Common Stock,
respectively.
Stock Option Committee
The Stock Option Committee will grant options, determine which employees
and other individuals performing substantial services to the Company may be
granted options and determine 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 Board and SFX Broadcasting, as sole stockholder of the Company, have
approved and adopted the Company's 1998 Stock Option and Restricted Stock
Plan, providing for the issuance of up to 2,000,000 shares of Company 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 option." The plan will be administered by the Stock
Option Committee. The Board has approved the issuance of stock options
exercisable for an aggregate of 252,500 shares under the plan. See
"--Employment Agreements and Arrangements with Certain Officers and
Directors."
Compensation of Directors
Directors employed by the Company will receive no compensation for
meetings they attend. Each director not employed by the Company will receive
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 will also receive $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
will receive an additional $500 for each committee meeting he attends. In
addition, the Company will pay each director an annual retainer of $30,000,
of which one-half will be paid in cash and one-half will be paid in shares of
the Company Class A Common Stock.
EXECUTIVE COMPENSATION
The Company did not pay any compensation to the current Executive Officers
in 1997. The Company anticipates that during 1998 its most highly compensated
executive officers will be Messrs. Sillerman, Ferrel, Tytel and Becker. See
"--Employment Agreements and Arrangements with Certain Officers and
Directors."
It is anticipated that compensation for the Executive Officers and for
other executives will consist principally of base salary, an annual incentive
bonus opportunity and long-term stock-based incentive awards. All direct and
indirect remuneration of all Executive Officers and certain other executives
will be approved by the Compensation and Stock Option Committees.
91
<PAGE>
It is anticipated that the Board will, after the Spin-Off, grant shares of
the Company Class A Common Stock to holders as of the Spin-Off Record Date of
stock options or SARs of SFX Broadcasting, whether or not vested. See
"Certain Relationships and Related Transactions--Issuance of Stock to Holders
of SFX Broadcasting's Options and SARs."
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS WITH CERTAIN OFFICERS AND DIRECTORS
The Company anticipates that it will enter into employment agreements with
all of the Executive Officers (except for Mr. Armstrong), and that the
employment agreements (except for Mr. Becker's employment agreement which is
described below) will become effective immediately after the consummation of
the SFX Merger. It is anticipated that the employment agreements will 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. Each executive
officer is expected to receive a bonus to be determined annually in the
discretion of the Board, on the recommendation of the Compensation Committee.
Each employment agreement will be 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. It is anticipated that each of the agreements will provide
for payments and other benefits to be mutually agreed upon, if the employee's
employment terminates following a change of control.
In connection with entering into the employment agreements, the Board (on
the review and recommendation of the Compensation Committee) approved the
following sales of restricted stock: 500,000 shares of Company Class B Common
Stock to Mr. Sillerman, 150,000 shares of Company Class B Common Stock to Mr.
Ferrel, 80,000 shares of Company Class A Common Stock to Mr. Tytel and 10,000
shares of Company Class A Common Stock to Mr. Benson. The shares of
restricted stock are to be sold to the officers at a purchase price of $2.00
per share. The shares are subject to certain restrictions on transfer. In
addition, the Board (on the review and recommendation of the Compensation
Committee) also approved the issuance, effective upon consummation of the
Spin-Off, of the following stock options exercisable for shares of Company
Class A Common Stock: options to purchase 120,000 shares to Mr. Sillerman,
options to purchase 50,000 shares to Mr. Ferrel, options to purchase 40,000
shares to Mr. Armstrong, options to purchase 25,000 shares to Mr. Tytel,
options to purchase 10,000 shares to Mr. Benson and options to purchase 2,500
shares 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
"Risk Factors--Future Charges to Earnings."
Until the closing date of the SFX Merger, the Executive Officers (other
than Mr. Becker) will continue to be employed by SFX Broadcasting (at SFX
Broadcasting's expense), but will devote as much time as they deem reasonably
necessary, consistent with their obligations to SFX Broadcasting, in support
of the Company on a basis consistent with the time and scope of services that
they devoted to the live entertainment business prior to the Spin-Off.
Effective immediately prior to the consummation of the SFX Merger, the
Company will assume all obligations arising under any employment agreement or
arrangement (written or oral) between SFX Broadcasting or any of its
subsidiaries and the Executive Officers, other than the rights, if any, of
the Executive Officers to receive options at the time of their termination
following a change of control of SFX Broadcasting (as defined in their
respective employment agreements) and all existing rights to indemnification.
The Company will assume the obligation to make change of control payments
under Messrs. Sillerman's, Ferrel's and Benson's existing employment
agreements with SFX Broadcasting of approximately $3.3 million, $1.5 million
and $0.2 million, respectively. The Company will also indemnify SFX
Broadcasting and its subsidiaries from all obligations arising under the
assumed employment agreements or arrangements (except in respect of the
termination options and all existing rights to indemnification).
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, Mr. Brian Becker (the "Becker Employment Agreement"). The Becker
Employment Agreement has a term of five years commencing on February 25,
1998. Mr. Becker will continue as President and Chief Executive Officer of
PACE. In
92
<PAGE>
addition, for the term of his employment, Mr. Becker will serve as (a) a
Member of the Company's Office of the Chairman, (b) an Executive Vice
President of the Company and (c) a director of each of PACE and the Company
(subject to shareholder approval). During the term of his employment, Mr.
Becker will receive (a) 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 (b) 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 February 25, 1999. If the Company
sells either line of business after the first anniversary of the PACE
Acquisition, it has agreed not to sell the other line of business prior to 15
days past the second anniversary of the PACE Acquisition. The Becker
Employment Agreement provides that Mr. Becker will have a right of first
refusal (the "Becker Right of First Refusal") if, between the first and
second anniversary of the PACE Acquisition, 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) will also be immediately exercisable as of such
closing. If that 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 the second anniversary of the PACE Acquisition
and ending six months thereafter. Mr. Becker will be paid an administrative
fee of $100,000 if he does not exercise his right of first refusal and the
Company does not consummate the proposed sale. Mr. Becker would thereafter
retain all rights to the Becker Right of First Refusal.
Beginning on the second anniversary of the date of the Becker Employment
Agreement (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: to (a) put 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; (b) 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
the Becker Employment Agreement; or (c) 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 the Becker
Employment Agreement.
The Becker Employment Agreement may be terminated (a) by the Company for
Cause (as defined in the Becker Employment Agreement), (b) by the Company for
Mr. Becker's death or permanent disability or (c) 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 any
time in the Company's sole discretion or by Mr. Becker at any time following,
among other things, (a) failure to elect or re-elect Mr. Becker as a director
of the Company, (b) a reduction in Mr. Becker's base salary or in the formula
to calculate his bonus, (c) discontinuation of Mr. Becker's participation in
any stock option, bonus or other employee benefit plan, (d) prior to two
years and fifteen days after consummation of the PACE Acquisition, 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 (as defined below)), (e) the sale of all or substantially
all of the assets of PACE, (f) a change of control of the Company or (g) 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, (a) for the period from the date of termination until the fifth
anniversary of the closing of the PACE Acquisition, 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 any and 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, (b) for a period of 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 (c) if the termination occurs
prior to two years and 15 days after consummation of the PACE Acquisition,
Mr. Becker will retain the Becker Second Year Option and the Becker Right of
First Refusal.
93
<PAGE>
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.
The Company has agreed to indemnify, defend and hold Mr. Becker harmless
to the maximum extent permitted by law against expenses, including attorney's
fees, incurred in connection with the fact that Mr. Becker is or was an
officer, employee or director of the Company or any of its affiliates.
Possible Amendments to Delsener/Slater Employment Agreements
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 Company's business as a result of the Recent
Acquisitions and the Spin-Off. Messrs. Delsener and Slater have agreed in
principle to waive any rights to repurchase (or to offer to repurchase)
Concerts, and any rights to receive a portion of the proceeds of a Return
Event (as defined in their employment agreements) that they might otherwise
have in connection with the SFX Merger or the Spin-Off. However, there can be
no assurance that Messrs. Delsener and Slater will waive these rights on
terms acceptable to the Company or that, if not so waived, neither Mr.
Delsener nor Mr. Slater will exercise these rights. These rights may continue
to apply in certain circumstances to transactions after, or unrelated to, the
Spin-Off and the SFX Merger. 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. See "Risk Factors--Control of Concerts" and
"Certain Relationships and Related Transactions--Delsener/Slater Employment
Agreements."
The Company and SFX 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."
94
<PAGE>
PRINCIPAL STOCKHOLDERS OF THE COMPANY
All of the outstanding Company Common Stock is currently held by SFX
Broadcasting. To the best of the Company's knowledge, the following table
sets forth projected information regarding the beneficial ownership of shares
of Company Common Stock after the Spin-Off and stock grants, with respect to
(a) each director of the Company, (b) certain executive officers of the
Company, (c) the directors and executive officers of the Company as a group
and (d) each person known by the Company to own beneficially more than five
percent of the outstanding shares of any class of SFX Broadcasting's common
stock. The ownership information presented below with respect to all persons
and organizations is based on record ownership of SFX Broadcasting's common
stock and certain options and warrants to purchase SFX Broadcasting's common
stock as of April 13, 1998 and assumes no change in record ownership of SFX
Broadcasting's common stock and the options and warrants.
<TABLE>
<CAPTION>
AFTER THE SPIN-OFF AND STOCK GRANTS(1), (2)
----------------------------------------------------------------------------
CLASS A CLASS B
COMMON STOCK COMMON STOCK
------------------------------------------------------------
PERCENT OF
NAME AND ADDRESS OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF TOTAL VOTING
BENEFICIAL OWNER(3) SHARES CLASS SHARES CLASS POWER
- --------------------------- --------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Directors and Executive
Officers:
Robert F.X. Sillerman .... 1,583,468(4) 6.9% 1,524,168(5) 89.9% 46.1%
Michael G. Ferrel ......... 191,236(6) * 172,869(7) 10.1% 5.3%
Brian Becker .............. 29,402 * -- -- *
Howard J. Tytel(8) ........ 137,891 (8),(9) * -- -- *
Thomas P. Benson .......... 19,000(10) * -- -- *
Richard A. Liese .......... 9,500(11) * -- -- *
D. Geoffrey Armstrong ..... 161,800(12) * -- -- *
James F. O'Grady, Jr. .... 14,772(13) * -- -- *
Paul Kramer ............... 15,922(14) * -- -- *
Edward F. Dugan ........... 5,922(15) * -- -- *
All directors and executive
officers as a group
(10 persons) .............. 2,168,913 11.1% 1,697,037 100.0% 52.5%
</TABLE>
- ------------
* Less than 1%
(1) Does not reflect the 5.0 million shares which are expected to be
issued pursuant to the Offering. Assumes that all of the outstanding
Class B Warrants and Unit Purchase Options of SFX Broadcasting are
exercised prior to the Spin-Off Record Date. Does not include
2,000,000 shares reserved for issuance pursuant to the Company's 1998
Stock Option and Restricted Stock Plan. The Board has approved the
issuance of stock options for an aggregate of 252,500 shares of
Company Class A Common Stock.
