<PAGE>
As filed with the Securities and Exchange Commission on January __, 1998
REGISTRATION NO. 333-43287
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
SFX ENTERTAINMENT, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 7922 13-3977880
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation
or Organization)
650 MADISON AVENUE, 16TH FLOOR
NEW YORK, NEW YORK 10022
(212) 838-3100
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
ROBERT F.X. SILLERMAN, EXECUTIVE CHAIRMAN
SFX ENTERTAINMENT, INC.
650 MADISON AVENUE, 16TH FLOOR
NEW YORK, NEW YORK 10022
(212) 838-3100
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
---------------------------
Copy to:
AMAR BUDARAPU
BAKER & MCKENZIE
805 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 751-5700
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective and
all other conditions to the distribution under the Distribution Agreement
described in the Prospectus have been satisfied or waived, and from time to
time thereafter pursuant to the exercise of certain warrants of SFX
Broadcasting, Inc.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
===============================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
SUBJECT TO COMPLETION, DATED JANUARY __, 1998
PROSPECTUS ANNEX D
SFX ENTERTAINMENT, INC.
-----------------------
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
($.01 PAR VALUE PER SHARE)
SFX Broadcasting, Inc. ("SFX") currently operates in two principal lines of
business: radio broadcasting and live entertainment. In August 1997, SFX
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's Class A common stock will have the right to receive
$75.00 per share, holders of SFX's Class B common stock will have the right to
receive $97.50 per share, and holders of SFX'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 retained the right to spin off its live
entertainment business to its stockholders (the "Spin-Off"). At a special
meeting to be held on _______ __, 1998, SFX's stockholders will vote on, among
other things, the SFX Merger and an amendment to SFX's certificate of
incorporation regarding the voting rights of stock to be received by two
members of management in the Spin-Off. If this amendment is approved (whether
or not the SFX Merger occurs), SFX will consummate the Spin-Off by issuing
shares of SFX Entertainment, Inc. ("SFX Entertainment"), which holds SFX's
live entertainment operations, to SFX's stockholders as a dividend in a
taxable transaction. See "Certain Federal Income Tax Consequences." Based on
the number of shares outstanding, and assuming the exercise of outstanding
options and warrants of SFX before the record date for the Spin-Off, SFX will
distribute approximately 14,200,000 shares of SFX Entertainment's Class A
Common Stock and 1,047,037 shares of its Class B Common Stock in the Spin-Off.
This Prospectus is SFX Entertainment's prospectus relating to those shares.
If the Pending Acquisitions (as defined herein), the Spin-Off and the SFX
Merger are consummated, then, among other things:
SFX ENTERTAINMENT WILL:
o continue to own and operate SFX's live entertainment venue
operation, promotion, production and marketing and consulting
business (the "Entertainment Business"), representing
approximately 22% of SFX's revenues for the nine months ended
September 30, 1997 and 9% of SFX's assets as of that time
(before the Pending Acquisitions); and
o own and operate the businesses acquired in the Pending
Acquisitions.
SFX WILL BE WHOLLY-OWNED BY SBI HOLDINGS CORPORATION AND WILL:
o continue to own and operate SFX's radio broadcasting business,
representing approximately 78% of SFX's revenues for the nine
months ended September 30, 1997 and 91% of SFX's assets as of
that time (before the Pending Acquisitions); and
o at the time of the SFX Merger, make a payment to SFX
Entertainment, or receive a payment from SFX Entertainment, for
Working Capital (as defined in "Agreements Between SFX
Entertainment and SFX--Distribution Agreement").
Before the Spin-Off, SFX Entertainment and SFX will enter into the
Distribution Agreement, which will govern the terms and conditions of the
Spin-Off (the "Distribution Agreement"). A form of the Distribution Agreement
is Annex F to the attached Proxy Statement. See "Agreements Between SFX
Entertainment and SFX--Distribution Agreement" and Annex F to the Proxy
Statement.
In the Spin-Off, for each share of SFX's Class A common stock held on the
record date for the Spin-Off to be set by SFX's board of directors (the
"Spin-Off Record Date"), the holder will receive one share of SFX
Entertainment's Class A common stock, par value $.01 per share, which has 1
vote in most matters (the "SFX Entertainment Class A Common Stock"). For each
share of SFX's Class B common stock owned on the Spin-Off Record Date, the
holder will receive one share of SFX Entertainment's Class B common stock, par
value $.01 per share, which has 10 votes in most matters (the "SFX
Entertainment Class B Common Stock" and, with the SFX Entertainment Class A
Common Stock, the "SFX Entertainment Common Stock"). Holders of SFX's Series D
preferred stock will receive the number of shares of SFX Entertainment Class A
Common Stock obtained by multiplying the number of shares held by 1.0987
(rounded down to the next whole share). In addition, persons who exercise
certain warrants of SFX after the Spin-Off Record Date will be entitled to
receive, among other things, up to 636,289 shares of SFX Entertainment Class A
Common Stock. Holders will not receive cash in lieu of fractional shares.
After the Spin-Off and certain other transactions described in this
Prospectus, Robert F.X. Sillerman, the Executive Chairman of SFX
Entertainment, will beneficially own approximately 45.7%, and all directors
and executive officers together will beneficially own approximately 52.3%, of
the combined vote of the SFX Entertainment Common Stock. Accordingly, these
individuals will generally be able to control the election of a majority of
SFX Entertainment's board of directors, as well as stockholder votes on most
other matters. See "Risk Factors--Control by Management," "Management,"
"Principal Stockholders" and "Certain Relationships and Related Transactions."
SFX Entertainment presently owns, leases or operates 20 venues in five states,
and engages in concert and live entertainment promotion, production and
marketing activities. SFX Entertainment has agreed to acquire the following
five additional live entertainment businesses (the "Pending Acquisitions"):
PACE Entertainment Corporation ("PACE"); Contemporary Group ("Contemporary");
BG Presents, Inc. ("BGP"); Album Network, Inc., SJS Entertainment Corporation
and The Network 40, Inc. (collectively, "Network"); and Concert/Southern
Promotions ("Concert/Southern"). The aggregate consideration to be paid in the
Pending Acquisitions is expected to be approximately $352.8 million in cash,
the assumption and repayment of $75.3 million of debt and the issuance of
4,216,680 shares of SFX Entertainment Class A Common Stock. SFX Entertainment
intends to finance the cash portion of the Pending Acquisitions through a
combination of approximately $275.0 million of privately-placed debt
securities and borrowings under a $350.0 million credit facility (the
"Financing"). See "Business," "Agreements Related to the Pending
Acquisitions," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Description of Indebtedness." Although SFX
Entertainment anticipates consummating the Pending Acquisitions during the
first quarter of 1998, there can be no assurance that any or all of the
Pending Acquisitions will be consummated during that time period, or at all.
The Spin-Off is not conditioned on the prior consummation of the Financing,
any of the Pending Acquisitions or the SFX Merger.
SFX stockholders will not pay any consideration for receiving SFX
Entertainment Common Stock in the Spin-Off. The SFX Entertainment Class A
Common Stock does not currently trade publicly. SFX Entertainment has applied
to list the SFX Class A Common Stock on the Nasdaq Stock Market's National
Market (the "Nasdaq National Market").
PLEASE READ THIS PROSPECTUS AND THE PROXY STATEMENT CAREFULLY, SINCE EACH
CONTAINS IMPORTANT INFORMATION. ALSO, PAY PARTICULAR ATTENTION TO THE "RISK
FACTORS" BEGINNING ON PAGE __.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC-
URITIES 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 ________ __, 1998.
D-1
<PAGE>
PROSPECTUS TABLE OF CONTENTS
PAGE
----
SUMMARY............................................................ D-3
SFX Entertainment............................................. D-3
Overview of the Spin-Off and the SFX Merger .................. D-5
The Spin-Off.................................................. D-6
Summary Consolidated Financial Information of
SFX Entertainment......................................... D-11
RISK FACTORS....................................................... D-13
Absence of Combined Operating History;
Potential Inability to Integrate Acquisition
Businesses................................................ D-13
Risks Related to Pending Acquisitions......................... D-13
Control of Motor Sports and Theatrical
Businesses................................................ D-16
BGP Right of First Refusal.................................... D-16
Control of Delsener/Slater.................................... D-16
Future Acquisitions........................................... D-17
Expansion Strategy; Need for Additional Funds................. D-17
Substantial Leverage.......................................... D-17
[Inability to Obtain Consents Required for Spin-Off].......... D-18
Economic Conditions and Consumer Taste........................ D-18
Availability of Artists and Events............................ D-19
Control of Venues............................................. D-19
Restrictions Imposed by SFX Entertainment's
Indebtedness.............................................. D-19
No Prior Market for SFX Entertainment Stock................... D-20
Working Capital Adjustments and Repayment of
Advances.................................................. D-20
Control by Management; Stock Issued to
Management................................................ D-20
Dependence on Key Personnel................................... D-21
Potential Conflicts of Interest............................... D-21
Indemnification Arrangements.................................. D-22
Seasonality................................................... D-22
Competition................................................... D-23
Regulatory Matters............................................ D-23
Environmental Matters......................................... D-23
Fraudulent Conveyance......................................... D-24
Anti-Takeover Effects......................................... D-24
OVERVIEW OF THE LIVE ENTERTAINMENT
INDUSTRY...................................................... D-26
Concert Promotion Industry.................................... D-26
Theatrical Industry........................................... D-26
Motor Sports Industry......................................... D-27
BUSINESS........................................................... D-28
General....................................................... D-28
Current and Historical Operations............................. D-28
SFX Entertainment's Live Entertainment
Activities................................................ D-29
Operating Strategy............................................ D-37
Pending Acquisitions.......................................... D-39
Properties.................................................... D-43
Employees..................................................... D-43
Litigation.................................................... D-43
Potential Conflicts of Interest............................... D-43
Seasonality................................................... D-44
Competition................................................... D-44
Regulatory Matters............................................ D-44
Forward-Looking Statements.................................... D-45
THE SPIN-OFF....................................................... D-46
Background and Reasons for the Spin-Off....................... D-46
Manner of Effecting the Spin-Off.............................. D-47
Regulatory Matters............................................ D-48
AGREEMENTS BETWEEN SFX
ENTERTAINMENT AND SFX......................................... D-49
Distribution Agreement........................................ D-49
Tax Sharing Agreement......................................... D-55
Employee Benefits Agreement................................... D-55
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES.................................................. D-56
AGREEMENTS RELATED TO THE PENDING
ACQUISITIONS.................................................. D-58
PACE Acquisition.............................................. D-58
Contemporary Acquisition...................................... D-66
BGP Acquisition............................................... D-69
Network Acquisition........................................... D-72
Concert/Southern Acquisition.................................. D-74
LISTING AND TRADING OF SFX
ENTERTAINMENT CLASS A COMMON
STOCK......................................................... D-77
DIVIDEND POLICY.................................................... D-77
CAPITALIZATION..................................................... D-78
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS................................. D-80
SELECTED CONSOLIDATED FINANCIAL
INFORMATION OF SFX ENTERTAINMENT ............................. D-99
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................................... D-101
Recent Acquisitions........................................... D-102
Pending Acquisitions.......................................... D-102
Spin-Off and SFX Merger....................................... D-104
Results of Operations......................................... D-105
Historical Results............................................ D-107
Liquidity and Capital Resources............................... D-109
MANAGEMENT......................................................... D-115
Directors and Executive Officers.............................. D-115
Executive Compensation........................................ D-119
Employment Agreements and Arrangements
with Certain Officers and Directors....................... D-119
PRINCIPAL STOCKHOLDERS............................................. D-121
[Possible Changes in Control]................................. D-124
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.................................................. D-125
Agreements with SFX........................................... D-125
SFX Entertainment Common Stock to Be
Received in the Spin-Off.................................. D-125
Issuance of Stock to Holders of SFX's Options
and SARs.................................................. D-125
Employment Agreements......................................... D-126
Delsener/Slater Employment Agreements ........................ D-126
Assumption of Employment Agreements;
Certain Change of Control Payments........................ D-127
Indemnification of Mr. Sillerman.............................. D-127
Potential Conflicts of Interest............................... D-128
[Meadows Repurchase Transaction].............................. D-128
Relationship Between Howard J. Tytel and
Baker & McKenzie.......................................... D-128
Arrangement Between Robert F.X. Sillerman
and Howard J. Tytel....................................... D-128
Triathlon Fees................................................ D-129
Relationships and Transactions with SFX ...................... D-129
SHARES ELIGIBLE FOR FUTURE SALE.................................... D-130
DESCRIPTION OF CAPITAL STOCK....................................... D-132
Common Stock.................................................. D-132
Preferred Stock............................................... D-134
Warrants of SFX............................................... D-134
DESCRIPTION OF INDEBTEDNESS........................................ D-136
Proposed Notes................................................ D-136
Proposed Senior Credit Facility............................... D-137
Other Debt.................................................... D-141
ADDITIONAL INFORMATION............................................. D-142
LEGAL MATTERS...................................................... D-142
EXPERTS............................................................ D-142
INDEX TO DEFINED TERMS............................................. D-144
INDEX TO FINANCIAL STATEMENTS...................................... D-F-1
D-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 (a) the Spin-Off (including recapitalizing SFX
Entertainment to increase its authorized capital stock and to increase the
number of shares of SFX Entertainment Common Stock outstanding) and the SFX
Merger described in "The Spin-Off" and in the accompanying Proxy Statement and
(b) the closing of and borrowing under the Financing as described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." However, there can be no
assurance that any or all of these transactions will be consummated on the
terms described herein or at all. This Prospectus is Annex D to the Proxy
Statement. PLEASE READ THIS PROSPECTUS AND THE PROXY STATEMENT CAREFULLY IN
THEIR ENTIRETIES.