(2) Assumes that (a) an aggregate of 4,216,680 shares of Company Class A
Common Stock are issued pursuant to the Recent Acquisitions, (b) an
aggregate of 793,633 shares of Company Class A Common Stock are
issued to the holders of stock options and SARs issued by SFX
Broadcasting and (c) an aggregate of 90,000 shares of Company Class A
Common Stock and 650,000 shares of Company Class B Common Stock are
issued pursuant to certain anticipated employment agreements. See
"Management--Employment Agreements and Arrangements with Certain
Officers and Directors" and "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX Broadcasting's
Options and SARs."
(3) 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
April 13, 1998. Unless noted otherwise, (a) information as to
beneficial ownership is based on statements furnished to SFX
Broadcasting or 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
95
<PAGE>
February 9, 1998, there were issued and outstanding 9,517,663 shares
of SFX Broadcasting's Class A common stock and 1,047,037 shares of
SFX Broadcasting's Class B common stock.
(4) Assumes that the Company issues 45,193 shares of Company Class A
Common Stock to Mr. Sillerman (or entities controlled by Mr.
Sillerman) as a result of his ownership of options of SFX
Broadcasting. See "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX Broadcasting's
Options and SARs." Includes (i) 8,949 shares of Company Class A
Common Stock expected to be issued to TSC in the Spin-Off; (ii)
600,000 shares of Company Class A Common Stock to be issued to SCMC
in the Spin-Off pursuant to certain warrants held by SCMC; (iii) an
option, exercisable upon consummation of the Spin-Off, to acquire an
aggregate of 537,185 shares of Company Class A Common Stock from a
third party and (iv) 250,538 shares of Company Class A Common Stock
to be received by Mr. Sillerman in connection with the Meadows
Repurchase. If the 1,524,168 shares of Company Class B Common Stock
to be held by Mr. Sillerman were included in calculating his
ownership of the Company Class A Common Stock, then Mr. Sillerman
would beneficially own 2,856,705 shares of Company Class A Common
Stock, representing approximately 14% of the class. Does not include
options to purchase an aggregate of 120,000 shares of Company Class A
Common Stock that are expected to be issued to Mr. Sillerman pursuant
to his anticipated employment agreement. See "Management--Employment
Agreements and Arrangements with Certain Officers and Directors" and
"Certain Relationships and Related Transactions."
(5) Includes 500,000 shares of Company Class B Common Stock that are
expected to be issued to Mr. Sillerman pursuant to his anticipated
employment agreement. See "Management--Employment Agreements and
Arrangements with Certain Officers and Directors."
(6) Assumes that the Company issues 167,372 shares of Company Class A
Common Stock to Mr. Ferrel as a result of his ownership of options of
SFX Broadcasting. See "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX Broadcasting's
Options and SARs." If the 22,869 shares of Company Class B Common
Stock held by Mr. Ferrel were included in calculating his ownership
of the Company Class A Common Stock, then Mr. Ferrel would
beneficially own 352,371 shares of Company Class A Common Stock,
representing approximately 1.9% of the class. Does not include
options to purchase an aggregate of 50,000 shares of Company Class A
Common Stock that are expected to be issued to Mr. Ferrel pursuant to
his anticipated employment agreement. See "Management--Employment
Agreements and Arrangements with Certain Officers and Directors."
(7) Includes 150,000 shares of the Company Class B Common Stock that are
expected to be issued to Mr. Ferrel pursuant to his anticipated
employment agreement. See "Management--Employment Agreements and
Arrangements with Certain Officers and Directors."
(8) In addition to the shares that Mr. Tytel beneficially owns, he has
economic interests in a limited number of shares beneficially owned
by Mr. Sillerman. These interests do not impair Mr. Sillerman's
ability to vote and dispose of those shares. See "Certain
Relationships and Related Transactions--Arrangement Between Robert
F.X. Sillerman and Howard J. Tytel."
(9) Assumes that the Company issues an aggregate of 113,614 shares of
Company Class A Common Stock to Mr. Tytel pursuant to his anticipated
employment agreement and as a result of his ownership of options of
SFX Broadcasting. Mr. Tytel has an economic interest in SCMC and TSC,
which together will beneficially own an aggregate of 608,949 shares
of Company Class A Common Stock, although he does not have voting or
dispositive power with respect to the shares beneficially held by
SCMC and TSC. See "Certain Relationships and Related
Transactions--Arrangement Between Robert F.X. Sillerman and Howard J.
Tytel." Does not include options to purchase an aggregate of 25,000
shares of Company Class A Common Stock that are expected to be issued
to Mr. Tytel pursuant to his employment agreement. See
"Management--Employment Agreements and Arrangements with Certain
Officers and Directors" and "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX Broadcasting's
Options and SARs."
(10) Assumes that the Company issues an aggregate of 19,000 shares of
Company Class A Common Stock to Mr. Benson pursuant to his
anticipated employment agreement and as a result of his ownership of
options of SFX Broadcasting. Does not include options to purchase an
aggregate of 10,000 shares of Company Class A Common Stock that are
expected to be issued to Mr. Benson pursuant to his employment
agreement. See "Management--Employment Agreements and Arrangements
with Certain Officers and Directors" and "Certain Relationships and
Related Transactions--Issuance of Stock to Holders of SFX
Broadcasting's Options and SARs."
(11) Assumes that the Company issues 9,500 shares of Company Class A
Common Stock to Mr. Liese as a result of his ownership of options of
SFX Broadcasting. See "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX Broadcasting's
Options and SARs."
96
<PAGE>
(12) Assumes that the Company issues an aggregate of 161,800 shares of
Company Class A Common Stock to Mr. Armstrong as a result of his
ownership of options of SFX Broadcasting. See "Management--Employment
Agreements and Arrangements with Certain Officers and Directors" and
"Certain Relationships and Related Transactions--Issuance of Stock to
Holders of SFX Broadcasting's Options and SARs."
(13) Assumes that the Company issues 13,000 shares of Company Class A
Common Stock to Mr. O'Grady as a result of his ownership of options
and/or SARs of SFX Broadcasting. See "Certain Relationships and
Related Transactions--Issuance of Stock to Holders of SFX
Broadcasting's Options and SARs." Includes 922 shares issuable
pursuant to SFX Broadcasting's director deferred stock ownership
plan.
(14) Assumes that the Company issues 13,000 shares of Company Class A
Common Stock to Mr. Kramer as a result of his ownership of options
and/or SARs of SFX Broadcasting. See "Certain Relationships and
Related Transactions--Issuance of Stock to Holders of SFX
Broadcasting's Options and SARs." Includes 922 shares issuable
pursuant to SFX Broadcasting's director deferred stock ownership
plan.
(15) Assumes that the Company issues 3,000 shares of Company Class A
Common Stock to Mr. Dugan as a result of his ownership of options
and/or SARs of SFX Broadcasting. See "Certain Relationships and
Related Transactions--Issuance of Stock to Holders of SFX
Broadcasting's Options and SARs." Includes 922 shares issuable
pursuant to SFX Broadcasting's director deferred stock ownership
plan.
POSSIBLE CHANGE IN CONTROL
Mr. Sillerman has pledged an aggregate of 793,401 of his shares of SFX
Broadcasting's Class B common stock as collateral for a line of credit, under
which Mr. Sillerman currently has no outstanding borrowings. The pledge
extends to all dividends payable on the pledged shares; accordingly, if the
pledge agreement is in effect at the time of the Spin-Off, then 793,401
shares of Company Class B Common Stock distributed to Mr. Sillerman will be
subject to the pledge agreement. Mr. Sillerman continues to be entitled to
exercise voting and consent rights with respect to the pledged shares, with
certain restrictions. However, if Mr. Sillerman 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 Company Class B Common
Stock has 10 votes per share in most matters, the pledged shares will
automatically convert into shares of Company 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 Company Common Stock, and would therefore be likely
to result in a change of control of the Company. See "Risk
Factors--Restrictions Imposed by the Company's Indebtedness."
97
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS WITH SFX BROADCASTING
The Company and SFX Broadcasting have entered into various agreements with
respect to the Spin-Off and related matters. For a description of the
material terms of these agreements, see "Agreements Relating to the
Spin-Off."
COMPANY COMMON STOCK TO BE RECEIVED IN THE SPIN-OFF
In the Spin-Off, the holders of SFX Broadcasting's Class A common stock,
Series D preferred stock and Warrants (upon exercise) will receive shares of
Company Class A Common Stock, whereas Messrs. Sillerman and Ferrel, as the
holders of SFX Broadcasting's Class B common stock (which is entitled to ten
votes per share on most matters), will receive shares of Company Class B
Common Stock. The Company Class A Common Stock and Class B Common Stock have
similar rights and privileges, except that the Company Class B Common Stock
differs as to voting rights generally to the extent that SFX Broadcasting's
Class A common stock and Class B common stock presently differ. The issuance
of the Company Class B Common Stock in the Spin-Off is intended to preserve
Messrs. Sillerman's and Ferrel's relative voting power after the Spin-Off.
Mr. Sillerman is anticipated to be deemed to beneficially own approximately
46.1% of the combined voting power of the Company after the Recent
Acquisitions, Spin-Off and stock grants to management. Similarly, Messrs.
Sillerman and Ferrel are anticipated to be deemed to beneficially own
approximately 51.4% of the combined voting power of the Company after the
Recent Acquisitions, Spin-Off and stock grants to management. 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. The Company and
Messrs. Sillerman and Ferrel have agreed in principle that Messrs. Sillerman
and Ferrel will continue to serve as officers and directors of the Company.
In addition, in August 1997, the board of directors of SFX Broadcasting
approved amendments to the SCMC Warrants (which represent the right to
purchase an aggregate of 600,000 shares of SFX Broadcasting's Class A common
stock). The SCMC Warrants had previously been issued to SCMC, an entity
controlled by Mr. Sillerman. The amendments memorialize the original intent
of the directors of SFX Broadcasting that SCMC receive the aggregate number
of shares of Company Class A Common Stock that it would have received if it
had exercised the SCMC Warrants immediately prior to the Spin-Off Record
Date.