SFX ENTERTAINMENT
SFX Entertainment, Inc. is a promoter of, and operator of venues for,
live entertainment events, including music concerts. Upon acquisition of the
businesses to be acquired in the Pending Acquisitions (the "Acquisition
Businesses"), SFX Entertainment will be a diversified promoter and producer of
live entertainment, including music concerts, theatrical shows and specialized
motor sports events. In addition, SFX Entertainment's venue network (currently
comprised of 20 venues) will consist of 41 venues (consisting of
amphitheaters, theaters and clubs) either directly owned or operated under
lease or exclusive booking arrangement. During 1997, approximately 1.4 million
people attended approximately 210 events promoted and/or produced by SFX
Entertainment, including approximately 200 music concerts. During the same
year, approximately 25 million people attended 9,100 events promoted and/or
produced by SFX Entertainment and the Acquisition Businesses, including
approximately 3,880 music concerts, 4,850 theatrical shows and 188 specialized
motor sports events.
SFX Entertainment'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 SFX Entertainment and in
third-party venues. As promoter, SFX Entertainment 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, SFX Entertainment, upon consummation of the Pending
Acquisitions, will (a) create tours for music concert, theatrical, specialized
motor sports and other events, (b) develop and manage Broadway-style touring
theatrical shows ("Touring Broadway Shows") and (c) develop specialized motor
sports and other live entertainment events. In connection with its live
entertainment events, SFX Entertainment 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 Pending Acquisitions, SFX Entertainment's music and
ancillary businesses would have comprised approximately 77%, theater would
have comprised approximately 17% and specialized motor sports would have
comprised approximately 6% of SFX Entertainment's total net revenues for the
12 months ended September 30, 1997.
SFX Entertainment currently owns and/or operates under lease or
exclusive booking arrangement a total of 20 venues, including two
amphitheaters and two theaters in the New York--Northern New Jersey--Long
Island market; an amphitheater and a theater/ballroom in the Indianapolis
market; an amphitheater in the Columbus market; an amphitheater in the
Hartford market; and an amphitheater in the Rochester market. The following
table summarizes the amphitheaters, theaters and other venues to be owned
and/or operated under lease or exclusive booking arrangement by SFX
Entertainment on a pro forma basis after giving effect to the Pending
Acquisitions. There can be no assurance that any or all of the Pending
Acquisitions will be consummated on the terms described in this Prospectus or
at all. See "Risk Factors--Risks Related to the Pending Acquisitions" and
"Business--Pending Acquisitions."
D-3
<PAGE>
<TABLE>
<CAPTION>
Number of Total
Market Number of Theaters and Total Seating
MARKET Rank(1) Amphitheaters(2) Clubs(2) Venues(2) Capacity
- ---------------------------------------- ------- ---------------- ------------ --------- --------
<S> <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 2 14,500(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: ............................. 26 15 41 504,819(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 SFX Entertainment sells
subscriptions for Touring Broadway Shows. See "Business--SFX
Entertainment'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.
SFX Entertainment was formed as a subsidiary of SFX in 1997. SFX
acquired Delsener/Slater Enterprises, Ltd. ("Delsener/Slater"), a New
York-based concert promotion company, in January 1997. 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. In March 1997,
Delsener/Slater acquired 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 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 Music
Theater lease, the "Recent Acquisitions"). As a result of the acquisition of
Sunshine Promotions, SFX Entertainment owns the Deer Creek Music Theater, a
21,000-seat complex located in Indianapolis, Indiana, and the Polaris
Amphitheater, a 20,000-seat complex located in Columbus, Ohio, and has a
long-term lease to operate the Murat Centre, a 2,700-seat theater and
2,200-seat ballroom located in Indianapolis, Indiana.
In December 1997, SFX Entertainment agreed to consummate the Pending
Acquisitions, consisting of the acquisition of the operations of PACE (the
"PACE Acquisition"), Pavilion Partners (the "Pavilion Acquisition"),
D-4
<PAGE>
Contemporary (the "Contemporary Acquisition"), BG Presents, Inc. (the "BGP
Acquisition"), Network (the "Network Acquisition") and Concerts Southern (the
"Concerts Southern Acquisition"). The aggregate purchase price of the Pending
Acquisitions is expected to be approximately $484.3 million, consisting of
approximately $352.8 million in cash, $75.3 million in assumed liabilities and
the issuance of approximately 4.2 million shares of SFX Entertainment Common
Stock (approximately 21% of the outstanding shares of SFX Entertainment Common
Stock, after the Spin-Off and other issuances described in this Prospectus)
with an attributed negotiated value of $56.2 million. There can be no
assurance that the value attributed by the parties to SFX Entertainment's
capital stock will approximate the actual trading price of the stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
SFX Entertainment intends to finance the cash portion of the Pending
Acquisitions through the Financing, consisting of approximately $275.0 million
of privately-placed debt securities and borrowings under a $350.0 million
credit facility. SFX Entertainment has received commitments from a group of
lenders for this senior credit facility, and expect to enter into the
definitive agreement with respect to the facility before consummating the
Pending Acquisitions (other than the PACE Acquisition). Under the expected
terms of the facility, the maximum amount of funding available on a pro forma
basis for the twelve months ended September 30, 1997 would have been $250.4
million. This amount, plus the net proceeds from the proposed sale of debt
securities, would be sufficient for the uses of funds described in this
Prospectus. However, there can be no assurance that SFX Entertainment will have
sufficient borrowing availability under the facility for those uses of funds,
including the Pending Acquisitions. If SFX Entertainment is unable to
consummate the Financing, there can be no assurance that it will otherwise be
able to obtain the necessary financing on terms comparable to the expected
terms of the Financing or on terms otherwise acceptable to SFX Entertainment.
The failure to obtain sufficient financing will result in breaches under
certain of SFX Entertainment's existing agreements, including the agreements
relating to the Pending Acquisitions. See "Risk Factors--Risks Related to the
Pending Acquisitions." In addition, SFX Entertainment's ability to borrow
under the credit facility or obtain other financing may be restricted by the
terms of the indenture governing its proposed debt securities. See "Agreements
Related to the Pending Acquisitions," "Unaudited Pro Forma Condensed Combined
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Description of Indebtedness."
On a pro forma basis, as of September 30, 1997 and for the nine
months then ended, the Pending Acquisitions represented 83% of SFX
Entertainment's revenues, 82% of assets and 29% of stockholders' equity. SFX
Entertainment anticipates consummating the Pending Acquisitions in the first
quarter of 1998. However, the timing and completion of the Pending
Acquisitions are subject to a number of conditions, certain of which are
beyond SFX Entertainment's control (including availability of sufficient
financing) and there can be no assurance that any Pending Acquisitions will be
consummated during that period on the terms described herein, or at all. See
"Risk Factors--Risks Related to Pending Acquisitions" and "Agreements Related
to the Pending Acquisitions."
The address and telephone number of SFX Entertainment's principal
executive offices are: 650 Madison Avenue, 16th Floor, New York, New York
10022; (212) 838-3100.
OVERVIEW OF THE SPIN-OFF AND THE SFX MERGER
In August 1997, SFX entered into the SFX Merger Agreement among SFX
Buyer, a wholly-owned subsidiary of SFX Buyer ("SFX Buyer Sub") and SFX. On
the terms and subject to the conditions set forth in the SFX Merger Agreement,
SFX will be merged with SFX Buyer Sub, with SFX 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 has agreed to effect the
Spin-Off (or an alternative transaction to dispose of SFX Entertainment) prior
to consummation of the Merger. The Spin-Off will separate the Entertainment
Business from SFX's radio broadcasting business and will enable SFX Buyer to
acquire only SFX's radio broadcasting business in the SFX Merger. It will also
allow SFX's stockholders to continue their equity participation in the
Entertainment Business.
D-5
<PAGE>
[SFX is currently in the process of obtaining consents under the
indenture governing certain of its notes and the Certificate of Designations
of its 125/8% Cumulative Exchangeable Series E Preferred Stock (the "Series E
Preferred Stock") that will be required to consummate the Spin-Off and to
permit SFX Entertainment to consummate the Financing. On January 7, 1998, SFX
sent to holders of certain of its securities (including its common stock) an
information statement (and on January 28, 1998, SFX sent those holders a
supplement to the information statement), which contained information relevant
to those holders with respect to the granting of consents. See "Risk
Factors--Inability to Obtain Consents Required for Spin-Off."]
Prior to the Spin-Off, pursuant to the Distribution Agreement, SFX
will contribute to SFX Entertainment all of its assets relating to the
Entertainment Business. Immediately after the Spin-Off, SFX will pay to
SFX Entertainment an allocation of working capital in an amount estimated by
SFX's management to be consistent with the proper operation of SFX
Entertainment, and SFX Entertainment will assume all of SFX's Entertainment
Business liabilities, as well as certain other liabilities. At the time of the
SFX Merger, SFX will contribute its positive Working Capital to SFX
Entertainment. If Working Capital is negative, SFX Entertainment must pay the
amount of the shortfall to SFX. As of September 30, 1997, SFX Entertainment
estimates that Working Capital to be received by SFX Entertainment would have
been approximately $2.1 million, and that approximately $135.5 million of
additional assets and $34.1 million of liabilities would have been contributed
to SFX Entertainment. The actual amount of Working Capital as of the closing
of the SFX Merger may differ substantially from the amount as of September 30,
1997, and will be a function of, among other things, the operating results of
SFX through the date of the SFX Merger and the actual cost of consummating the
SFX Merger and the related transactions. In addition, at the time of the
Spin-Off, SFX Entertainment must repay sums advanced to SFX Entertainment by
SFX for certain acquisitions or capital expenditures subsequent to the date of
the SFX Merger Agreement and which have not been repaid. As of January 15,
1998, SFX had advanced approximately $6.5 million to SFX Entertainment for use
in connection with certain acquisitions and capital expenditures. SFX
Entertainment intends to repay these amounts from the proceeds of the
Financing. SFX may advance additional amounts to SFX Entertainment for these
purposes before the consummation of the Spin-Off. See "The Spin-Off,"
"Agreements Between SFX Entertainment and SFX" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
In the Spin-Off, shares of SFX Entertainment Common Stock will be
distributed pro rata to holders on the Spin-Off Record Date of SFX's Class A
common stock, Class B common stock, Series D preferred stock and interests in
SFX'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.
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'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 or decrease
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, as
described under "The Merger Agreement--The Merger" in the Proxy Statement.
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 Between SFX Entertainment and SFX," and a form
of the Distribution Agreement is attached as Annex F to the Proxy Statement.
Distributing Company............... SFX. References to SFX include its
subsidiaries, except where the context
otherwise requires.