ISSUANCE OF STOCK TO HOLDERS OF SFX BROADCASTING'S OPTIONS AND SARS
The SFX Broadcasting Board has approved the grant of shares of Company
Class A Common Stock to holders as of the Spin-Off Record Date of the stock
options or SARs of SFX Broadcasting, whether or not vested. These grants were
approved by the Board to allow holders of these options and SARs to
participate in the Spin-Off in a manner similar to holders of SFX
Broadcasting's Class A common stock. Additionally, many of the option and SAR
holders will become officers, directors or employees of the Company. These
grants will result in the issuance of an aggregate of up to 793,633 shares of
Company Class A Common Stock. Among those receiving shares will be all
members of the Board other than Mr. Becker.
EMPLOYMENT AGREEMENTS
In January 1998, in order to retain the services of Messrs. Sillerman,
Ferrel, Tytel and Benson as officers 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
Company Common Stock or $4.20 in cash for each share of SFX 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 SFX Merger Agreement)
were to occur. The
98
<PAGE>
amount of $4.20 was based on the value attributed to the Company Common Stock
in the fairness opinion obtained by SFX Broadcasting in connection with the
SFX Merger. The Company's obligation will be deemed satisfied by the receipt
of shares of Company Common Stock in the Spin-Off.
The Company anticipates that it will enter into employment agreements with
each member of its senior management before consummating the Spin-Off (except
for Mr. Armstrong), and that the employment agreements (except for Mr.
Becker's employment agreement) will become effective immediately after the
consummation of the SFX Merger. The Company anticipates that the employment
agreements will 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. In connection with entering into the employment agreements, the
Board (on the review and recommendation of the Compensation Committee)
approved the following sales of restricted stock: 500,000 shares of Company
Class B Common Stock to Mr. Sillerman, 150,000 shares of Company Class B
Common Stock to Mr. Ferrel, 80,000 shares of Company Class A Common Stock to
Mr. Tytel and 10,000 shares of Company Class A Common Stock to Mr. Benson.
The shares of restricted stock are to be sold to the officers at a purchase
of $2.00 per share. The shares are subject to certain restrictions on
transfer. In addition, the Board, on the recommendation of its Compensation
Committee, also has approved the issuance of stock options exercisable for an
aggregate of 252,500 shares of Company 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 the three-year
exercise period to the extent that the fair value of the underlying Company
Class A Common Stock on the date of issuance exceeds the exercise price. See
"Management--Employment Agreements and Arrangements with Certain Officers and
Directors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources--Future Charges to
Earnings."
The Company has entered into an employment agreement with Mr. Becker who
serves as a Director, Member of the Office of the Chairman and Executive Vice
President. Mr. Becker's employment agreement provides for (a) 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, (b) an
annual bonus in the discretion of the Board and (c) the other terms described
in "Management--Employment Agreements and Arrangements with Certain Officers
and Directors."
DELSENER/SLATER EMPLOYMENT AGREEMENTS
In connection with the Delsener/Slater Acquisition, SFX Broadcasting
entered into employment agreements in January 1997 with Ron Delsener and
Mitch Slater (collectively, the "Delsener/Slater Employment Agreements"),
pursuant to which each of Messrs. Delsener and Slater serve as co-Presidents
and co-Chief Executive Officers of Delsener/Slater. The employment agreements
will continue until December 31, 2001 unless terminated earlier by the
Company for Cause (as defined in the employment agreements) or voluntarily by
Messrs. Delsener or Slater.
After the consummation of the Spin-off or the SFX Merger, Messrs. Delsener
and Slater may have the right pursuant to their employment agreements (a) to
purchase the outstanding capital stock of Concerts (a subsidiary of the
Company holding a significant amount of the assets of the Company) for Fair
Market Value (as defined in their employment agreements) or (b) to receive a
cash payment equal to 15% of the amount by which the Fair Market Value of
Concerts exceeds the fixed payment portion of the cash purchase price of the
acquisition of Concerts, plus 20% interest thereon. The senior management of
Concerts and SFX Broadcasting have reached an agreement in principle to waive
any of the above rights in connection with the Spin-Off, the SFX Merger and
related transactions; however, there can be no assurance that the rights will
be waived on terms acceptable to SFX Broadcasting and the Company or at all.
In addition, although the Company is in the process of negotiating amendments
to these agreements, these and certain other rights described in the
agreements may continue to apply to transactions after, or unrelated to, the
Spin-Off or the SFX Merger.
Additionally, the Messrs. Delsener's and Slater's employment agreements
provide for certain annual bonus arrangements.
99
<PAGE>
Management believes that no bonuses were earned in 1997 pursuant to such
arrangements. However, any bonuses that may accrue to Messrs. Delsener and
Slater in the future will not be available for the Company's use to service
its debt or for other purposes.
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 SFX Merger, the Company will assume all obligations under
any employment agreement or arrangement (whether written or oral) between SFX
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 include the obligation
to pay to Messrs. Sillerman, Ferrel and Benson, after the termination of
their employment with SFX Broadcasting, cash payments aggregating
approximately $3.3 million, $1.5 million and $0.2 million, respectively.
These payments will become due to Messrs. Sillerman, Ferrel and Benson after
the termination of their employment with SFX Broadcasting following a change
of control of SFX Broadcasting, pursuant to their employment agreements with
SFX Broadcasting. In addition, the Company's assumed obligations will 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 SFX
Broadcasting in connection with the SFX Merger.
INDEMNIFICATION OF MR. SILLERMAN
On August 24, 1997, Mr. Sillerman entered into an agreement with SFX
Broadcasting, SFX Buyer and SFX Buyer Sub to waive his right to receive
indemnification (except to the extent covered by directors' and officers'
insurance) from SFX Broadcasting, its subsidiaries, SFX Buyer and SFX Buyer
Sub for claims and damages arising out of the SFX Merger and related
transactions. It is anticipated that, in any employment agreement with Mr.
Sillerman, the Company will agree to indemnify Mr. Sillerman for these claims
and damages to the fullest extent permitted by applicable law.
POTENTIAL CONFLICTS OF INTEREST
Marquee is a publicly-traded company that, among other things, acts as
booking agent for tours and appearances for musicians and other entertainers.
Messrs. Sillerman and Tytel have an aggregate equity interest of
approximately 8.8% in Marquee; Mr. Sillerman is the chairman of its board of
directors, and Mr. Tytel is one of its directors. 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, the Company could in the future compete with Marquee in the
production or promotion of motor sports or other sporting events. 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 approval of each particular
arrangement.
TSC, an entity controlled by Mr. Sillerman and in which Mr. Tytel also has
an equity interest, provides financial consulting services to Marquee and
Triathlon. TSC's services are provided by certain directors, officers and
employees of the Company who are not separately compensated for their
services by TSC. Messrs. Sillerman and Tytel have substantial equity
interests in Triathlon. In any transaction, arrangement or competition with
Marquee or Triathlon, 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, Marquee and Triathlon, 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 the second anniversary of the
consummation of the PACE Acquisition, to purchase the Company's then existing
motor sports line of business (or, if that line of business has been sold,
the Company's then existing theatrical line of business) at its then fair
market value. Mr. Becker's option may present a conflict of interest in his
role as a director of the Company. See "Management."
100
<PAGE>
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, is "of counsel" to the law firm of
Baker & McKenzie. Mr. Tytel is also an executive vice president, the general
counsel and a director of SFX Broadcasting. Baker & McKenzie serves as
counsel to SFX Broadcasting, the Company and certain other affiliates of Mr.
Sillerman. Baker & McKenzie compensates Mr. Tytel based, in part, on the fees
it receives from providing legal services to SFX Broadcasting, other
affiliates of Mr. Sillerman and other clients introduced to the firm by Mr.
Tytel.
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, SFX
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 has not been compensated directly by SFX 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 SFX
Broadcasting. In 1997, these cash fees aggregated approximately $5.0 million,
a portion of which were paid from the proceeds of payments made by SFX
Broadcasting to Mr. Sillerman or entities controlled by Mr. Sillerman and the
proceeds from Mr. Sillerman's exercise for tax purposes of options granted to
him by SFX Broadcasting and subsequent sale of the underlying shares. It is
anticipated that, in connection with the consummation of the SFX Merger and
certain related transactions, Mr. Tytel will receive shares of the Company
and cash fees from TSC, SCMC and Mr. Sillerman personally in an amount to be
determined in the future. See "--Assumption of Employment Agreements; Certain
Change of Control Payments." It is also anticipated that Mr. Tytel will enter
into an employment agreement directly with the Company that will be effective
at the time of consummation of the SFX Merger. See "--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
will 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 SFX
Broadcasting. Pursuant to the terms of the Distribution Agreement, SFX
Broadcasting will assign its rights to receive these fees to the Company.
Triathlon has previously announced that it is exploring ways of maximizing
stockholder value, including possible sale to a third party. If Triathlon
were acquired by a third party, the agreement might not continue for the
remainder of its term.
RELATIONSHIPS AND TRANSACTIONS WITH SFX BROADCASTING
SFX Broadcasting has guaranteed certain payments in connection with the
PACE Acquisition, the Contemporary Acquisition and the Network Acquisition.
MEADOWS REPURCHASE
In connection with the acquisition of Meadows Music Theater, SFX
Broadcasting obtained an option to repurchase 250,838 shares of its Class A
common stock (the "Meadows Shares") for an aggregate purchase price of $8.3
million (the "Meadows Repurchase"). Pursuant to the terms of the SFX Merger
101
<PAGE>
Agreement, if the Meadows Shares are outstanding at the effective time of the
SFX Merger, Working Capital would be decreased by approximately $10.5
million. However, SFX Broadcasting was restricted from exercising the Meadows
Repurchase by certain loan covenants and other restrictions.
In January 1998, Mr. Sillerman, the Executive Chairman of the Company,
committed to finance the $8.3 million exercise price of the Meadows
Repurchase in order to avoid the $10.5 million 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.
At the time SFX Broadcasting accepted Mr. Sillerman's commitment, the board
of directors of SFX Broadcasting valued the Company Class A Common Stock to
be issued in the Spin-Off at $4.20 per share, the value attributed to such
shares in the fairness opinion obtained by SFX Broadcasting in connection
with the SFX Merger. In April 1998, SFX Broadcasting assigned the option for
the Meadows Shares to an unaffiliated third party and, in connection
therewith, paid such party a fee of $75,000. Mr. Sillerman subsequently
advanced such party the $8.3 million exercise price for the Meadows
Repurchase which will become due on the earlier of the date on which the
Meadows Shares are disposed of by the third party or January 16, 1999. If the
SFX Merger is consummated, the Meadows Shares will be tendered in the SFX
Merger without any gain or loss to the third party. See "Agreements Relating
to the Spin-Off--Distribution Agreement--Working Capital." 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.
The transaction has been approved by SFX Broadcasting's board of directors,
including the independent directors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Future Charges to Earnings."
102
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Company Class A Common Stock in the public
market after the Spin-Off, or the possibility that these sales may occur,
could adversely affect market prices for Company Class A Common Stock or the
future ability of the Company to raise capital through an offering of equity
securities.
After the Spin-Off, certain stock grants to officers of the Company and
other transactions described below, approximately 19.0 million shares of
Company Class A Common Stock and approximately 1.7 million shares of Company
Class B Common Stock will be outstanding. See "The Spin-Off" and
"Management." Shares distributed in the Spin-Off will be freely tradeable in
the public market without restriction under the Securities Act, unless the
shares are held by "affiliates" of the Company (as that term is defined in
Rule 144 under the Securities Act). Of the shares of Company Class A Common
Stock to be issued in conjunction with the Spin-Off, approximately 6,164,551
shares will be issued to affiliates of the Company. These shares held by
affiliates will be eligible for sale subject to compliance with the
provisions of Rule 144 or pursuant to an effective registration statement
filed with the SEC.
Under Rule 144, as recently amended, shares held by affiliates that are
not "restricted securities" may be sold in "brokers' transactions" or to
market makers, in a number of shares no larger within any three-month period
than the greater of (a) one percent of the number of shares of Company Class
A Common Stock then outstanding (approximately 187,000 shares at the time of
completion of the Spin-Off, certain stock grants to officers of the Company
and other issuances described below) or (b) generally, the average weekly
trading volume in the Company Class A Common Stock during the four calendar
weeks preceding the required filing of a Form 144 with respect to the sale.
Sales under Rule 144 are also subject to certain requirements pertaining to
the availability of current public information concerning the Company. Under
Rule 144(k), a person who is not deemed to have been an affiliate of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holder of any prior owner other than an affiliate from whom
the shares were purchased), is entitled to sell the shares without having to
comply with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. As an alternative to sales under Rule 144,
shares of Company Class A Common Stock may be sold without any volume
limitations pursuant to an effective registration statement filed with the
SEC.
The board of directors of the Company has approved the grant of up to
793,633 shares of Company Class A Common Stock to holders as of the Spin-Off
Record Date of stock options or SARs of SFX Broadcasting, whether or not
vested. See "Certain Relationships and Related Transactions--Issuance of
Stock to Holders of SFX Broadcasting's Options and SARs." These shares will
be "restricted securities" under Rule 144.
The aggregate of up to 4,216,680 shares of Company Class A Common Stock
issuable in connection with the Recent Acquisitions will be "restricted
securities" under Rule 144 of the Securities Act when issued, but the Company
has obligations to register all or a portion of these shares with the SEC for
resale.
The Company has adopted a stock option plan providing for the issuance of
options to purchase up to 2,000,000 shares of Company Class A Common Stock.
The Board has approved the grant of options to purchase an aggregate of
approximately 252,500 shares of Company Class A Common Stock under such plan.
These options will vest over three years and will have an exercise price of
$5.50 per share. The Company anticipates that in the future it will file a
registration statement with the SEC to register the shares issuable upon
exercise of options granted under the plan. See "Management--Employment
Agreements and Arrangements with Certain Officers and Directors."
The Board also approved the following sales of restricted stock: 500,000
shares of Company Class B Common Stock to Mr. Sillerman, 150,000 shares of
Company Class B Common Stock to Mr. Ferrel, 80,000 shares of Company Class A
Common Stock to Mr. Tytel and 10,000 shares of Company Class A Common Stock
to Mr. Benson. The shares of restricted stock are to be sold to the officers
at a purchase price of $2.00 per share. The shares are subject to certain
restrictions on transfer.
103
<PAGE>
Furthermore, approximately 1.7 million shares of Company Class B Common
Stock will be outstanding after the Spin-Off and anticipated stock grants,
which may be converted at any time into shares of Company Class A Common
Stock.
104
<PAGE>
DESCRIPTION OF CAPITAL STOCK
At the time of the Spin-Off, the authorized capital stock of the Company
will consist of 110,000,000 shares of common stock (comprised of 100,000,000
shares of Company Class A Common Stock and 10,000,000 shares of Company Class
B Common Stock), par value $.01 per share, and 25,000,000 shares of preferred
stock, par value $.01 per share. The following descriptions of the common
stock and the preferred stock are summaries, and are qualified in their
entirety by reference to the detailed provisions of the Company Certificate
and the Company By-laws (each of which are filed as exhibits to the
Registration Statement). See "Additional Information."
COMMON STOCK
Shares Outstanding
As of February 13, 1998, there are issued and outstanding 1,000 shares of
Company Class A Common Stock and 1,000 shares of Company Class B Common
Stock. All of these shares are validly issued, fully paid and nonassessable.
After the consummation of the Spin-Off and other issuances described in
this Prospectus, it is anticipated that there will be issued and outstanding
approximately 18,850,000 shares of Company Class A Common Stock and
approximately 1,700,000 shares of Company Class B Common Stock. All of these
shares will be validly issued, fully paid and nonassessable.
Dividends
Although no dividends are anticipated to be paid on the Company Common
Stock in the foreseeable future, holders of common stock are entitled to
receive any dividends (payable in cash, stock, or otherwise) that are
declared thereon by the Board at any time and from time to time out of funds
legally available for that purpose. No dividend may be declared or paid in
cash or property on either class of common stock, unless the same dividend is
simultaneously declared or paid on the other class of common stock. If
dividends are declared that are payable in shares of Company Common Stock,
then the stock dividends will be payable at the same rate on each class of
common stock and will be payable only in shares of Company Class A Common
Stock to holders of Company Class A Common Stock and in shares of Company
Class B Common Stock to holders of Company Class B Common Stock. If dividends
are declared that are payable in shares of common stock of another
corporation, then the shares paid may differ as to voting rights to the
extent that voting rights differ among the Company Class A Common Stock and
the Company Class B Common Stock.
Voting Rights
Holders of Company Class A Common Stock and Company Class B Common Stock
vote as a single class on all matters submitted to a vote of the
stockholders, with each share of Company Class A Common Stock entitled to one
vote and each share of Company 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 Robert F.X. Sillerman or any of
his affiliates and (c) as otherwise provided by law.
In the election of directors, the holders of shares of Company Class A
Common Stock, voting as a separate class, are entitled to elect two sevenths
of the Company's directors (each, a "Class A Director"). Any person nominated
by the Board for election by the holders of Company Class A Common Stock as a
director of the Company must be qualified to be an "Independent Director" (as
defined in the Company Certificate). If a Class A Director dies, is removed
or resigns before his term expires, then that director's vacancy on the Board
may be filled by any person appointed by a majority of the directors then in
office, although less than a quorum. Any person appointed to fill the vacancy
must, however, be qualified to be an Independent Director. The holders of
Company Class A Common Stock and Company Class B Common Stock, voting as a
single class, with each share of Company Class A Common Stock entitled to one
vote and each share of Company Class B Common Stock entitled to ten votes,
are entitled to elect
105
<PAGE>
the remaining directors. The holders of Company Common Stock are not entitled
to cumulative votes in the election of directors. Mr. Sillerman has agreed to
abstain, and has agreed to cause each of his affiliates to abstain, from
voting in any election of Class A Directors.
The initial Class A Directors are Messrs. Dugan, Kramer and O'Grady. If
the SFX Merger Agreement is terminated, each of these individuals has
indicated that he will promptly resign from his position as a director of the
Company, and the board of directors of the Company will appoint three
different Class A Directors, to serve until the next annual meeting of the
stockholders of the Company.
The holders of the Company Class A Common Stock and Company Class B Common
Stock vote as a single class with respect to any proposed "going private"
transaction with Mr. Sillerman or any of his affiliates, with each share of
Company Class A Common Stock and Company Class B Common Stock entitled to one
vote.
Under Delaware law, the affirmative vote of the holders of a majority of
the outstanding shares of any class of common stock is required to approve,
among other things, a change in the designations, preferences or limitations
of that class of common stock.
Liquidation Rights
Upon liquidation, dissolution or winding-up of the Company, after
distribution in full of any preferential amounts required to be distributed
to holders of preferred stock, the holders of Company Class A Common Stock
will be entitled to share ratably with the holders of Company Class B Common
Stock all assets available for distribution after payment in full of
creditors.
Conversion
Each share of Company Class B Common Stock is convertible at any time, at
the holder's option, into one share of Company Class A Common Stock. Each
share of Company Class B Common Stock converts automatically into one share
of Company Class A Common Stock (a) at the time of its sale or transfer to a
party not affiliated with the Company or (b) in the case of shares held by
Mr. Sillerman or any of his affiliates, at the time of Mr. Sillerman's death.
Other Provisions
The holders of Company Common Stock are not entitled to preemptive or
subscription rights. In any merger, consolidation or business combination,
the consideration to be received per share by holders of Company Class A
Common Stock must be identical to that received by holders of Company Class B
Common Stock, except that in any such transaction in which shares of common
stock are to be distributed, the distributed shares may differ as to voting
rights to the extent that voting rights now differ among the Company Class A
Common Stock and the Company Class B Common Stock. The Company may not
subdivide (by any stock split, reclassification, stock dividend,
recapitalization, or otherwise) or combine the outstanding shares of either
class of Company Common Stock unless the outstanding shares of both classes
are proportionately subdivided or combined.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company Class A Common Stock and
the Company Class B Common Stock is Chase Mellon Shareholder Services, L.L.C.
PREFERRED STOCK
As of March 27, 1998, there are 10 shares of the Company's preferred
stock, par value $.01 per share, outstanding and there are 25,000,000 shares
of preferred stock authorized. The shares of preferred stock issued and
outstanding will convert, upon consummation of the Spin-Off, into 1,402,850
shares of Company Class A Common Stock.
The Board has the authority to issue this preferred stock in one or more
series and to fix the number of shares and the relative designations and
powers, preferences, and rights, and qualifications, limitations,
106
<PAGE>
and restrictions thereof, without further vote or action by the stockholders.
If shares of preferred stock with voting rights are issued, the voting rights
of the holders of Company Common Stock could be diluted by increasing the
number of outstanding shares having voting rights, and by creating class or
series voting rights. If the Board authorizes the issuance of shares of
preferred stock with conversion rights, the number of shares of common stock
outstanding could potentially be increased by up to the authorized amount.
Issuances of preferred stock could, under certain circumstances, have the
effect of delaying or preventing a change in control of the Company and may
adversely affect the rights of holders of Company Common Stock. Also, the
preferred stock could have preferences over the common stock (and other
series of preferred stock) with respect to dividend and liquidation rights.