D-6
<PAGE>
Distributed Company................ SFX Entertainment, which will hold the
assets and be responsible for the
liabilities of SFX relating to the
Entertainment Business, as well as certain
other liabilities. In connection with the
SFX Merger, SFX Entertainment will be
required to make or entitled to receive
certain payments of Working Capital of
SFX. References to SFX Entertainment
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 the Pending
Acquisitions.............. 4,216,680 shares of SFX Entertainment
Class A Common Stock.(1)
Shares to be Distributed
in the Spin-Off........... approximately 14,200,000 shares of SFX
Entertainment Class A Common Stock and
1,047,037 shares of SFX Entertainment
Class B Common Stock.(2)
Conditions to the Spin-Off......... Stockholder approval of proposal 3 in the
accompanying Proxy Statement; acceptance
for listing or trading of SFX
Entertainment Class A Common Stock;
receipt of all necessary third-party and
stockholder consents; and others. The
Spin-Off is not conditioned on the prior
consummation of the Financing, any of the
Pending Acquisitions or the SFX Merger.
Management believes that it will
consummate the Spin- Off early in the
second quarter of 1998, although there can
be no assurance that the Spin-Off will be
consummated during that time period, on
the terms described herein or at all. See
"Agreements Between SFX Entertainment and
SFX--Distribution Agreement--Conditions to
the Distribution."
- -------------
(1) If SFX Entertainment is unable to issue these shares of its capital
stock in certain of the Pending Acquisitions, then the cash portion
of the purchase price in those acquisitions will increase. See "Risk
Factors--Risks Related to the Pending Acquisitions," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Agreements Related
to the Pending Acquisitions."
(2) Assumes that all presently outstanding and exercisable options and
warrants of SFX are exercised prior to the Spin-Off Record Date.
Includes the issuance of up to 636,289 shares of SFX Entertainment
Class A Common Stock upon the exercise of certain warrants of SFX and
2,766 shares issuable pursuant to SFX's director deferred stock
ownership plan. See "The Spin-Off--Manner of Effecting the Spin-Off."
Does not include shares anticipated to be issued to holders of
options and stock appreciation rights ("SARs") of SFX and shares
anticipated to be issued pursuant to certain employment agreements
after the Spin-Off. See "Management--Employment Agreements and
Arrangements with Certain Officers and Directors" and "Certain
Relationships and Related Transactions--Issuance of Stock to Holders
of SFX's Options and SARs."
D-7
<PAGE>
Distribution Ratio to SFX
Stockholders.............. For each share owned on the Spin-Off
Record Date of: (a) SFX's Class A common
stock, 1 share of SFX Entertainment Class
A Common Stock; (b) SFX's Class B common
stock, 1 share of SFX Entertainment Class
B Common Stock; and (c) SFX's Series D
preferred stock, approximately 1.0987
shares of SFX Entertainment Class A Common
Stock, rounded down to the nearest whole
number for each holder. In addition,
participants in SFX's director deferred
stock ownership plan will receive one
share of SFX Entertainment Class A Common
Stock per share of SFX's Class A common
stock credited to their accounts. Shares
of SFX Entertainment Class A Common Stock
will also be placed in escrow for issuance
upon exercise of certain warrants of SFX.
See "The Spin-Off--Manner of Effecting the
Spin-Off."
Federal Income Tax Consequences.... The receipt of stock of SFX Entertainment
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..................... There is currently no public market for
SFX Entertainment Class A Common Stock.
SFX Entertainment has applied to list the
SFX Entertainment Class A Common Stock on
the Nasdaq National Market but, even if
the application is approved, may seek
listing elsewhere. See "Listing and
Trading of SFX Entertainment Class A
Common Stock."
Assets and Liabilities of SFX
Entertainment............. SFX will transfer to SFX Entertainment all
of its assets relating to the
Entertainment Business, and SFX
Entertainment will assume all of SFX's
Entertainment Business liabilities, as
well as certain other liabilities. In
addition, at the time of the SFX Merger,
SFX will pay to SFX Entertainment any
positive Working Capital; if Working
Capital is negative, SFX Entertainment
must pay the amount of the shortfall to
SFX. In addition, SFX Entertainment will
hold the assets and liabilities purchased
in the Pending Acquisitions, and will have
consummated the Financing, which is
anticipated to consist of approximately
$275.0 million of privately-placed debt
securities and borrowings under a $350.0
million credit facility. See "Business,"
"The Spin-Off," "Agreements Between SFX
Entertainment and SFX," "Agreements
Related to the Pending Acquisitions,"
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations" and "Description of
Indebtedness."
D-8
<PAGE>
Working Capital.................... At the time of the SFX Merger, SFX will
pay to SFX Entertainment any positive
Working Capital; if Working Capital is
negative, SFX Entertainment must pay the
amount of the shortfall to SFX. As of
September 30, 1997, SFX Entertainment
estimates that Working Capital payable by
SFX to SFX Entertainment would have been
approximately $2.1 million, and that
approximately $135.5 million of additional
assets and $34.1 million of liabilities
would have been apportioned to SFX
Entertainment. As of January 15, 1998, SFX
had advanced approximately $6.5 million to
SFX Entertainment in connection with
certain acquisitions and capital
expenditures. SFX may advance additional
amounts to SFX Entertainment prior to the
Spin-Off. All of these advances must be
repaid to SFX by the time of the Spin-Off.
See "The Spin-Off," "Agreements Between
SFX Entertainment and SFX," "Agreements
Related to the Pending Acquisitions" and
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations--Liquidity and Capital
Resources."
Effect of the Spin-Off............. SFX will deliver to [Chase Mellon], as the
distribution agent (the "Distribution
Agent") and [Chase Mellon], as escrow
agent (the "Escrow Agent"), shares of SFX
Entertainment Class A Common Stock
representing all of the outstanding shares
of SFX Entertainment Class A Common Stock
and SFX Entertainment Class B Common
Stock. The Distribution Agent will
distribute shares of SFX Entertainment
Class A Common Stock to the holders of
SFX's Class A common stock and Series D
preferred stock, and will distribute
shares of SFX Entertainment Class B Common
Stock to the holders of SFX'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 who exercise their
warrants after the Spin-Off Record Date
will be entitled to receive from the
Escrow Agent shares of SFX Entertainment
Class A Common Stock, in addition to stock
of SFX or cash in lieu thereof. See "The
Spin-Off--Manner of Effecting the
Spin-Off."
Relationship with SFX after the
Spin-Off.................. After the Spin-Off, SFX Entertainment and
SFX will be separate companies. However,
until the consummation of the SFX Merger,
they will share their boards of directors,
senior management and administrative
functions. SFX Entertainment and SFX 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. SFX
Entertainment may also be responsible for
certain taxes resulting from the Spin-Off.
See "Agreements Between SFX Entertainment
and SFX" and "Management."
Spin-Off Record Date............... It is expected that the Spin-Off Record
Date will be established on a date
subsequent to __________ __, 1998 [special
meeting date], but no later than the date
of consummation of the SFX Merger.
However, there can be no assurance that
the Spin-Off will occur.
D-9
<PAGE>
Date of the Spin-Off............... If the conditions to the Spin-Off set
forth in the Distribution Agreement are
fulfilled or waived, the Spin-Off will be
effected on a date to be determined by the
board of directors of SFX, which, in any
event, will be before the closing of the
SFX Merger. The distribution of
certificates of shares of SFX
Entertainment Common Stock will occur as
promptly as practicable thereafter.
Distribution Agent, Transfer
Agent and Registrar....... [Chase Mellon].
Risk Factors....................... Stockholders should carefully review the
matters discussed under the section titled
"Risk Factors" in this Prospectus.
D-10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF SFX ENTERTAINMENT
(in thousands, except per share amounts)
The Summary Consolidated Financial Data of SFX Entertainment includes the
historical financial statements of Delsener/Slater and affiliated companies,
the predecessor of SFX Entertainment, for each of the five years ended
December 31, 1996 and the nine months ended September 30, 1996, and the
historical financial statements of SFX Entertainment for the nine months
ended September 30, 1997. The statement of operations data with respect to
Delsener/Slater for the years ended December 31, 1992 and 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 of SFX Entertainment, the Recent Acquisitions and the Pending
Acquisitions included herein. The financial information has been derived from
the audited and unaudited financial statements of SFX Entertainment, the
Recent Acquisitions and the Pending Acquisitions. The pro forma summary data
as of September 30, 1997 and for the year ended December 31, 1996 and the
nine months ended September 30, 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. Operating results
for the nine months ended September 30, 1997 are not necessarily indicative
of the results that may be achieved for the fiscal year ending December 31,
1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
PREDECESSOR (ACTUAL) 1996 (1)
---------------------------------------------------- PRO FORMA
1992 1993 1994 1995 1996 (UNAUDITED)
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue................ $38,017 $46,526 $92,785 $47,566 $50,362 $552,365
Operating expenses .... 36,631 45,635 90,598 47,178 50,687 505,537
Depreciation &
amortization.......... 758 762 755 750 747 37,795
Corporate
expenses (2).......... -- -- -- -- -- 3,000
--------- --------- --------- --------- --------- -----------
Operating income
(loss)................ 628 129 1,432 (362) (1,072) 6,033
Interest expense....... (171) (148) (144) (144) (60) (43,000)
Other income, net .... 74 85 138 178 198 1,832
Equity income (loss)
from investments ..... -- -- (9) 488 525 3,402
--------- --------- --------- --------- --------- -----------
Income (loss) before
income taxes.......... 531 66 1,417 160 (409) (31,733)
Income tax (provision)
benefit............... (32) (57) (5) (13) (106) (1,500)
--------- --------- --------- --------- --------- -----------
Net income (loss)...... $ 499 $ 9 $ 1,412 $ 147 $ (515) (33,233)
========= ========= ========= ========= ========= ===========
Accretion on temporary
equity (7)............ (3,300)
-----------
Net loss applicable to
common shares ........ $(36,533)
===========
Net loss
per common share...... $ (1.84)
Weighted average
common shares
outstanding (9)....... 20,400
OTHER OPERATING DATA:
EBITDA (3)............. $ -- $ -- $ 2,187 $ 388 $ (325) $ 43,828
========= ========= ========= ========= ========= ===========
Cash flow from:
Operating activities . $ -- $ -- $ 2,959 $ (453) $ 4,214 $ --
Investing activities . -- -- 0 0 (435) --
Financing activities . -- -- (477) (216) (1,431) --
Ratio of earnings to
fixed charges (4)..... 4.1x 1.4x 10.8x 5.5x 2.9x --
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
PREDECESSOR
-------------
1996 1997 (1)
ACTUAL 1997 PRO FORMA
(UNAUDITED) ACTUAL (UNAUDITED)
------------- ---------- -----------
<S> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue................ $41,609 $74,396 $500,843
Operating expenses .... 42,930 63,045 440,266
Depreciation &
amortization.......... 744 4,041 28,378
Corporate
expenses (2).......... -- 1,307 2,807
------------- ---------- -----------
Operating income
(loss)................ (2,065) 6,003 29,392
Interest expense....... (60) (956) (32,206)
Other income, net .... 143 213 779
Equity income (loss)
from investments ..... 525 1,344 5,653
------------- ---------- -----------
Income (loss) before
income taxes.......... (1,457) 6,604 3,618
Income tax (provision)
benefit............... (80) (2,952) (3,500)
------------- ---------- -----------
Net income (loss)...... $(1,537) $ 3,652 118
============= ========== ===========
Accretion on temporary
equity (7)............ (2,475)
-----------
Net loss applicable to
common shares ........ $ (2,357)
===========
Net loss
per common share...... $ (.12)
Weighted average
common shares
outstanding (9)....... 20,400
OTHER OPERATING DATA:
EBITDA (3)............. $ 1,321 $10,044 $ 57,770
============= ========== ===========
Cash flow from:
Operating activities . $ 2,761 $ 789 $ --
Investing activities . 0 (71,997) --
Financing activities . 684 78,302 --
Ratio of earnings to
fixed charges (4)..... -- 9.3x 1.3x
</TABLE>
D-11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF SFX ENTERTAINMENT
(IN THOUSANDS)
BALANCE SHEET DATA(5):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
PREDECESSOR (ACTUAL)
-------------------------------------
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(7)....... -- -- -- --
Stockholders' equity ..... 6,420 2,969 2,900 907
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
PRO FORMA
ACTUAL (UNAUDITED)(6)
<S> <C> <C>
Current assets............ $ 12,189 $117,326
Property and equipment,
net...................... 55,882 185,371
Intangible assets, net ... 59,721 427,566
Total assets.............. 135,470 772,114
Current liabilities....... 11,333 89,619
Long-term debt, including
current portion.......... 16,453 497,322
Temporary equity(7)....... -- 16,500
Stockholders' equity ..... 101,378 143,223(8)
</TABLE>
- ------------
(1) The Unaudited Pro Forma Statement of Operations Data for the year ended
December 31, 1996 and the nine months ended September 30, 1997 are
presented as if SFX Entertainment had completed the Recent
Acquisitions, the Financing, the Pending Acquisitions, the Spin-Off and
the SFX Merger as of January 1, 1996. There can be no assurance that
any of the Financing, the Pending Acquisitions, the Spin-Off and the
SFX Merger will be consummated on the terms assumed in preparing such
pro forma data or at all. See "Risk Factors--Risks Related to Pending
Acquisitions."