WARRANTS AND OTHER SECURITIES OF SFX BROADCASTING
IPO Warrants
MMR, a company previously controlled by Mr. Sillerman, granted the IPO
Warrants to the underwriters of its initial public offering in July 1993.
When SFX Broadcasting acquired MMR, the IPO Warrants converted into warrants
to purchase SFX Broadcasting's Class A common stock. Pursuant to the terms of
the IPO Warrants, their holders will be entitled to receive, upon exercise
after the Spin-Off Record Date, the number of shares of Company Class A
Common Stock that they would be entitled to receive if the IPO Warrants were
exercised before the Spin-Off Record Date. As of February 9, 1998, there are
outstanding IPO Warrants with the right to purchase an aggregate of 9,858
shares of SFX Broadcasting's Class A common stock at an aggregate price per
share of $22.36, which will require the transfer of 9,858 shares of Company
Class A Common Stock into escrow at the time of the Spin-Off. See "The
Spin-Off--Manner of Effecting the Spin-Off."
SCMC Warrants
Prior to April 1996, SCMC, a corporation controlled by Mr. Sillerman,
provided advisory services to SFX Broadcasting from time to time with respect
to specific transactions. In April 1996, SFX Broadcasting and SCMC agreed to
terminate the arrangement pursuant to which SFX Broadcasting compensated SCMC
for financial consulting services. Pursuant to the termination agreement,
among other things, SFX Broadcasting issued to SCMC the SCMC Warrants to
purchase up to 600,000 shares of SFX Broadcasting's Class A common stock at
an exercise price, subject to adjustment, of $33.75 per share (the market
price at the time of the termination agreement). A committee of SFX
Broadcasting's independent directors approved the termination transaction. A
nationally-recognized investment banking firm provided to the independent
directors its written opinion that, as of the date the termination agreement
was entered into, the consideration offered by SFX Broadcasting to SCMC
pursuant to the agreement was fair, from a financial point of view, to SFX
Broadcasting. The SCMC Warrants were subsequently amended to provide for the
receipt of an aggregate of 600,000 shares of Company Class A Common Stock
upon exercise. See "Certain Relationships and Related Transactions--Company
Common Stock to Be Received in the Spin-Off." As of February 13, 1998, all of
the SCMC Warrants remain outstanding, and therefore 600,000 shares of Company
Class A Common Stock will be transferred into escrow at the time of the
Spin-Off. See "The Spin-Off--Manner of Effecting the Spin-Off."
Director Deferred Stock Ownership Plan
SFX Broadcasting has adopted a director deferred stock ownership plan, in
which Messrs. Dugan, Kramer and O'Grady are the sole participants. Under this
plan, each participant receives an annual fee of $20,000, payable in shares
of SFX Broadcasting's Class A common stock to a bookkeeping account
maintained for that person. As of the date of this Prospectus, 922 shares of
SFX Broadcasting's Class A common stock had been credited to each
participant's account. The plan provides that, if there is a change in the
capitalization of SFX Broadcasting (such as the Spin-Off), an appropriate
adjustment will be made to the number and kind of shares held in the
directors' accounts. On January 15, 1998, the committee overseeing the plan
determined that the adjustment occasioned by the Spin-Off would consist of
the issuance to each participant of one share of Company Class A common stock
per share of SFX Broadcasting's Class A common stock held in that
participant's account on the Spin-Off Record Date.
107
<PAGE>
DESCRIPTION OF INDEBTEDNESS
NOTES
The following is a summary of the material terms contained in the
Indenture. This summary is not complete. It is subject to the terms of the
Indenture, which was filed as an exhibit to the Registration Statement. See
"Additional Information."
On February 11, 1998, the Company consummated the private placement of
$350.0 million in aggregate principal amount of 9 1/8% Senior Subordinated
Notes due 2008. The Notes bear interest at an annual interest rate of 9 1/8%,
and interest payments will be due semi-annually, commencing August 1, 1998.
The Notes will mature on February 1, 2008. The Notes do not contain any
sinking fund provision.
Ranking
The Notes are general unsecured obligations of the Company, subordinate in
right to all Senior Debt (as defined in the Indenture), whether outstanding
on the date of the Indenture or thereafter incurred, of the Company and
senior in right of payment to or pari passu with all other indebtedness of
the Company. See "Capitalization."
Subsidiary Guarantees
The Company's payment obligations under the Notes are jointly and
severally guaranteed on a senior subordinated basis by all of its current and
future domestic subsidiaries, with certain specified exceptions.
Optional Redemption
Except as noted below, the Notes are not redeemable at the Company's
option before February 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
specified redemption prices plus accrued and unpaid interest and Liquidated
Damages (as defined in the Indenture), if any, thereon to the applicable
redemption date. In addition, at any time prior to February 1, 2001, the
Company may on any one or more occasions redeem up to 35.0% 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 proceeds of
one or more offerings of common equity of the Company. However, at least
65.0% of the original aggregate principal amount of Notes must remain
outstanding immediately after each occurrence of redemption.
Change of Control
After the occurrence of a Change of Control (as defined in the Indenture),
the Company will be required to make an offer to repurchase the Notes at a
price equal to 101% of their principal amount, together with accrued and
unpaid interest and Liquidated Damages, if any, to the date of purchase.
Certain Covenants
The Indenture contains certain covenants that, among other things, limit
the ability of the Company and its subsidiaries to (a) incur additional
Indebtedness (as defined in the Indenture), (b) issue preferred stock, (c)
pay dividends, (d) make certain other restricted payments, (e) create certain
Liens (as defined in the Indenture), (f) enter into certain transactions with
affiliates, (g) sell assets of the Company or its Restricted Subsidiaries (as
defined in the Indenture), (h) issue or sell Equity Interests (as defined in
the Indenture) of the Company's Restricted Subsidiaries or (i) enter into
certain mergers and consolidations. In addition, under certain circumstances,
the Company will be required to offer to purchase Notes at a price equal to
100.0% 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 in the Indenture).
108
<PAGE>
Exchange Offer; Registration Rights
Pursuant to a registration rights agreement among the Company and the
initial purchasers of the Notes, the Company must use its best efforts to
file a registration statement with the SEC with respect to an offer to
exchange the Notes for a new issue of debt securities registered under the
Securities Act, with terms identical in all material respects to those of the
Notes. If (a) this exchange offer is not permitted by applicable law or (b)
any holder of Transfer Restricted Securities (as defined in the Indenture)
notifies the Company that (i) it is prohibited by law or SEC policy from
participating in the exchange offer, (ii) it may not resell the new issue of
debt securities to be acquired by it in the exchange offer to the public
without delivering a prospectus, and the prospectus contained in the
registration statement is not appropriate or available for those resales, or
(iii) it is a broker-dealer and holds Notes acquired directly from the
Company or an affiliate of the Company, then the Company will be required to
provide a shelf registration statement to cover resales of the Notes by their
holders. If the Company fails to satisfy these registration obligations, it
will be required to pay Liquidated Damages to the holders of Notes under
certain circumstances.
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.
CREDIT FACILITY
The following is a summary of the material terms of the Credit Facility.
This summary is not complete. It is subject to, and qualified in its entirety
by reference to, the Credit and Guarantee Agreement (the "Credit Agreement"),
which has been filed as an exhibit hereto.
In February of 1998, the Company entered into the Credit Agreement which
established a $300.0 million of senior secured credit facilities. The Credit
Facility is comprised of (a) the $150.0 million eight-year Term Loan and (b)
the $150.0 million seven-year reducing Revolver. Borrowings under the 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 the Recent Acquisitions. 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 the Term Loan by $50.0 million.
General
The Credit Facility provides for borrowings in a principal amount of up to
$300.0 million, subject to certain covenants and conditions. Borrowings under
the Credit Facility may be used by the Company to finance Permitted
Acquisitions (as defined in the Credit Agreement), for working capital and
for general corporate purposes. Up to $20.0 million of the Revolver will be
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 Credit Agreement) if the
cost of the Permitted Acquisition exceeds $50.0 million.
Interest Rates; Fees
Loans outstanding under the Credit Facility will bear interest, at the
Company's option, at certain spreads 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 below). The Company will pay 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 will also pay an annual letter of
credit fee equal to the Applicable LIBOR Margin (as defined in the Credit
Agreement) for the Revolver then in effect.
109
<PAGE>
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 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 Credit Facility will be subject to, among
others, the following mandatory prepayments, which will also permanently
reduce commitments: (a) 100.0% of the net cash proceeds received from
permitted Asset Sales (as defined in the Credit Agreement), subject to
standard reinvestment provisions; (b) 50.0% of Excess Cash Flow (as defined
in the Credit Agreement), calculated for each fiscal year beginning with the
year ending December 31, 2000; and (c) 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
Credit Facility. In order to secure its obligations under the Credit
Facility, the Company and each of the Senior Guarantors must also grant to
the lenders a continuing security interest in all of their tangible assets
(subject to certain non-material exceptions), all of the capital stock of
each Senior Guarantor and not less than 66 2/3% of the capital stock of the
Company's present and future direct and indirect foreign subsidiaries.
The 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 Credit
Agreement);
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 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 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 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 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
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 Credit Agreement) and (B) cash dividends
and other cash
110
<PAGE>
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 to, less cash and cash
equivalents in excess of $5.0 million, to (b) Operating Cash Flow;
o a 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 a 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 Credit Agreement) 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 Credit
Agreement).
The Total Leverage Ratio may not at any time exceed (a) 6.75x from the
Credit Facility Closing Date to September 29, 1998, (b) 6.50x from September
30, 1998 to December 30, 1998, (c) 6.25x from December 31, 1998 to June 29,
1999, (d) 5.75x from June 30, 1999 to December 30, 1999, (e) 5.25x from
December 31, 1999 to December 30, 2000, (f) 4.50x from December 31, 2000 to
December 30, 2001 and (g) 3.75x on December 31, 2001 and thereafter.
The Senior Leverage Ratio may not at any time exceed (a) 3.50x from the
Credit Facility Closing Date to September 29, 1998, (b) 3.25x from September
30, 1998 to December 30, 1999, (c) 3.00x from December 31, 1999 to December
30, 2000 and (d) 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 from the Credit Facility Closing Date to
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 from the Credit Facility Closing Date to 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 Credit Facility will also prohibit prepayment of any subordinated
notes, including the Notes.
Events of Default
The Credit Facility contains customary events of default, including
payment defaults, the occurrence of a Change of Control (as defined in the
Credit Agreement), the invalidity of guarantees or security documents under
the Credit Facility, any Material Adverse Change (as defined in the Credit
Agreement), breach of any representation or warranty under the 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
111
<PAGE>
termination of the commitments to extend credit under the Credit Facility and
foreclosure on the collateral securing those obligations, each of which,
individually, could have a material adverse effect on the Company.
OTHER DEBT
In addition, the Company also has approximately $16.2 million of long-term
debt outstanding, which was incurred primarily in connection with the 1997
Acquisitions. See Note 5 to the Notes to the Consolidated Financial
Statements of the Company. The Company also assumed $18.7 million of debt in
connection with the Recent Acquisitions.
112
<PAGE>
ADDITIONAL INFORMATION
The Company is a reporting company under the Exchange Act. The Company has
filed a Registration Statement on Form S-1 under the Securities Act with the
SEC with respect to the Company Common Stock described in this Prospectus.
This Prospectus, which is part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and
the exhibits thereto. For further information with respect to the Company and
its common stock offered hereby, reference is hereby made to the Registration
Statement (No. 333-43287) and its exhibits, which may be inspected without
charge at the office of the SEC at 450 Fifth Street, NW, 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 Prospectus 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 as
an exhibit to the Registration Statement, and each such statement is
qualified in all respects by this reference.
In addition, SFX Broadcasting is a reporting company under the Exchange
Act and therefore files reports, proxy statements and other materials with
the SEC. SFX Broadcasting's reports, proxy statements and other filed
materials are available as discussed above for the Company.
LEGAL MATTERS
The validity of the shares of Company Common Stock to be issued in
connection with the Spin-Off will be passed upon for the Company by Baker &
McKenzie, New York, New York. Howard J. Tytel, who is an executive officer
and director of and is anticipated after the Spin-Off to have an equity
interest in the Company, and who has an equity interest in SFX Broadcasting,
TSC and SCMC and is an executive officer and director of those entities, is
Of Counsel to Baker & McKenzie. See "Management," "Principal Stockholders of
the Company" and "Certain Relationships and Related Transactions."
EXPERTS
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, 1996 and 1995; the combined financial statements of
Contemporary Group as of December 31, 1996 and 1997, and for the years ended
December 31, 1996 and 1997; the combined financial statements of SJS
Entertainment Corporation as of December 31, 1996 and 1997, and for the years
ended December 31, 1996 and 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 years ended January 31, 1996, 1997 and 1998; and
the combined financial statements of Concert/Southern Promotions and
Affiliated Companies as of December 31, 1997, and for the year ended December
31, 1997, included in the Prospectus and Registration Statement of the
Company have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included
in reliance on such reports given on the authority of such firm as experts in
accounting and auditing.
Arthur Andersen LLP, independent public accountants, audited the following
financial statements (as set forth in their reports thereon appearing
elsewhere herein and in the Registration Statement), each appearing in this
Prospectus and the Registration Statement: 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
113
<PAGE>
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, which are included
in reliance on such reports given on the authority of such firm as experts in
accounting and auditing.
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 Prospectus and the Registration Statement have been
so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The Board expects to appoint Ernst & Young LLP as the Company's
independent auditors to audit the Company's consolidated financial
statements.
114
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SFX ENTERTAINMENT, INC.
Reports of Independent Auditors............................................................ F-4
Consolidated Balance Sheets as of December 31, 1997 and 1996 (Predecessor) ............... F-6
Consolidated Statements of Operations for the years ended December 31, 1997, 1996
(Predecessor) and 1995 (Predecessor) ..................................................... F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996
(Predecessor) and 1995 (Predecessor) ..................................................... F-8
Notes to Consolidated Financial Statements................................................. F-9
CONNECTICUT PERFORMING ARTS, INC. AND CONNECTICUT PERFORMING ARTS PARTNERS
Report of Independent Public Accountants................................................... F-23
Combined Balance Sheets as of December 31, 1995 and 1996................................... F-24
Combined Statements of Operations for the years ended December 31, 1995
and 1996.................................................................................. F-25
Combined Statements of Shareholders' and Partners' Equity (Deficit) for the years ended
December 31, 1995 and 1996................................................................ F-26
Combined Statements of Cash Flows for the years ended December 31, 1995 and 1996 ......... F-27
Notes to Combined Financial Statements..................................................... F-28
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
Report of Independent Public Accountants .................................................. F-36
Combined Balance Sheets as of December 31, 1995 and 1996................................... F-37
Combined Statements of Operations and Partners' Equity (Deficit) for the years ended
December 31, 1995 and 1996................................................................ F-39
Combined Statements of Cash Flows for the years ended December 31, 1995
and 1996.................................................................................. F-40
Notes to Combined Financial Statements..................................................... F-41
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants .................................................. F-47
Report of Independent Auditors............................................................. F-48
Consolidated Balance Sheets as of September 30, 1996 and 1997 and December 31, 1997
(unaudited) .............................................................................. F-49
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-50
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-51
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-52
Notes to Consolidated Financial Statements................................................. F-53
PAVILION PARTNERS
Report of Independent Public Accountants .................................................. F-67
Report of Independent Accountants ......................................................... F-68
Consolidated Balance Sheets as of September 30, 1996 and 1997 and December 31, 1997
(unaudited) .............................................................................. F-69
F-1
<PAGE>
PAGE
---------
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-70
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-71
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-72
Notes to Consolidated Financial Statements ................................................ F-73
CONTEMPORARY GROUP
Report of Independent Auditors ............................................................ F-82
Combined Balance Sheets as of December 31, 1996 and 1997 .................................. F-83
Combined Statements of Operations for the years ended December 31, 1996 and 1997 ......... F-84
Combined Statements of Cash Flows for the years ended December 31, 1996 and 1997 ......... F-85
Combined Statements of Stockholders' Equity for the years ended December 31, 1996 and 1997 F-86
Notes to Combined Financial Statements .................................................... F-87
RIVERPORT PERFORMING ART CENTRE, JOINT VENTURE
Report of Independent Public Accountants .................................................. F-91
Balance Sheets as of December 31, 1997 and 1996 ........................................... F-92
Statements of Income and Changes in Partners' Equity for the years ended December 31, 1997
and 1996 ................................................................................. F-93
Statements of Cash Flows for the years ended December 31, 1997 and 1996 .................. F-94
Notes to Financial Statements ............................................................. F-95
SJS ENTERTAINMENT CORPORATION
Report of Independent Auditors ............................................................ F-98
Combined Balance Sheets as of December 31, 1996 and 1997 .................................. F-99
Combined Statements of Operations and Retained Earnings for the years ended December 31,
1996 and 1997 ............................................................................ F-100
Combined Statements of Cash Flows for the years ended December 31, 1996 and 1997 ......... F-101
Notes to Combined Financial Statements .................................................... F-102
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
Report of Independent Auditors ............................................................ F-106
Combined Balance Sheets as of September 30, 1996 and 1997 ................................. F-107
Combined Balance Sheet as of December 31, 1997 (unaudited) ................................ F-108
Combined Statements of Operations and Stockholders' Deficit for the years ended September
30, 1996 and 1997 ........................................................................ F-109
Combined Statements of Operations and Stockholders' Deficit for the three months ended
December 31, 1997 (unaudited) ............................................................ F-110
Combined Statements of Cash Flows for the years ended September 30, 1996 and 1997 ......... F-111
Combined Statements of Cash Flows for the three months ended December 31, 1997 (unaudited) F-112
Notes to Combined Financial Statements .................................................... F-113
F-2
<PAGE>
PAGE
---------
BG PRESENTS, INC. AND SUBSIDIARIES
Report of Independent Auditors ............................................................ F-117
Consolidated Balance Sheets as of January 31, 1997 and 1998 ............................... F-118
Consolidated Statements of Operations for the years ended January 31, 1996, 1997 and 1998 F-119
Consolidated Statements of Cash Flows for the years ended January 31, 1996, 1997 and 1998 F-120
Consolidated Statements of Stockholders' Equity for the years ended January 31, 1996, 1997
and 1998 ................................................................................. F-121
Notes to Consolidated Financial Statements ................................................ F-122
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
Report of Independent Auditors ............................................................ F-128
Combined Balance Sheet as of December 31, 1997 ............................................ F-129
Combined Statement of Operations for the year ended December 31, 1997 ..................... F-130
Combined Statement of Cash Flows for the year ended December 31, 1997 ..................... F-131
Combined Statements of Stockholders' Equity for the year ended
December 31, 1997 ........................................................................ F-132
Notes to Combined Financial Statements .................................................... F-133
</TABLE>
F-3
<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
F-4
<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-5
<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:
Capital to be contributed by SFX Broadcasting ........................... 98,330 --
Preferred Stock, $.01 par value, 1,000 shares authorized, none issued
and outstanding ........................................................ -- --
Class A common stock, $.01 par value, 1,000 shares authorized, issued
and outstanding ........................................................ -- --
Class B common stock, $.01 par value, 1,000 shares authorized, issued
and outstanding ........................................................ -- --
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-6
<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-7
<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 to be 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>
SUPLEMENTAL 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
or will be contributed by SFX Broadcasting to the Company prior to the
Spin-Off.
See accompanying notes.
F-8
<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-9
<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 or will be contributed by
SFX Broadcasting to the Company prior to 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>
Pending 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 is
subject to certain conditions, including, among others: (i) the satisfaction
of the Board of Directors of SFX Broadcasting that SFX Broadcasting's surplus
would be sufficient to permit the Spin-Off under Delaware law, (ii) the
acceptance for listing or trading of the Class A Common Stock of the Company,
subject to official notice of issuance, on the American Stock Exchange or
Nasdaq Stock Market, (iii) receipt of all necessary third party consents to
the Spin-Off, and (iv) receipt of necessary SFX Broadcasting stockholder
approvals. On March 26, 1998, the Company's stockholders approved the
Spin-off.
At or prior to the Spin-Off, pursuant to the terms of the Spin-Off, SFX
Broadcasting will contribute 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 will assume 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
F-10
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
with the Spin-Off were reimbursed in February 1998 with the proceeds from
the Senior Subordinated Notes (see Note 2). SFX Broadcasting may advance
additional amounts to the Company prior to the consummation of the Spin-Off.
Prior to the Spin-Off, SFX Broadcasting and the Company will enter 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. If the Company's
Common Stock had a value of approximately $15 per share at the time of the
Spin-Off, management believes that no material indemnification payment would
be required. Such indemnification obligation would be approximately $4.0
million at $16 per share and would increase by approximately $7.7 million for
each $1.00 increase above the per share valuation of $16. If the Company's
Common Stock was valued at $24 1/2 per share, (the last sales price of the
Company's Class A Common Stock (trading on a when-issued basis) on the over
the counter market on March 27, 1998), management estimates that the Company
would have been required to pay approximately $70.0 million pursuant to such
indemnification obligation. 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,
F-11
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-12
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On February 27, 1998, the Company acquired the Network Magazine Group
("Network Magazine"), a publisher of trade magazines for the radio
broadcasting industry, and SJS Entertainment Corporation ("SJS"), an
independent creator, producer and distributor of music-related radio
programming, services and research which it exchanges with radio broadcasters
for commercial air-time sold, in turn, to national network advertisers (the
"Network Acquisition"), for total consideration of approximately $66,800,000
comprised of $52,000,000 in cash, a payment for working capital of
approximately $1,800,000, reimbursed sellers costs of $500,000, the purchase
of an office building and property for $2,500,000 and the issuance upon the
Spin-Off of 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."