(2) Pro forma corporate expenses are reduced by $3,000,000 and $1,693,000
for fees earned from Triathlon Broadcasting Company ("Triathlon") for
the year ended December 31, 1996 and for the nine months ended
September 30, 1997, respectively. The right to receive such fees in the
future is to be assigned to SFX Entertainment by SFX 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) "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"), SFX Entertainment 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 SFX Entertainment'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
$58,200,000 for the year ended December 31, 1996 and $67,300,000 for
the nine months ended September 30, 1997. These adjustments include the
elimination of non-recurring charges including a litigation settlement
recovered by PACE and Pavilion of $6,000,000 and $0, expected cost
savings in connection with the Pending Acquisitions associated with the
elimination of duplicative staffing and general and administrative
expenses of $5,000,000 and $3,800,000 and include SFX Entertainment's
pro rata share of equity income from investments of $3,400,000 and
$5,700,000, for the year ended December 31, 1996 and the nine months
ended September 30, 1997, respectively.
While management believes that such cost savings and the elimination of
non-recurring expenses are achievable, SFX Entertainment's ability to
fully achieve such cost savings and to eliminate the non-recurring
expenses is subject to numerous factors certain of which may be beyond
SFX Entertainment's control.
(4) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consists of earnings before income taxes and fixed charges.
"Fixed charges" consists of interest on all indebtedness. Earnings were
insufficient to cover fixed charges by $932,000 for the nine months
ended September 30, 1996 and $28,311,000 on a pro forma basis for the
year ended December 31, 1996.
(5) The required 1992 balance sheet data for Delsener/Slater has not been
included herein due to the difficulty in preparing an accurate balance
sheet as of that date coupled with management's belief that such
information would not be of substantial use to a potential investor. The
difficulty in preparing an accurate balance sheet is due to the fact
that (i) Delsener/Slater was not audited at such time, (ii)
Delsener/Slater included a number of companies with different fiscal
year ends and (iii) the unaudited balance sheets of Delsener/Slater and
its related entities were not prepared in strict accordance with GAAP
reporting requirements as such entities were privately held. The lack of
usefulness of the information is due to the fact that (i)
Delsener/Slater is the predecessor of SFX Entertainment and therefore
its accounts were adjusted to a new basis upon its acquisition by SFX;
(ii) the balance sheet is principally comprised of cash, leasehold
improvements and accruals for bonuses to the prior owners and would not
include the operating lease for the Jones Beach Amphitheater, which
management believes is Delsener/Slater's most significant operating
agreement and (iii) the balance sheet of Delsener/Slater as of December
31 in any year contains a low level of assets relative to operating
income as the concert business is seasonal with most concerts occurring
in the summer and the promotion business does not require large amounts
of capital investment.
(6) The Unaudited Pro Forma Balance Sheet Data at September 30, 1997 is
presented as if SFX Entertainment had completed the Financing, the
Pending Acquisitions, the Spin-Off and the SFX Merger as of September
30, 1997.
(7) The PACE Agreement provides that each PACE Seller (as defined) 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 SFX Entertainment
to purchase up to one-third of SFX Entertainment's 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 all Fifth Year
Put Options ($16,500,000) has been presented as temporary equity on the
pro forma balance sheet.
(8) Retained earnings on a pro forma basis for the Financing, the Pending
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 SFX Entertainment. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources--Future Charges to Earnings."
(9) Includes 500,000 shares of Class A Common Stock issued to the PACE
Sellers in connection with the Fifth Year Put Option; such shares are
not included in calculating the net loss per common share.
D-12
<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,"
"The Spin-Off" and "Agreements Related to the Pending Acquisitions," 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 initial public offerings. 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 SFX Entertainment'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 SFX
Entertainment's revenues, growth strategies, future profitability and
operating results, or that otherwise could cause actual results to differ
materially from those expressed in or implied by any forward-looking
statement, include the following: lack of operating history as an independent
public company; failure to consummate any or all of the Pending Acquisitions;
inability to enter into and borrow under the Financing; inability to
successfully implement operating strategies (including the achievement of cost
savings); failure to derive anticipated benefits from the Pending
Acquisitions; 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. SFX
Entertainment 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
ACQUISITION BUSINESSES
The business of SFX Entertainment has been developed principally
through the acquisition of established live entertainment businesses, which
have all been acquired since January 1997. Prior to their acquisition by SFX
Entertainment, these acquired companies operated independently. In addition,
each of the Acquisition Businesses currently operates independently, and the
Pending Acquisitions will significantly increase the size and operations of
SFX Entertainment. The Unaudited Pro Forma Condensed Combined Financial
Statements include the combined operating results of the recently acquired
businesses and the Acquisition Businesses during periods when they were not
under common control of management, and therefore may not necessarily be
indicative of the results that would have been attained had SFX Entertainment
and the acquired businesses operated on a combined basis during those periods.
SFX Entertainment's prospects should be considered in light of the numerous
risks commonly encountered in business combinations. Although the anticipated
management of SFX Entertainment has significant experience in other
industries, there can be no assurance that SFX Entertainment's management
group will be able to effectively integrate the Acquisition Businesses. SFX
Entertainment's business, financial condition and results of operations could
be materially adversely affected if SFX Entertainment is unable to retain the
key personnel that have contributed to the historical performances of the
Acquisition Businesses or SFX Entertainment. See "--Dependence on Key
Personnel," "Business" and "Agreements Related to the Pending Acquisitions."
RISKS RELATED TO PENDING ACQUISITIONS
Although management believes that the consummation of the Pending
Acquisitions is in the best interests of SFX Entertainment, it will involve
substantial expenditures and risks on the part of SFX Entertainment. There can
be no assurance that the Pending Acquisitions will be completed successfully
or, if completed, will yield the expected benefits to SFX Entertainment or
will not materially adversely affect SFX Entertainment's business, financial
condition or results of operations.
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Financing Matters
The aggregate purchase price of the Pending Acquisitions is expected
to be approximately $484.3 million, consisting of approximately $352.8 million
in cash, $75.3 million in debt and the issuance of approximately 4.2 million
shares of SFX Entertainment Class A Common Stock with a negotiated value of
$56.2 million. There can be no assurance that the value attributed by the
parties to SFX Entertainment's capital stock will approximate the actual
trading price of the stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In order to consummate the
Pending Acquisitions, SFX Entertainment will require significant new sources
of financing, which it anticipates obtaining through the Financing. However,
there can be no assurance that the Financing will be consummated or, if
consummated, that SFX Entertainment will meet any applicable tests for
borrowing under its proposed credit facility. Pursuant to the expected terms
of the proposed credit facility, pro forma for the 12 months ended September
30, 1997, the maximum amount of funding available to SFX Entertainment under
the facility as of September 30, 1997 would have been approximately $250.4
million. This amount, in addition to the proposed private placement of $275.0
million in debt securities, would be sufficient to consummate the Pending
Acquisitions (including fees and expenses of approximately $39.0 million) as
presently contemplated and the additional uses of funds described in this
Prospectus (including anticipated capital expenditures of approximately $39.0
million and certain other payments and obligations of approximately $11.7
million). However, there can be no assurance that SFX Entertainment will be
able to enter into the proposed credit agreement or have sufficient borrowing
availability under the proposed credit facility to fund the Pending Acquisitions
and for the other uses of funds described herein. If SFX Entertainment is
unable to consummate any or all of the Financing, there can be no assurance
that it will otherwise be able to obtain the necessary financing on terms
comparable to the expected terms of the Financing or on terms otherwise
acceptable to SFX Entertainment. If the Pending Acquisitions are not
consummated due to a material breach by SFX Entertainment (such as an
inability to obtain financing in a timely fashion), then SFX Entertainment
may lose deposits aggregating approximately $2.0 million and be responsible
for other damages resulting from any potential breach of the agreements
relating to the Pending Acquisitions. In addition, if Proposal 3 in the
attached Proxy Statement (a proposal that will allow the Spin-Off to occur
as currently structured) is not approved, that failure would result in a
"Change of Control" pursuant to the expected terms of the credit facility.
In that event, there can be no assurance that SFX Entertainment would be
able to obtain a waiver of that provision, and there can be no assurance of
the terms, if any, under which such a waiver could be obtained. The failure
to obtain such a waiver could result in a material adverse effect to SFX
Entertainment's business, results of operations and financial condition.
SFX Entertainment's ability to borrow under the proposed credit facility or
to obtain other financing may be restricted by the terms of the indenture
governing its proposed privately-placed debt. See "Description of Indebtedness."
The cash portion of the purchase price in the Pending Acquisitions is
subject to increase under certain circumstances, including, in particular, if
SFX Entertainment is unable to issue shares of its capital stock to certain of
the sellers by virtue of having failed to consummate the Spin-Off or for any
other reason. In that case, the aggregate cash consideration that would be
owed to the sellers in the Pending Acquisitions would increase by
approximately $56.2 million, resulting in a corresponding increase in debt and
decrease in stockholders' equity. Although management believes that the
Spin-Off is likely to occur, the Spin-Off is subject to certain conditions,
some of which are outside of management's control, and there can be no
assurance that the Spin-Off will be consummated on the terms presently
contemplated or at all. In addition, the agreements relating to the Pending
Acquisitions provide for certain other purchase price adjustments and future
contingent payments in certain circumstances. There can be no assurance that
SFX Entertainment will have sufficient sources of available capital to pay any
material increases in cash consideration or satisfy future contingent cash
payment obligations in connection with the Pending Acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Pending Acquisitions and --Liquidity and Capital Resources" and
"Agreements Related to the Pending Acquisitions."
Furthermore, consummation of the Pending Acquisitions will result in
substantial charges to earnings relating to interest expense and the
recognition and amortization of goodwill; these charges would increase SFX
Entertainment's losses or reduce or eliminate its earnings, if any. See
"Agreements Related to the Pending Acquisitions," "Unaudited Pro Forma
Condensed Combined Financial Statements" (including the notes thereto) and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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PACE Acquisition
The Pavilion Partners partnership agreement contains a provision (the
"Pavilion Exclusivity Provision") that restricts PACE and its affiliates from
directly or indirectly owning or operating amphitheaters outside of Pavilion
Partners, with certain limited exceptions. If SFX Entertainment consummates
the PACE Acquisition but not the Pavilion Acquisition, absent an amendment to
the partnership agreement, SFX Entertainment may be in breach of the Pavilion
Exclusivity Provision. The partnership agreement provides for certain
cumulative remedies available to the non-breaching partner, including, among
other things, the right to (a) sue for damages, (b) seek an injunction, (c)
deny the breaching partner any of its voting, consent or approval rights under
the partnership agreement and (d) where the nature of the damages incurred by
the non-breaching partner is difficult or impossible to ascertain, purchase
the breaching partner's entire interest in Pavilion Partners for 75% of the
balance of the breaching partner's capital account. Management believes that
the Pavilion Acquisition will be consummated; however, there can be no
assurance that any portion of the Pavilion Acquisition will be consummated on
the terms described in this Prospectus or at all. In addition, if SFX
Entertainment consummates the PACE Acquisition but fails to consummate all of
the Pavilion Acquisition, there can be no assurance that the Pavilion Partners
partnership agreement will be amended to remove the Pavilion Exclusivity
Provision. See "Agreements Related to the Pending Acquisitions--PACE
Acquisition--Pavilion Acquisition."
SFX Entertainment has agreed to waive the condition to the closing of
the PACE Acquisition that the sellers deliver all of the outstanding shares of
PACE, if the sellers deliver 85% of the shares at closing. If only 85% of the
outstanding shares are delivered, SFX Entertainment intends to effect a
cash-out merger of the remaining stockholders of PACE. However, there can be
no assurance that any cash-out merger will occur on terms as favorable to SFX
Entertainment as those contemplated in the PACE Acquisition agreement.
Furthermore, pursuant to the terms of the PACE Acquisition agreement, PACE
provided a final bring down of its representations and warranties to December
24, 1997. As a consequence, if SFX Entertainment closes the PACE Acquisition,
it will assume the risk of any material adverse changes in the business of
PACE subsequent to that date.
The PACE Agreement provides that each PACE Seller (as defined herein)
will have an option, exercisable for 90 days after the fifth anniversary of
the closing of the PACE Acquisition, to require SFX Entertainment to
repurchase up to one-third of the SFX Entertainment Class A Common Stock
received by that PACE 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 PACE Sellers. In certain circumstances, if
the selling price of SFX Entertainment Class A Common Stock is less than
$13.33 per share, SFX Entertainment may be required to make an offer to those
PACE Sellers to provide an additional cash payment or additional shares of SFX
Entertainment Class A Common Stock, which each PACE Seller will have the
option of taking. See "Agreements Related to the Pending Acquisitions--PACE
Acquisition."
Contemporary Acquisition
In addition, pursuant to the terms of the Contemporary Acquisition
agreement, SFX Entertainment has agreed to make payments to any Contemporary
sellers who own shares of SFX Entertainment 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 SFX Entertainment Class A
Common Stock for 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 SFX Entertainment Class A Common Stock will be $13.33 per share at that
time. See "Agreements Related to the Pending Acquisitions--Contemporary
Acquisition."
General
As a result of the foregoing, there can be no assurance as to when
the Pending Acquisitions will be consummated or that they will be consummated
on the terms described in this Prospectus or at all. Furthermore, the
consummation of the Pending Acquisitions may fail to conform to the
assumptions used in the preparation of the Unaudited Pro Forma Condensed
Combined Financial Statements included herein. Therefore, in analyzing the
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Unaudited Pro Forma Condensed Combined Financial Statements and other
information, stockholders should consider that the Pending Acquisitions may
not be consummated at all or on the terms described in this Prospectus. In
addition, although SFX Entertainment and SFX have conducted a due diligence
investigation of the Acquisition Businesses, the scope of their investigation
has been limited. Although the agreements governing the Pending Acquisitions
generally provide for indemnification from the seller for a limited period of
time with respect to certain matters, the indemnification is subject to
thresholds and limitations, and it is possible that other material matters not
identified in due diligence will subsequently be identified or that the
matters heretofore identified will prove to be more significant than currently
expected. See "Agreements Related to the Pending Acquisitions."
Although none of the Pending Acquisitions (except one acquisition of
an interest in Pavilion Partners) is conditioned on the consummation of any
other Pending Acquisition, consummation of each of the Pending Acquisitions is
subject to the satisfaction or waiver of a number of closing conditions,
certain of which are beyond SFX Entertainment's control, including the
approval of Proposal 3 in the attached Proxy Statement by SFX's stockholders
and, in certain cases, approvals under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"). The failure to satisfy
these conditions would permit each of the parties to the acquisition
agreements to refuse to consummate the respective Pending Acquisitions. For a
more complete description of the closing conditions for each of the Pending
Acquisitions, see "Agreements Related to the Pending Acquisitions."
CONTROL OF MOTOR SPORTS AND THEATRICAL BUSINESSES
Pursuant to the employment agreement entered into between Brian
Becker and SFX Entertainment in connection with the PACE Acquisition, Mr.
Becker has the option, exercisable within 15 days after the second anniversary
of the consummation of the PACE Acquisition, to acquire SFX Entertainment's
then existing motor sports line of business (or, if that line of business has
previously been sold, SFX Entertainment'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 SFX Entertainment's business,
financial condition and results of operations. In addition, Mr. Becker also
has the right under certain circumstances to acquire the theatrical or motor
sports line of business at a price equal to 95% of the proposed purchase
price. See "Agreements Related to the Pending Acquisitions--PACE
Acquisition--Becker Employment Agreement." On a pro forma basis giving effect
to the Pending Acquisitions, specialized motor sports would have comprised
approximately 6%, and theater would have comprised approximately 17%, of SFX
Entertainment's total net revenues for the 12 months ended September 30, 1997.
BGP RIGHT OF FIRST REFUSAL
SFX Entertainment has agreed that it will not sell all, or
substantially all, of BGP's assets (as of December 11, 1997) for three years
following the consummation of the BGP Acquisition without offering the BGP
Sellers (as defined herein) the opportunity to purchase the assets on the same
terms as those included in any bona fide offer received by SFX Entertainment
from any third party. See "Agreements Related to the Pending Acquisitions--BGP
Acquisition."
CONTROL OF DELSENER/SLATER
After the consummation of the SFX Merger, the senior management of
Delsener/Slater may have the right pursuant to their employment agreements (a)
to purchase the outstanding capital stock of Delsener/Slater 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
Delsener/Slater exceeds the fixed payment portion of the cash purchase price
of the acquisition of Delsener/Slater, plus 20% interest thereon. The senior
management of Delsener/Slater and SFX have reach 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 and SFX Entertainment or at all. In
addition, although SFX Entertainment 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."
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FUTURE ACQUISITIONS
SFX Entertainment expects to pursue additional acquisitions of live
entertainment businesses in the future, although SFX Entertainment has no
present understandings, commitments or agreements with respect to any
acquisitions besides the Pending Acquisitions. Future acquisitions by SFX
Entertainment could result in (a) potentially dilutive issuances of equity
securities, (b) the incurrence of substantial additional indebtedness and/or
(c) the amortization of expenses related to goodwill and other intangible
assets, any or all of which could materially adversely affect SFX
Entertainment'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, SFX Entertainment's business,
financial condition and results of operations may be materially adversely
affected.
EXPANSION STRATEGY; NEED FOR ADDITIONAL FUNDS
SFX Entertainment intends to pursue additional expansion
opportunities. 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 SFX
Entertainment's lenders. Any debt financing would require payments of
principal and interest and would adversely impact SFX Entertainment's cash
flow. Additional financing for future acquisitions may be unavailable and,
depending on the terms of the proposed acquisitions and financings, may be
restricted by the terms of the credit agreement and privately-placed debt
securities contained in the Financing. See "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 SFX Entertainment'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, SFX
Entertainment's business, financial condition and results of operations might
be materially adversely affected.
SUBSTANTIAL LEVERAGE
SFX Entertainment is, and after the Financing will continue to be,
highly leveraged. As of September 30, 1997, on a pro forma basis giving effect
to the Financing, the Pending Acquisitions and the Spin-Off, SFX
Entertainment's consolidated indebtedness would have been approximately $497.3
million, its temporary equity would have been approximately $16.5 million, and
its stockholders' equity would have been approximately $143.2 million. See
"Unaudited Condensed Combined Pro Forma Financial Statements." If SFX
Entertainment is unable to issue shares of capital stock, and thus is
obligated to pay cash to the sellers in the Pending Acquisitions in lieu of
issuing shares of its common stock, then its total pro forma indebtedness
would increase by $56.2 million, and its pro forma stockholders' equity would
decrease by a similar amount. On a pro forma basis for the Pending
Acquisitions and the Financings, SFX Entertainment's ratio of total debt to
total capitalization as of September 30, 1997 would have been 1.3 to 1 (1.2 to
1 if SFX Entertainment is obligated to pay cash in lieu of issuing shares),
and its ratio of earnings to fixed charges for the nine months ended September
30, 1997 would have been 1.2 to 1. Although management believes that the
Spin-Off is likely to occur, the Spin-Off is subject to certain conditions,
some of which are outside of management's control. There can be no assurance
that the Spin-Off will be consummated on the terms presently contemplated, or
at all. Certain of the agreements relating to the Pending 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--Pending Acquisitions." In addition, SFX
Entertainment may incur substantial additional indebtedness from time to time
to finance future acquisitions, for capital expenditures or for other
purposes. See "Capitalization" and "Unaudited Condensed Combined Pro Forma
Financial Statements."
SFX Entertainment's ability to make scheduled payments of principal
of, 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
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extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors beyond its control, as well as the success of the
Acquisition Businesses and their integration into SFX Entertainment's
operations. Based on the current level of operations of SFX Entertainment and
the Acquisition Businesses and anticipated cost savings and revenue growth,
management believes that, following the consummation of the Pending
Acquisitions, cash flow from operations and available cash, together with
anticipated borrowings under the proposed credit agreement, will be adequate
to meet SFX Entertainment's future liquidity needs until at least December 31,
1999. However, SFX Entertainment may be unable to make planned borrowings,
including the Financing; SFX Entertainment's business and the acquired
businesses may not generate sufficient cash flow from operations; anticipated
improvements in operating results may not be achieved; and future working
capital borrowings may be unavailable in an amount sufficient to enable SFX
Entertainment to service its indebtedness, to make necessary capital or other
expenditures or to fund its other liquidity needs. SFX Entertainment may be
required to refinance a portion of the principal amount of its indebtedness
prior to their respective maturities. However, SFX Entertainment may be unable
to effect any refinancing on commercially reasonable terms or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The degree to which SFX Entertainment will be leveraged following the
Financing could have material consequences to the holders of shares of SFX
Entertainment's Common Stock, including, but not limited to, (a) increasing
SFX Entertainment's vulnerability to general adverse economic and industry
conditions, (b) limiting SFX Entertainment'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 SFX Entertainment'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 SFX
Entertainment's flexibility in planning for, or reacting to, changes in its
business and the industry and (e) placing SFX Entertainment at a competitive
disadvantage to less leveraged competitors. In addition, the instruments
governing SFX Entertainment's indebtedness are likely to contain financial and
other restrictive covenants that will limit the ability of SFX Entertainment
to, among other things, borrow additional funds. Failure by SFX Entertainment
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 SFX
Entertainment's business, financial condition and results of operations. SFX
Entertainment anticipates that the indebtedness to be incurred under the
proposed credit facility will be 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, SFX Entertainment anticipates that the debt it
incurs in the Financing will be guaranteed by its subsidiaries. See
"Description of Indebtedness."
[INABILITY TO OBTAIN CONSENTS REQUIRED FOR SPIN-OFF]
[If SFX is unable to obtain the consents required from the holders of
its Series E Preferred Stock and certain outstanding notes, it will be unable
to consummate the Spin-Off and the Financing as described herein. In that
event, SFX may be obligated pursuant to the SFX Merger Agreement to dispose of
SFX Entertainment in some other manner. If SFX does not consummate the
Spin-Off or another disposition of SFX Entertainment, then SFX Buyer may
refuse to consummate the SFX Merger or may elect to consummate the SFX Merger,
effectively purchasing SFX Entertainment for an additional $42.5 million. In
addition, if SFX Entertainment is unable to obtain the consents required to
consummate the Financing, it (or SFX) will be required to seek alternative
financing to consummate the Pending Acquisitions.]
ECONOMIC CONDITIONS AND CONSUMER TASTES
SFX Entertainment'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 SFX Entertainment's
revenues. In addition, the profitability of events promoted or produced by SFX
Entertainment 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
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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 SFX
Entertainment to predict the success of any music concert, theatrical show or
motor sports event. In addition, decreased attendance, a change in public
tastes or an increase in competition could have a material adverse effect on
SFX Entertainment's business, financial condition and results of operations.
AVAILABILITY OF ARTISTS AND EVENTS
SFX Entertainment's and the Acquisition Businesses' success and
ability to sell tickets (including subscriptions) are highly dependent on the
availability of popular musical artists, Touring Broadway Shows and
specialized motor sports talent, among other performers of live entertainment.
SFX Entertainment's and the Acquisition 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 SFX Entertainment in the future. The
lack of availability of these artists and productions could have a material
adverse effect on SFX Entertainment's business, financial condition and
results of operations.
CONTROL OF VENUES
SFX Entertainment and the Acquisition Businesses operate a number of
their live entertainment venues under leasing or booking agreements, and
accordingly SFX Entertainment'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 SFX Entertainment 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--SFX Entertainment's Live
Entertainment Activities--Venue Operations."