Each of the Recent Acquisition agreements other than Concert/Southern
provide that, should the Spin-Off not occur prior to July 1, 1998, the
sellers may require the Company to repurchase the shares of the Company's
common stock issued to the sellers for $13.33 each.
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
F-13
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $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.
F-14
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
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):
F-15
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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, 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.
F-16
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-17
<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-18
<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>
<CAPTION>
<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-19
<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.
F-20
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
Prior to the Spin-Off, the Company will amend and restate its certificate
of incorporation to, among other things, increase its authorized capital
stock and will issue to SFX Broadcasting, in exchange for the issued and
outstanding shares of the Company's Common Stock held by SFX Broadcasting,
the number of shares of the Company's Common Stock necessary to consummate
the Spin-Off.
Subject to the approval of shareholders of SFX Broadcasting, holders of
the Company's Class A Common Stock will be entitled to one vote and holders
of the Company's Class B Common Stock will be
F-21
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The Board of Directors has the authority to issued 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 245,000 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 the three-year period to the extent that
the fair value of the Company's Class A Common Stock exceeds the exercise
price.
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. See "Agreements Relating to the Spin-Off--Distribution
Agreement--Working Capital." 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-22
<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-23
<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-24
<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-25
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED STATEMENTS OF SHAREHOLDERS'
AND PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PARTNERS'
SHAREHOLDERS' EQUITY (DEFICIT) EQUITY
-------------------------------------- (DEFICIT)
COMMON PREFERRED ACCUMULATED
STOCK STOCK 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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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> <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-37
<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-38
<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-39
<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-40
<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-41
<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
F-42
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- --------------
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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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 pounds sterling239,000 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-65
<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)
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 thoe 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 and all outstanding stock options in
conjunction with the SFX Transaction resulted in a one-time charge during
February 1998 of approximately $5.2 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-66
<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-67
<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-68
<PAGE>
PAVILION PARTNERS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------- DECEMBER 31
1996 1997 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-69
<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-70
<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-71
<PAGE>
PAVILION PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE ELEVEN MONTHS FOR THE
DECEMBER 31,
YEAR ENDED ENDED YEAR ENDED
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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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 periodical 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-80
<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).
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-81
<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, 1996 and 1997 and the related combined statements of
operations, cash flows and stockholders' equity 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
Contemporary Group at December 31, 1996 and 1997 and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
New York, New York
March 20, 1998
F-82
<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-83
<PAGE>
CONTEMPORARY GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Operating revenues:
Event promotion revenue ............ $38,023,454 $48,057,060
Marketing revenue .................. 12,969,621 30,195,359
Other event revenue ................ 8,859,218 10,800,118
------------- -------------
59,852,293 89,052,537
Cost of revenue ..................... 46,410,935 66,940,088
------------- -------------
13,441,358 22,112,449
Operating expenses:
Salary and bonus expense ........... 8,010,991 18,992,476
Depreciation and amortization ..... 566,573 540,986
General and administrative expenses 3,767,111 4,887,615
------------- -------------
12,344,675 24,421,077
Income (loss) from operations ....... 1,096,683 (2,308,628)
Other income (expense):
Interest income .................... 158,512 201,310
Interest expense ................... (213,658) (192,130)
Loss on asset disposal ............. -- (84,261)
Equity in income of Riverport ..... 822,716 1,002,204
------------- -------------
767,570 927,123
------------- -------------
Income before income taxes .......... 1,864,253 (1,381,505)
Federal and state taxes ............. 35,367 --
------------- -------------
Net income (loss) ................... $ 1,828,886 $(1,381,505)
============= =============
</TABLE>
See accompanying notes.
F-84
<PAGE>
CONTEMPORARY GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1996 1997
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income .................................................. $ 1,828,886 $(1,381,505)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .............................. 566,573 540,986
Loss on asset disposal ..................................... -- 84,261
Non cash interest expense................................... 148,113 154,701
Equity in income of Riverport, net of distributions
received .................................................. (222,716) (502,204)
Changes in operating assets and liabilities:
Accounts receivable ....................................... (899,830) (3,604,743)
Prepaid expenses and other current assets ................. 225,754 61,465
Reimbursable event costs .................................. (207,355) 321,852
Deferred event expenses ................................... (159,393) (151,487)
Other assets .............................................. (29,923) (79,262)
Accounts payable .......................................... (186,876) (386,137)
Accrued compensation and bonuses .......................... 1,489,179 3,815,306
Accrued expenses and other current liabilities ........... 1,116,003 4,175,825
Deferred revenue .......................................... 1,324,206 3,227,827
Other liabilities ......................................... (1,134,683) (244,412)
------------- --------------
Net cash provided by operating activities ................... 3,857,938 6,032,473
INVESTING ACTIVITIES
Loan to related party ....................................... -- (1,000,000)
Purchase of property and equipment .......................... (1,159,382) (1,063,848)
Proceeds from sale of property and equipment ................ -- 62,909
------------- --------------
Net cash used in investing activities ....................... (1,159,382) (2,000,939)
FINANCING ACTIVITIES
Borrowings .................................................. 626,970 --
Payments of notes payable ................................... (109,832) (667,138)
Proceeds received from capital contributions ................ -- 5,000,000
Distributions paid .......................................... (2,993,000) (909,000)
------------- --------------
Net cash provided by (used in) financing activities ........ (2,475,862) 3,423,862
------------- --------------
Net increase in cash ........................................ 222,694 7,455,396
Cash at beginning of period ................................. 2,749,715 2,972,409
------------- --------------
Cash at end of period ....................................... $ 2,972,409 $10,427,805
============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ...................................... $ 143,271 $ 37,421
============= ==============
Cash paid for income taxes .................................. $ 34,550 $ 27,077
============= ==============
</TABLE>
See accompanying notes.
F-85
<PAGE>
CONTEMPORARY GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C>
Balance, January 1, 1996 ....................... $ 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-86
<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, certain of the entities were "C Corporations" for which a
tax provision has been provided.
For the year ended December 31, 1996, with respect to the "C
Corporations," the total provision for income taxes is $35,367.
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 and 1996 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-87
<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 and 1996, advertising costs were $115,634 and $71,879, 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 amounts in the 1996 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, 1996 and
1997:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Current assets .......................... $ 473,275 $ 284,424
Property and equipment .................. 11,815,552 11,188,826
Other assets ............................ 16,553 --
------------- -------------
Total assets ............................ $12,305,380 $11,473,250
============= =============
Current liabilities ..................... $ 1,993,981 $ 318,028
Other liabilities ....................... 442,374 281,789
Partners' capital ....................... 9,869,025 10,873,433
------------- -------------
Total liabilities and partners' capital $12,305,380 $11,473,250
============= =============
Revenue ................................. $11,693,138 $14,247,109
Net operating income .................... $ 1,970,887 $ 2,616,839
Net income .............................. $ 1,645,431 $ 2,004,408
</TABLE>
F-88
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
During the years ended December 31, 1997 and 1996, CIC received a cash
distribution of $500,000 and $600,000, respectively, from Riverport.
3. NOTES PAYABLE
At December 31, 1997 and 1996, 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 and $1,734,723 at December 31, 1997 and 1996, 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 year ended December 31, 1997 and 1996 was
$705,489 and $818,123, respectively.
F-89
<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, 1996 and 1997, the
Companies contributions totaled approximately $25,600 and $37,769,
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 convertible into
1,402,851 shares of SFX Entertainment Class A Common Stock upon a spin-off or
redeemable into cash if the spin-off does not occur by July 1, 1998. 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-90
<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-91
<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-92
<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-93
<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-94
<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-95
<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-96
<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-97
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
SJS Entertainment Corporation
We have audited the accompanying combined balance sheets of SJS
Entertainment Corporation as of December 31, 1996 and 1997, and the related
combined statements of operations and retained earnings 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 financial position of SJS
Entertainment Corporation 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
March 18, 1998
F-98
<PAGE>
SJS ENTERTAINMENT CORPORATION
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................... $ 230,280 $ 330,315
Accounts receivable ................................ 2,257,110 2,954,730
Due from officers .................................. 616,177 --
Prepaid expenses ................................... 27,962 54,475
------------ -------------
Total current assets................................. 3,131,529 3,339,520
Fixed assets, at cost:
Furniture, fixtures and office equipment .......... 309,756 414,904
Production equipment ............................... 95,317 190,721
Leasehold improvements ............................. 61,228 61,228
------------ -------------
466,301 666,853
Accumulated depreciation and amortization .......... 187,546 314,940
------------ -------------
Net fixed assets .................................... 278,755 351,913
Other assets ........................................ 23,658 24,737
------------ -------------
Total assets ........................................ $3,433,942 $3,716,170
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable--bank ................................ $1,900,000 1,500,000
Accounts payable ................................... 694,055 955,876
Accrued expenses ................................... 857,423 399,614
Due to officers .................................... -- 1,294,291
------------ -------------
Total current liabilities............................ 3,451,478 4,149,781
Stockholders' equity:
Common stock ....................................... 27,200 27,200
Retained earnings (deficit) ........................ 30,264 (385,811)
Treasury stock ..................................... (75,000) (75,000)
------------ -------------
Total stockholders' equity (deficit) ................ 17,536 (433,611)
------------ -------------
Total liabilities and combined stockholders' equity $3,433,942 $3,716,170
============ =============
</TABLE>
See accompanying notes.