RESTRICTIONS IMPOSED BY SFX ENTERTAINMENT'S INDEBTEDNESS
It is anticipated that the instruments governing SFX Entertainment's
indebtedness incurred in the Financing will contain a number of significant
covenants that, among other things, will restrict the ability of SFX
Entertainment 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. There can be no
assurance that these restrictions will not adversely affect SFX
Entertainment's ability to finance its future operations or capital needs or
engage in other business activities that may be in the interest of SFX
Entertainment. In addition, it is anticipated that the instruments governing
SFX Entertainment's indebtedness will also require SFX Entertainment to
maintain compliance with certain financial ratios, including 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. SFX Entertainment'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 SFX Entertainment to comply with the required financial
ratios or limits could result in an event of default under any credit
facility. Such an event of default could permit the lenders to declare all
borrowings outstanding to be due and payable, to require SFX Entertainment to
apply all of its available cash to repay its borrowings or to prevent SFX
Entertainment from making debt service payments on certain portions of its
outstanding indebtedness. If SFX Entertainment were unable to repay any
borrowings when due, the lenders could proceed against their collateral. SFX
Entertainment's senior credit facility is likely to require SFX Entertainment
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 SFX Entertainment's indebtedness were to be
accelerated, there can be no assurance that the assets of SFX Entertainment
would be sufficient to repay its indebtedness in full. See "Description of
Indebtedness."
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NO PRIOR MARKET FOR SFX ENTERTAINMENT STOCK
There has been no prior trading market for any stock of SFX
Entertainment. Although SFX Entertainment intends to seek listing of the SFX
Entertainment Class A Common Stock on the Nasdaq National Market or on a
national exchange, there can be no assurance that it will be initially listed
on the Nasdaq National Market or elsewhere or will continue to be listed in
the future. Even if a trading market does develop in the SFX Entertainment
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
SFX Entertainment Class A Common Stock in the market at any particular time.
In addition, until the SFX Entertainment Class A Common Stock is fully
distributed and an orderly market develops, the trading prices of SFX
Entertainment Class A Common Stock may fluctuate significantly. There can be
no assurance as to the trading prices of SFX Entertainment Class A Common
Stock before or after the Spin-Off. See "Shares Eligible for Future Sale."
WORKING CAPITAL ADJUSTMENTS AND REPAYMENT OF ADVANCES
Pursuant to the Distribution Agreement, SFX Entertainment must pay
SFX any net negative Working Capital at the time of consummation of the SFX
Merger. Alternatively, SFX must pay to SFX Entertainment any net positive
Working Capital. Therefore, the capitalization of SFX Entertainment will
depend, to a large extent, on the operating results of SFX through the date of
the SFX Merger. As of September 30, 1997, SFX Entertainment estimates that
Working Capital to be received by SFX Entertainment would have been
approximately $2.1 million. The actual amount of Working Capital as of the
closing of the SFX Merger may differ substantially from the amount as of
September 30, 1997, and will be a function of, among other things, the
operating results of SFX through the date of the SFX Merger and the actual
cost of consummating the SFX Merger and the related transactions. If SFX
Entertainment is required to make Working Capital payments to SFX, there can
be no assurance that SFX Entertainment will have the funds to do so or that it
will have sufficient funds to conduct its operations after making the required
payments.
In addition, at the time of the Spin-Off, SFX Entertainment must
repay sums advanced to it by SFX for certain acquisitions or capital
expenditures after August 25, 1997 and not repaid at or before the closing of
the Spin-Off. As of January 15, 1998, SFX had advanced approximately $6.5
million to SFX Entertainment for use in connection with certain acquisitions
and capital expenditures. SFX Entertainment intends to repay these amounts
from the proceeds of the Financing. SFX may advance additional amounts to SFX
Entertainment for these purposes before the consummation of the Spin-Off. See
"Agreements Between SFX Entertainment and SFX--Distribution Agreement."
CONTROL BY MANAGEMENT; STOCK ISSUED TO MANAGEMENT
At the time of completion of the Spin-Off (assuming that Proposal 3
in the Proxy Statement is approved), and after the grant of additional shares
as described in "Management--Employment Agreements and Arrangements with
Certain Directors and Officers" and "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX's Options and SARs," it is
anticipated that Mr. Sillerman will beneficially own approximately 35% of the
voting power of the SFX Entertainment Common Stock, and that all directors and
executive officers of SFX Entertainment will beneficially own approximately
45.7% of the total voting power of the SFX Entertainment Common Stock, and
that all directors and executive officers together will beneficially own
approximately 52.3% of the total voting power of the SFX Entertainment Common
Stock. Accordingly, these persons will have substantial influence over the
affairs of SFX Entertainment, including the ability to control the election of
a majority of the board of directors of SFX Entertainment (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. In addition, the issuance of these shares of SFX Entertainment
Common Stock to certain members of senior management of SFX Entertainment in
connection with their employment with SFX Entertainment will result in
substantial non-cash charges to operations, which could increase SFX
Entertainment's losses or reduce or eliminate its earnings, if any. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Management," "Principal Stockholders" and "Description of
Capital Stock."
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DEPENDENCE ON KEY PERSONNEL
The success of SFX Entertainment depend substantially on the
abilities and continued service of certain of its (and its subsidiaries')
executive officers and directors. In particular, SFX Entertainment will depend
on the continued services of Robert F.X. Sillerman, Michael G. Ferrel,
Geoffrey Armstrong, Howard J. Tytel and Thomas P. Benson. Although these
individuals 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 SFX's directors and executive
officers are also acting as directors and executive officers of SFX
Entertainment. 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 (which may detract from their performance with
respect to SFX Entertainment). If the SFX Merger is not consummated, there can
be no assurance that SFX Entertainment will be able to retain the services of
these directors and executive officers. See "The Spin-Off" and "Management."
SFX and Messrs. Sillerman and Ferrel have reached agreements in principle that
those individuals will serve as officers and directors of SFX Entertainment.
However, if Proposal 3 in the Proxy Statement is not approved, there can be no
assurance that they will serve in that capacity, in which event SFX intends to
pursue alternative means of disposing of SFX Entertainment. In addition, if
Proposal 3 in the Proxy Statement is not approved, that failure would likely
result in a "Change of Control" pursuant to the expected terms of the proposed
senior credit facility. In that event, SFX Entertainment might be unable to
obtain a waiver of that provision of the credit facility, or might be required
to make substantial concessions to the lenders under the credit facility in
order to obtain such a waiver. The failure to obtain such a waiver could
result in a material adverse effect to SFX Entertainment's business, results
of operation and financial condition.
Messrs. Sillerman and Tytel are also officers and directors of and
have an aggregate equity interest of approximately 9.2% 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 Broadcasting Company ("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 SFX Entertainment. 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.
Furthermore, the operations of each of the businesses to be acquired
in the Pending Acquisitions are local in nature and depend to a significant
degree on the continued services of between one to three individuals at each
business, all of whom SFX Entertainment anticipates employing pursuant to
written employment agreements after the Pending Acquisitions are consummated.
See "Management" and "Certain Relationships and Related Transactions." SFX
Entertainment anticipates that each of these individuals will make significant
contributions to its business, and the loss of their services could have a
material adverse effect on SFX Entertainment's business, financial condition
and results of operations. There can be no assurance that SFX Entertainment
will be able to retain the services of these individuals. See "Management."
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 9.2% in Marquee; Mr. Sillerman is the chairman of the board of
directors, and Mr. Tytel is a director, of Marquee. See "Certain Relationships
and Related Transactions--Potential Conflicts of Interest." SFX Entertainment
anticipates that, from time to time, it will enter into transactions and
arrangements (particularly, booking arrangements) with Marquee and Marquee's
clients, and it may compete with Marquee for specific concert promotion
engagements. In any transaction or arrangement with Marquee, Messrs. Sillerman
and Tytel are likely to have conflicts of interest as officers and directors
of SFX Entertainment. Any such transaction or arrangement will be subject to
the approval of the independent committees of SFX Entertainment and SFX,
except that booking arrangements in the ordinary course of business will be
subject to periodic review but not the approval of each particular
arrangement.
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In addition, Marquee acts as a promoter of various sporting events
and sports personalities. At the time of the consummation of the Contemporary
Acquisition, SFX Entertainment will produce 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."
In addition, prior to the consummation of the SFX Merger, Mr.
Sillerman and other members of SFX Entertainment's management team will have
management obligations to both SFX and Entertainment that may cause them to
have certain conflicts of interest. See "Management--Employment Agreements and
Arrangements with Certain Officers and Directors" and "Certain Relationships
and Related Transactions--Potential Conflicts of Interest."
Pursuant to the employment agreement entered into between Brian
Becker and SFX Entertainment, Mr. Becker has the option, exercisable within 15
days after the second anniversary of the consummation of the PACE Acquisition,
to acquire SFX Entertainment's then existing motor sports line of business
(or, if that line of business has previously been sold, SFX Entertainment'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 SFX Entertainment in evaluating proposals for the acquisition or
development of either line of business. See "Agreements Related to the Pending
Acquisitions--PACE Acquisition."
INDEMNIFICATION ARRANGEMENTS
In the Distribution Agreement, SFX Entertainment will agree to
indemnify, defend and hold SFX and its subsidiaries harmless from and against
certain liabilities to which SFX 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 SFX
Entertainment in the Spin-Off), debts or liabilities of SFX Entertainment and
its subsidiaries (collectively, the "SFX Entertainment Group"). Although SFX
Entertainment does not anticipate that any material liabilities for which it
has agreed to indemnify SFX and its subsidiaries will arise, it is possible
that SFX Entertainment will become subject to these liabilities. Any of these
liabilities may have a material adverse effect on SFX Entertainment's
business, financial condition or results of operations. See "Agreements
Between SFX Entertainment and SFX--Distribution Agreement." In addition,
pursuant to the tax sharing agreement to be entered into between SFX
Entertainment and SFX (the "Tax Sharing Agreement"), SFX Entertainment may be
responsible for certain taxes resulting from the Spin-Off. See "Agreements
Between SFX Entertainment and SFX--Tax Sharing Agreement."
Concurrently with the execution of the SFX Merger Agreement, Mr.
Sillerman waived his right to receive indemnification from SFX, 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 can
be reimbursed under the terms of its directors' and officers' liability
insurance. It is anticipated that, after the Spin-Off, SFX Entertainment 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 (which will be assumed by SFX
Entertainment pursuant to the SFX Merger Agreement), SFX Entertainment 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 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."
SEASONALITY
SFX Entertainment'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 Recent
Acquisitions, SFX Entertainment generated approximately 70% of its revenues in
the second and third quarters for the 12 months ending September 30, 1997. SFX
Entertainment'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 SFX Entertainment promotes largely occur
in the second and third quarters. To the extent that SFX Entertainment's
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entertainment marketing and consulting relate to musical concerts, they also
predominantly generate revenues in the second and third quarters. Therefore,
the seasonality of SFX Entertainment's business causes (and will probably
continue to cause) a significant variation in SFX Entertainment's quarterly
operating results. These variations in demand could have a material adverse
effect on the timing of SFX Entertainment's cash flows and, therefore, on its
ability to service its obligations with respect to its indebtedness. However,
SFX Entertainment believes that this variation may be somewhat offset with the
acquisition of typically non-summer seasonal businesses in the Pending
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. SFX Entertainment
competes both 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, SFX Entertainment's marketing and
consulting operations compete with advertising agencies and other marketing
organizations. SFX Entertainment and the Acquisition 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 SFX Entertainment's
competitors may have greater operating and financial flexibility than SFX
Entertainment. 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 SFX Entertainment. There can be no assurance
that SFX Entertainment will be able to compete successfully in this market or
against these competitors. See "Business--Competition."
REGULATORY MATTERS
SFX Entertainment's business is not generally subject to material
governmental regulation. However, if SFX Entertainment 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 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 HSR Act. Other types of licenses, approvals and permits from governmental
or quasi-governmental agencies might also be required for other opportunities
that SFX Entertainment may pursue in the future, although SFX Entertainment
has no agreements or understandings with respect to these opportunities at
this time. There can be no assurance that SFX Entertainment 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
SFX Entertainment has real property relating to its business,
consisting of fee interests, leasehold interests and other contractual
interests. SFX Entertainment'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 nonhazardous
substances, materials or wastes, including laws relating to noise emissions
(which may affect, among other things, the hours of operation of SFX
Entertainment's venues). Further, under certain of these laws and regulations,
SFX Entertainment 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. SFX Entertainment
believes that it is, and the properties to be acquired in the Pending
Acquisitions are, in substantial compliance with all of these laws and
regulations, and has performed preliminary environmental assessments of all of
the properties that are (or after consummating the Pending Acquisitions will
be) wholly-owned, without identifying material environmental hazards. Although
the level of future expenditures cannot be determined with certainty, SFX
Entertainment does not anticipate, based on currently known facts, that its
environmental costs are likely to have a material adverse effect on SFX
Entertainment's business, financial condition and results of operations.
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FRAUDULENT CONVEYANCE
The Board of Directors of SFX does not intend to consummate the
Spin-Off unless it is satisfied that SFX 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 to be
binding on creditors of SFX or that a court would reach the same conclusions
as the Board of Directors of SFX in determining that SFX 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 (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 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's shareholders to return the
shares of SFX Entertainment distributed in the Spin-Off (in whole or in part)
to SFX or require SFX Entertainment to fund certain liabilities of SFX for the
benefit of SFX's creditors. If the assets of SFX Entertainment were recovered
as fraudulent transfers by a creditor or trustee of SFX, the relative priority
of right to payment between any Financing and any fraudulent transfer claimant
would be unclear and SFX Entertainment 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 surplus.
Indebtedness of SFX Entertainment is being incurred to finance the Pending
Acquisitions, to refinance certain indebtedness of SFX Entertainment and the
Pending Acquisitions, to pay related fees and expenses, and for general
corporate purposes. Management believes that the indebtedness of SFX
Entertainment represented by the Financing is being 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 and the Pending
Acquisitions, SFX Entertainment will be solvent, will have sufficient capital
for carrying on its business and will be able to pay its debts as they mature.
SFX Entertainment believes that, in accordance with the facts
examined in connection with the Spin-Off and the Financing, (a) SFX and SFX
Entertainment will be solvent at the time of the Spin-Off and the Financing,
respectively, and (b) the Spin-Off will be made entirely out of SFX surplus in
accordance with applicable law. However, SFX Entertainment cannot predict what
standard a court might apply in evaluating these matters, and it is possible
that the court would disagree with SFX Entertainment's conclusions.
ANTI-TAKEOVER EFFECTS
The Amended and Restated Certificate of Incorporation of SFX
Entertainment (the "SFX Entertainment Certificate"), the By-laws of SFX
Entertainment (the "SFX Entertainment By-laws") and the Delaware General
Corporation Law (the "DGCL") contain (or will contain) several provisions that
could have the effect of delaying, deferring or preventing a change of control
of SFX Entertainment in a transaction not approved by the Board. The SFX
Entertainment Certificate will provide for the issuance of shares of SFX
Entertainment 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 SFX Entertainment if they so desire. In addition, the SFX
Entertainment Certificate will authorize 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 SFX Entertainment and may adversely affect the rights of holders of SFX
Entertainment Common Stock. Furthermore, SFX Entertainment is subject to the
anti-takeover provisions of Section 203 of the DGCL, which prohibit SFX
Entertainment 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 change of control of SFX
Entertainment. The Board has also adopted certain other
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programs, plans and agreements with its management and/or employees that may
make a change of control more expensive. See "Description of Capital Stock."
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OVERVIEW OF THE LIVE ENTERTAINMENT INDUSTRY
CONCERT PROMOTION INDUSTRY
The concert promotion industry consists primarily of regional
promoters focused generally in one or two major metropolitan markets.
According to Amusement Business, industry gross box office receipts for North
American concert tours totaled $922 million in 1996, compared to $322 million
in 1985, representing a compounded annual growth rate of approximately 10%.
SFX Entertainment 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 SFX Entertainment, 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. 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
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presentation outside of New York City. Touring Broadway Shows are typically
revivals of previous commercial successes or reproductions of theatrical shows
currently playing on Broadway in New York City ("Broadway Shows").
Live professional theater consists mainly of the production of
existing musical and dramatic works and the development of new works. In
general, musicals require more investment of time and capital than dramatic
productions. For an existing musical work (which is more likely to be
presented as a Touring Broadway Show), a period of 12 to 24 months typically
elapses between the time a producer acquires the theatrical stage rights and
the date when the musical is first performed before the public. During this
time, a touring company is assembled and the show is readied for the road. By
comparison, dramatic productions have smaller production budgets, shorter
pre-production periods, 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.
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BUSINESS
There can be no assurance that any or all of the Pending Acquisitions
will be consummated on the terms described herein, or at all.
GENERAL
SFX Entertainment, Inc. is a promoter of, and operator of venues for,
live entertainment events. Upon consummation of the Pending Acquisitions, SFX
Entertainment will be a diversified promoter and producer of live
entertainment, including music concerts, theatrical shows and specialized
motor sports events. In addition, SFX Entertainment's venue network (currently
comprised of 20 venues) will consist of 41 venues (consisting of
amphitheaters, theaters and clubs) either directly owned or operated under
lease or exclusive booking arrangement. During 1997, approximately 1.4 million
people attended approximately 210 events promoted and/or produced by SFX
Entertainment, including approximately 200 music concerts. During the same
year, approximately 25 million people attended 9,100 events promoted and/or
produced by SFX Entertainment and the Acquisition Businesses, including
approximately 3,880 music concerts, 4,850 theatrical shows and 188 specialized
motor sports events.
SFX Entertainment'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 SFX Entertainment and in
third-party venues. As promoter, SFX Entertainment 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, SFX Entertainment, upon consummation of the Pending
Acquisitions, will (a) create tours for music concert, theatrical, specialized
motor sports and other events, (b) develop and manage Touring Broadway Shows
and (c) develop specialized motor sports and other live entertainment events.
In connection with its live entertainment events, SFX Entertainment 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 Pending
Acquisitions, SFX Entertainment's music and ancillary businesses would have
comprised approximately 77%, theater would have comprised approximately 17%
and specialized motor sports would have comprised approximately 6% of SFX
Entertainment's total net revenues for the 12 months ended September 30, 1997.
CURRENT AND HISTORICAL OPERATIONS
SFX Entertainment, currently a wholly-owned subsidiary of SFX, was
formed in January of 1997 to acquire and hold SFX's live entertainment
operations. SFX acquired Delsener/Slater, a New York-based concert promotion
company, in January 1997. Delsener/Slater has long-term leases or is the
exclusive promoter for several 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 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 acquired Sunshine
Promotions, a concert promoter in the Midwest. As a result of the acquisition
of Sunshine Promotions, SFX Entertainment owns the Deer Creek Music Theater, a
21,000-seat complex located in Indianapolis, Indiana and the Polaris
Amphitheater, a 20,000-seat complex located in Columbus, Ohio, and has a
long-term lease to operate the Murat Centre, a 2,700-seat theater and
2,200-seat ballroom located in Indianapolis, Indiana. In certain cases, the
senior management of Delsener/Slater have certain rights to purchase the
outstanding stock of Delsener/Slater, along with certain other rights to
receive additional cash payments. See "Risk Factors--Control of
Delsener/Slater" and "Certain Relationships and Related
Transactions--Delsener/Slater Employment Agreements." SFX Entertainment has
also acquired rights or ownership interests in various additional venues, as
set forth in "SFX Entertainment's Live Entertainment Activities--Venue
Operation."
SFX was formed in 1992 principally to acquire and operate radio
broadcasting stations. In August 1997, SFX agreed to the SFX Merger, and to
the Spin-Off of SFX Entertainment to the stockholders of SFX on a pro rata
basis. Before consummating the SFX Merger, SFX intends (a) to contribute its
concert and other live entertainment operations
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to SFX Entertainment and (b) to distribute all of the outstanding shares of
common stock of SFX Entertainment to the holders of common stock, Series D
preferred stock and certain warrants of SFX in the Spin-Off. SFX Entertainment
intends to consummate the Financing and the Pending Acquisitions before the
Spin-Off and the SFX Merger. SFX intends to consummate the Spin-Off on or
prior to the consummation of the SFX Merger. The Spin-Off is subject to
certain conditions, including (a) the acceptance for listing or trading of the
SFX Entertainment Class A Common Stock, subject to official notice of
issuance, on a national exchange or The Nasdaq Stock Market and (b) the
receipt of all necessary third-party and stockholder consents to the Spin-Off
as presently contemplated (including the consents currently being sought of
the holders of SFX's Series E preferred stock and certain notes). There can be
no assurance that the conditions to the Spin-Off will be satisfied or that the
Pending Acquisitions will be consummated prior to the Spin-Off on the terms
described herein or at all. However, the Spin-Off is not conditioned on the
prior consummation of the Financing, any of the Pending Acquisitions or the
SFX Merger. Management believes that the Spin-Off is likely to be consummated
early in the second quarter of 1998, although there can be no assurance that
the Spin-Off will be consummated on the terms described herein or at all.
SFX ENTERTAINMENT'S LIVE ENTERTAINMENT ACTIVITIES
SFX Entertainment is, and after the consummation of the Pending
Acquisitions will be to a heightened extent, 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.
Booking and Promotion
Currently, SFX Entertainment books and promotes music concert and
other live entertainment events, principally in the New York--Northern New
Jersey--Long Island, Indianapolis, Columbus, Hartford and Rochester markets.
SFX Entertainment and the Acquisition Businesses book and promote 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. SFX
Entertainment and the Acquisition Businesses book and promote events in a
number of types of venues (including amphitheaters, theaters, clubs, arenas
and stadiums) that are owned and/or operated by SFX Entertainment, by the
Acquisition Businesses or by third parties. See "--Venue Operations." SFX
Entertainment and the Acquisition Businesses primarily promote 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 Buffet). Operating profit per show for concerts performed by
either type of group tends to be generally similar because the more popular
new groups command significantly higher ticket prices but also require higher
compensation, while more established groups may draw larger audiences.
Moreover, SFX Entertainment believes that its large distribution network upon
consummation of the Pending Acquisitions will enable it to set an aggregate
guarantee for a series of shows, mitigating the risk of loss associated with a
single show. SFX Entertainment also believes that the market research and
audience demographics database that it will acquire in the Pending
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 SFX Entertainment believes will
increase ticket pre-sales and overall sales in a cost-efficient manner. In
addition, Contemporary's Capital Tickets retail distribution outlets and
Dialtix interactive, voice-response automated phone ticket order system are
currently operating in three markets. SFX Entertainment believes that
expanding the markets where it can utilize its own ticketing sources will
permit SFX Entertainment to promote its live entertainment events more
effectively. The following table identifies artists whose events were recently
promoted by SFX Entertainment or the Acquisition Businesses:
D-29
<PAGE>
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
* National tour produced.
Production
SFX Entertainment is currently involved in the creation of tours for
music concert and other live entertainment events. Upon consummation of the
Pending Acquisitions, SFX Entertainment's, production activities will be
broadened to 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 Acquisition Businesses produce tours on a national or
regional basis and in 1997 structured national tours for Fleetwood Mac and
Ozzy Osbourne, among others. SFX Entertainment plans to increase its
production of national music tours. PACE also produces Touring Broadway Shows,
acquiring the stage and touring rights from a show's owner, assembling the
touring cast, hiring a director and arranging for the construction and design
of sets and costumes. Touring Broadway Shows are typically revivals of
previous commercial successes or reproductions of theatrical shows currently
playing on Broadway in New York City. PACE also produces and makes small
investments (i.e., from approximately $150,000 to $600,000) as a limited
partner in the creation of a small number of original Broadway Shows in
exchange for obtaining touring rights and favorable scheduling for those
shows.
The Touring Broadway Show production and promotion industry is highly
fragmented. SFX Entertainment believes it will be, after consummating the
Pending Acquisitions, 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. PACE 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. Upon consummation of
the Pending Acquisitions, SFX Entertainment's competitors, some of whom have
also been partners of PACE in certain theater investments from time to time,
will 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 Pending Acquisitions, SFX Entertainment would have
had a producing interest or investment in the following shows for 1997 and/or
1998:
SFX ENTERTAINMENT'S
SHOW TITLE TYPE INVOLVEMENT
---------- ---- -------------------
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
D-30
<PAGE>
SFX ENTERTAINMENT'S
SHOW TITLE TYPE INVOLVEMENT
---------- ---- -------------------
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
SFX Entertainment 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.