F-99
<PAGE>
SJS ENTERTAINMENT CORPORATION
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Net sales, including management fees from related
party
(Note 2) ............................................. $11,374,672 $14,218,435
Cost of sales ......................................... 4,039,320 4,320,654
------------- -------------
Gross profit........................................... 7,335,352 9,897,781
------------- -------------
Operating expenses:
Officers salaries and bonus .......................... 2,965,353 4,000,000
Employee payroll and taxes ........................... 2,211,372 3,087,185
Consulting fees ...................................... 272,233 290,693
Messengers and delivery expense ...................... 208,697 255,814
Telephone and utilities .............................. 341,649 468,878
Travel and Transportation expenses ................... 240,218 351,748
Advertising and promotion ............................ 149,907 382,640
Rent expense, net .................................... 182,012 261,834
Depreciation and amortization ........................ 84,001 127,394
Other, net ........................................... 648,128 1,002,727
------------- -------------
7,303,570 10,228,913
------------- -------------
Income (loss) from operations ......................... 31,782 (331,132)
Interest expense--net ................................. (3,229) (35,657)
Other income .......................................... -- 77,510
------------- -------------
Income before provision for income taxes .............. 28,553 (289,279)
Provision for income taxes ............................ 91,197 126,796
------------- -------------
Net loss .............................................. (62,644) (416,075)
Retained earnings at beginning of year ................ 92,908 30,264
------------- -------------
Retained earnings (deficit) at end of year ............ $ 30,264 $ (385,811)
============= =============
</TABLE>
See accompanying notes.
F-100
<PAGE>
SJS ENTERTAINMENT CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss ............................................. $ (62,644) $ (416,075)
Adjustments to reconcile net loss to net cash
provided
by (used in) operating activities:
Depreciation and amortization ...................... 84,001 127,394
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ....... 241,679 (697,620)
(Increase) in prepaid expenses .................... (5,445) (26,513)
(Increase) Decrease in other assets ............... 4,737 (1,079)
Increase (decrease) in accounts payable .......... (130,667) 261,821
Increase (decrease) in accrued expenses .......... 636,011 (457,809)
Increase in due to affiliate ...................... 22,137 --
------------- -------------
Net cash provided by operating activities ............ 789,809 (1,209,881)
------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES
Cash used to acquire fixed assets .................... (184,132) (200,552)
------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES
Officers' loans, net ................................. (2,204,564) 1,910,468
Repayments of bank loan .............................. (275,760) (1,900,000)
Proceeds from new bank loans ......................... 1,900,000 1,500,000
Payments towards treasury stock financing agreement . (12,500) --
------------- -------------
Net cash provided by (used by) financing activities . (592,824) 1,510,468
------------- -------------
Net increase in cash ................................. 12,853 100,035
------------- -------------
Cash at beginning of year ............................ 217,427 230,280
------------- -------------
Cash at end of year .................................. $ 230,280 $ 330,315
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during period .......................... $ 9,003 $ 33,222
============= =============
Income taxes paid during period ...................... $ 180,636 $ 77,333
============= =============
</TABLE>
See accompanying notes.
F-101
<PAGE>
SJS ENTERTAINMENT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements present the combined financial position and
results of operations of SJS Entertainment Corporation and its wholly-owned
subsidiary SJS Research Corporation, and Urban Entertainment Corp.
(collectively, the "Company") which is affiliated through common management
and ownership. All intercompany balances and transactions have been
eliminated in combination.
Nature of Business
The Company creates, produces and distributes music-related radio programs
and services which it barters or exchanges with radio broadcasters for
commercial air time, which is then sold to national network advertisers.
Through SJS Research, incorporated in September 1997, the Company provides
statistical information relating to the Entertainment Industry based upon
telephone surveys.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management use of estimates based
upon available information, which directly affect reported amounts. Actual
results could differ from those estimates.
Depreciation and Amortization
Depreciation of furniture, fixtures and equipment is computed using the
straight-line and declining balance methods, at rates adequate to allocate
the cost of the applicable asset over its expected useful life. Amortization
of leasehold improvements is computed using the straight-line method over the
shorter of the lease term or the expected useful life of the asset.
<TABLE>
<CAPTION>
<S> <C>
Estimated useful life ranges are as follows:
Furniture, fixtures and office equipment ...... 5-7 years
Production equipment ........................... 5 years
Leasehold improvements ......................... 5-10 years
</TABLE>
Concentration of Credit Risk
The Company maintains bank balances with Sterling National Bank in excess
of the federally insured limit of $100,000.
Reclassification
Certain 1996 amounts have been reclassified to conform to the 1997
presentation. Retained earnings at January 1, 1996 was adjusted to reflect
the underaccrual of $51,831 of state and local taxes and $115,000 of sales
commissions related to 1995.
2. RELATED PARTY TRANSACTIONS
Due from/to Officers
The Company maintains a running loan/exchange account with its officers in
order to satisfy the cash flow needs of operations. There is no interest
charged by either party on these temporary loans.
As of January 1, 1996, the Company owed its officers $1,589,146. During
1996, the officers loaned the Company an additional $354,780, while the
Company paid to its officers a total of $2,560,103.
As of January 1, 1997, the officers owed the companies $616,177. During
the year, the officers paid back this amount, and loaned the Company an
additional $1,294,291.
F-102
<PAGE>
SJS ENTERTAINMENT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
In addition, the Company pays its officers in total $2,000 per month
towards the business use of their home. These amounts are charged to rent
expense and totaled $24,000 for each of the years ended December 31, 1996 and
1997.
Salaries and bonuses paid to officers is determined annually by the
Company's board of directors.
Management Services
The Company managed the operations of a related company which is 40% owned
by the officers of the Company. In exchange for the services provided, the
Company received management fees of $40,000 per month. In addition, the
Company had subleased a portion of its premises to this related company and
is also reimbursed for other direct operating expenses (telephone, utilities,
cleaning, bookkeeping and administrative) and indirect overhead costs. This
arrangement terminated at the end of April 1997.
During the years ended December 31, 1996 and 1997, the Company received
the following amounts from this related company:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Management fees ................. $480,000 $160,000
Rental income ................... 69,780 32,490
Direct expense reimbursement ... 25,519 13,347
Indirect overhead reimbursement 108,000 27,914
---------- ----------
$683,299 $233,751
========== ==========
</TABLE>
Management fees, rental income, the direct expense reimbursement and
indirect overhead reimbursement are reflected as an adjustment to the related
income or expense account in the accompanying statement of operations.
The Company received $77,510 from an unrelated third party as
consideration for the termination of the management services agreement and
sublease agreement, which was recorded as other income in 1997.
3. LOANS PAYABLE--BANK
At December 31, 1997, the Company owed to Sterling National Bank a term
loan of $1,500,000, which was secured by all corporate receivables and is
personally guaranteed by the officers of the Company. Interest charged to the
Company was at a rate of prime plus 1%. This amount was fully repaid on
February 28, 1998.
At December 31, 1996, the Company owed to Sterling National Bank a term
loan of $1,600,000 which was secured by personal certificates of deposit
totaling $1,600,000 and a $300,000 line-of-credit which was secured by all
corporate assets and guaranteed by the officers/shareholders. Interest
charged to the Company was at the rate of prime plus 1%.
On February 20, 1997 the certificates matured, at which time they were
transferred into the Company as an officers' loan repayment and used to
pay-off the bank loan. In 1997, the Company also repaid the $300,000
line-of-credit from Sterling National Bank.
4. COMMITMENTS AND CONTINGENCIES
Automobile Lease
The Company leases automobiles with monthly payments of $1,834 due through
February, 1999.
F-103
<PAGE>
SJS ENTERTAINMENT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Office and Audio Production Studio Leases
The Company maintains several offices for sales and administration
throughout the United States, as well as two production studios. The main
premises are located in New York City and is subject to an operating lease
expiring March 31, 2006. Other premises are subject to operating leases with
various terms ranging from month-to-month, to January 31, 2001.
Future minimum commitments for automobile, office and studio leases,
including two new leases entered into during 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 ......... $ 311,200
1999 ......... 300,000
2000 ......... 267,000
2001 ......... 240,100
2002 ......... 246,200
Thereafter .. 852,500
-----------
$2,217,000
===========
</TABLE>
Rent expense for offices and production studios, net of the subtenant
lease income (see note 2 below), totaled $261,834 for the year ended December
31, 1997 compared to $182,012 for the year ended December 31, 1996, while the
automobile lease cost was approximately $22,000 for both 1996 and 1997.
Consulting Agreements
Urban Entertainment Corp. is a party to consulting agreements with two
individuals, requiring monthly payments totaling $9,583 to be paid through
December 31, 1999.
5. SHAREHOLDERS' EQUITY
Shareholders' equity consists of the following:
<TABLE>
<CAPTION>
PAR ISSUED AND
COMPANY CLASS VALUE AUTHORIZED OUTSTANDING VALUE
- ----------------------------- --------------- ------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
SJS Entertainment
Corporation.................. -- None 1,000 1,000 $27,000
Urban Entertainment Corp. .... A (voting) None 840 840 100
B (nonvoting) None 160 160 100
---------
$27,200
=========
</TABLE>
6. INCOME TAXES
Urban Entertainment Corporation has elected "S" Corporation status for
both federal and state tax purposes. Accordingly, all items of income, loss,
deduction or credit are reported by the stockholders on their respective
personal income tax returns. Therefore, no federal or state tax has been
provided.
SJS Entertainment Corporation is subject to corporate taxes at the federal
level and eight state and local jurisdictions.
The provision for income taxes for the years ended December 31, 1997 and
1996 is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Current:
Federal..... $ 9,647 $ 28,266
State....... 81,550 98,530
Deferred: .. -- --
--------- ----------
Total....... $91,197 $126,796
========= ==========
</TABLE>
F-104
<PAGE>
SJS ENTERTAINMENT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
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. As of December 31,
1997, the Company had deferred tax assets of approximately $124,000 relating
to start-up costs which is offset in full by a valuation allowance.
The provision for income taxes differed from the U.S. statutory rate
principally due to nondeductible meals and entertainment expense, state and
local taxes and in 1997 only, the valuation allowance.
7. EMPLOYEE RETIREMENT PLAN
The Company maintains 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 six months with the Company.
Participants may make voluntary contributions into the plan of up to 15% of
their compensation. The Company contributes to each participant's account an
amount equal to 25% of the participant's voluntary contribution, or $2,000,
whichever is less.
During the years ended December 31, 1996 and 1997, employer contributions
totaled $16,758 and $18,747 respectively.
8. LEGAL MATTERS
The Company has been named in various lawsuits arising in the normal
course of business. It is not possible at this time to assess the probability
of any liability against the Company as a result of these lawsuits.
Management has stated that all cases will be vigorously defended.
9. SUBSEQUENT EVENTS
On February 27, 1998, the Company was acquired by SFX Entertainment Inc.
F-105
<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-106
<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 1997 and $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-107
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <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-108
<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-109
<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> <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-110
<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-111
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <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-112
<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>
<CAPTION>
<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-113
<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-114
<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-115
<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-116
<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-117
<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-118
<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-119
<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-120
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
<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-121
<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-122
<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-123
<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-124
<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-125
<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-126
<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-127
<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-128
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <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-129
<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-130
<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-131
<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-132
<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-133
<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-134
<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-135