PACE currently sells subscription series for its Touring Broadway
Shows in the following 31 of the approximately 60 markets that maintain active
touring schedules:
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
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.
Certain of the Acquisition Businesses also produce motor sports
events such as monster truck events, tractor pulls, mud races, demolition
derbies and motocross races, and design 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.
SFX Entertainment believes that, upon consummation of the Pending
Acquisitions, it will be the largest participant in the industry, on a pro
forma basis having produced 188 events in over 70 markets in 1997. SFX
Entertainment's two major specialized motor sports competitors produce
approximately 40 and 55 events each year, respectively. SFX Entertainment also
will compete 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.
D-31
<PAGE>
In addition, SFX Entertainment and the Acquisition Businesses produce
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
SFX Entertainment'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, SFX Entertainment typically receives 100% of
sponsorship and advertising revenues. Since few artists will play in every
available market during a tour, SFX Entertainment 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, SFX Entertainment also competes with
other venues to promote an artist in that city. SFX Entertainment currently
owns and/or operates under lease or exclusive booking arrangement a total of
20 venues, including two amphitheaters and two theaters in the New
York--Northern New Jersey--Long Island market, an amphitheater and a
theater/ballroom in the Indianapolis market, an amphitheater in the Columbus
market, an amphitheater in the Hartford market and an amphitheater in the
Rochester market. After the consummation of the Pending Acquisitions, SFX
Entertainment will have 41 venues either directly owned or operated, under
lease or exclusive booking arrangements. The following chart sets forth
certain information with respect to the venues that will be owned and/or
operated by SFX Entertainment, after giving effect to the Pending
Acquisitions:
<TABLE>
<CAPTION>
SFX TOTAL AVG. NO. OF TOTAL SEATS
MARKET TYPE OF ENTERTAINMENT'S SEATING ATTENDANCE EVENTS SOLD IN
MARKET AND VENUE RANK(1) VENUE INTEREST CAPACITY IN 1996 IN 1996 1996
- ------------------------------- ------- ------- --------------- -------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
New York--Northern New 1
Jersey--Long Island:
PNC Bank Arts Center2
(formerly Garden State 22-year lease
Arts Center) (Holmdel, (expires October 31,
NJ)................... amphitheater 2017) 17,500(3) 6,512 48 312,595
Jones Beach Marine 10-year license
Amphitheater agreement (expires
(Wantagh, NY)......... amphitheater December 31, 1999) 14,000(3) 8,712 44 383,314
Roseland Theater.......... theater exclusive booking 3,200 2,765 57 157,605
agent
Westbury Music Fair 43-year lease
(Westbury, NY)........ theater (expires December 2,870 2,026 190 384,917
31, 2034)
Los Angeles--Riverside-- 2
Orange County: 50% partnership
Glen Helen Blockbuster interest in 25-year
Pavilion(2) (San lease (expires July 1,
Bernardino, CA)....... amphitheater 2018) 25,000(4) 9,842 25 246,039
Irvine Meadows 50% partnership
Amphitheater2 (Irvine, interest in 20-year
CA)................... amphitheater lease (expires 15,500 8,505 32 272,162
February 28, 2017)
D-32
<PAGE>
SFX TOTAL AVG. NO. OF TOTAL SEATS
MARKET TYPE OF ENTERTAINMENT'S SEATING ATTENDANCE EVENTS SOLD IN
MARKET AND VENUE RANK(1) VENUE INTEREST CAPACITY IN 1996 IN 1996 1996
- ------------------------------- ------- ------- --------------- -------- ---------- ------- -----------
San Francisco--Oakland--San 5
Jose:
Shoreline Amphitheater(5). amphitheater facility owned; land 25,000 10,306 37 381,315
leased for 35 years
(expires November
30, 2021)
Concord Pavilion(5)....... amphitheater 10-year exclusive 12,500 6,002 42 252,070
outside booking
agent (expires
December 31, 2005)
Greek Theater(5).......... theater 4-year lease (expires 8,500 5,572 10 55,718
October 31, 1998)
Warfield Theatre(5)....... theater 10-year lease 2,250 1,727 56 96,726
(expires May 31,
2008)
Fillmore Auditorium(5).... theater 10-year lease 1,249 913 146 133,279
(expires August 31,
2007)
Punchline Comedy Club(5).. club 5-year lease (expires N/A N/A N/A N/A
September 15, 2001)
Philadelphia--Wilmington-- 6
Atlantic City:
Blockbuster/SONY Music 31-year lease
Entertainment Centre (expires February 9,
on the Waterfront(2).. amphitheater 2025) 25,000 7,111 48 341,319
Dallas--Ft. Worth: 9
Starplex Amphitheater(2).. amphitheater 32.5% partnership 20,100 9,479 33 312,806
interest in 31 year
lease (expires
December 31, 2028)
Houston--Galveston--Brazoria: 10
Cynthia Woods Mitchell 15-year management
Pavilion(2)........... amphitheater contract (expires 13,000 9,178 36 258,364
December 31, 2009)
Bayou Place Performance 50% partnership
Hall(2)............... theater interest in 10-year 2,800 N/A N/A N/A
lease (expires
December 31, 2007)
Atlanta: 12
Lakewood Amphitheater(2).. amphitheater 32.5% partnership 19,000 9,768 22 214,896
interest in 35-year
lease (expires
January 1, 2019)
Chastain Park 10-year lease
Amphitheater(2)....... amphitheater (expires December 7,000 5,732 28 160,492
31, 2000)
Roxy Theater(2)........... theater 7-year lease (expires 1,600 673 92 61,960
March 31, 2004)
D-33
<PAGE>
SFX TOTAL AVG. NO. OF TOTAL SEATS
MARKET TYPE OF ENTERTAINMENT'S SEATING ATTENDANCE EVENTS SOLD IN
MARKET AND VENUE RANK(1) VENUE INTEREST CAPACITY IN 1996 IN 1996 1996
- ------------------------------- ------- ------- --------------- -------- ---------- ------- -----------
Cotton Club(6)............ theater 5-year lease (expires 650 321 152 48,751
June 12, 2000)
St. Louis: 17
Riverport Amphitheater(7). amphitheater 50% partnership 21,000 8,782 44 386,399
interest in
ownership(8)
American Theater(7)....... theater 10-year lease 2,000 1,485 22 32,662
(expires July 31,
2004)
Westport Playhouse(7)..... theater 1-year lease 1,100 897 22 19,724
Phoenix--Mesa: 18
Desert Sky Blockbuster 60-year lease
Pavilion(2)........... amphitheater (expires June 30, 20,000 8,165 32 261,284
2049)
Pittsburgh: 19
Star Lake Amphitheater(2). amphitheater 45-year lease 22,500 9,471 44 416,733
(expires December
31, 2034)
Kansas City: 24
Sandstone Amphitheater(7) 10-year lease
(Kansas City, KS)..... amphitheater (expires December 18,000 7,150 36 257,395
31, 2002)
Starlight Theater(7)...... theater annual exclusive 9,000 2,908 10 29,083
booking agent
contract (1998
renewal under
negotiation)
Memorial Hall(7).......... theater 1998 contract 3,000 2,169 17 36,874
renewal under
negotiation
Sacramento--Yolo: 26
Cal Expo Theater(5)....... amphitheater operating agreement 14,500 6,006 15(9) 90,091
(renewal under
negotiation)
Punchline Comedy Club(5).. club 9-year lease (expires N/A N/A N/A N/A
December 17, 1999)
Indianapolis: 28
Deer Creek Music Center... amphitheater owned 21,000 10,187 38 387,119
Murat Centre.............. theater and 50-year lease 2,700 1,900 85 161,50010
ballroom (expires August 31,
2045)
Columbus: 30
Polaris Amphitheater...... amphitheater owned 20,000 6,751 38 256,553
D-34
<PAGE>
SFX TOTAL AVG. NO. OF TOTAL SEATS
MARKET TYPE OF ENTERTAINMENT'S SEATING ATTENDANCE EVENTS SOLD IN
MARKET AND VENUE RANK(1) VENUE INTEREST CAPACITY IN 1996 IN 1996 1996
- ------------------------------- ------- ------- --------------- -------- ---------- ------- -----------
Charlotte--Gastonia--Rock 32
Hill:
Charlotte Blockbuster
Pavilion(2)........... amphitheater owned 18,000 6,185 39 241,233
Hartford: 36
Meadows Music Theater..... amphitheater facility owned; land 25,000 6,914 38 262,741
leased for 37 years
(expires September
13, 2034)
Rochester: 39
Finger Lakes Amphitheater. amphitheater 3-year lease (expires 12,700 4,203 15 63,044
in 1999)
Nashville: 41
Starwood Amphitheater(2).. amphitheater one-half ownership 20,100 6,970 27 188,187
Oklahoma City: 43
Zoo Amphitheatre)(7)...... amphitheater year-to-year 9,000 4,510 6 27,061
exclusive booking
agent
Raleigh--Durham--Chapel Hill: 47
Walnut Creek 662/3% partnership
Amphitheater(2)....... amphitheater interest in 40-year 20,000 8,476 43 364,489
lease (expires
October 31, 2030)
West Palm Beach--Boca Raton: 50
SONY Music/Blockbuster 75% partnership
Coral Sky interest in 10-year
Amphitheater(2)....... amphitheater lease (expires 20,000 9,417 26 244,835
January 4, 2005)
Reno: 119
Reno Hilton Amphitheater(5) amphitheater operating agreement 8,500 3,977 21 83,509
(renewal under
negotiation)
TOTAL..................... 504,819 5,833 1,716 7,888,844
</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 SFX Entertainment sells subscriptions
for Touring Broadway Shows.
(2) After the consummation of the PACE Acquisition (including the
Pavilion Acquisition). There can be no assurance that SFX
Entertainment will be able to consummate the acquisition of either or
both of the interests of Charlotte Amphitheater Corporation and The
Westside Amphitheater Corporation (collectively, "Blockbuster Sub")
and YM Corp. ("Sony Sub") in Pavilion Partners; as a result, SFX
Entertainment may not obtain 100% ownership of Pavilion Partners.
(3) Assumes completion of current expansion projects, which are
anticipated to be completed by summer 1998.
(4) Additional seating of approximately 40,000 is available for certain
events.
(5) After the consummation of the BGP Acquisition.
(6) After the consummation of the Concert/Southern Acquisition.
(7) After the consummation of the Contemporary Acquisition.
D-35
<PAGE>
(8) Contemporary currently owns a 50% interest in a partnership that owns
the Riverport Amphitheater. If Contemporary is unable to purchase the
remaining partnership interest prior to the consummation of the
Contemporary Acquisition, the purchase price for Contemporary will be
reduced. See "Agreements Related to the Pending
Acquisitions--Contemporary Acquisition."
(9) Does not include dates for the California State Fair.
(10) Numbers shown are for 1997. Numbers for 1996 are unavailable.
Because SFX Entertainment and the Acquisition Businesses operate a
number of their venues under leasing or booking agreements, SFX
Entertainment's long-term success will depend on its ability to renew these
agreements when they expire or terminate. There can be no assurance that SFX
Entertainment 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, SFX Entertainment 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 SFX
Entertainment's existing venues and venues to be acquired in the Pending
Acquisitions currently have no sponsorship arrangements in many of the
available categories (including naming rights). SFX Entertainment believes
that the national venue network being assembled in the Pending Acquisitions
will likely (a) attract a larger number of major corporate sponsors and (b)
enable SFX Entertainment to sell national sponsorship rights at a premium over
local or regional sponsorship rights. SFX Entertainment 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. SFX Entertainment 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.
SFX Entertainment and the Acquisition Businesses provide 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 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, SFX Entertainment 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). SFX Entertainment
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.
SFX Entertainment and the Acquisition Businesses are engaged in music
marketing, research and artist development activities, and Network is a
publisher of trade magazines for radio broadcasters, music retailers,
performers and record industry executives. Each of Network's magazines focuses
on research and insight common to a specific contemporary radio format.
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
D-36
<PAGE>
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.
SFX Entertainment and the Acquisition Businesses create and
distribute network radio special events and live concert programming for over
400 music radio stations in the top 200 United States radio markets.
Additionally, they produce eight daily radio "show prep" services that
stations use to supplement in-house content production. In 1996, they
delivered these services to approximately 1,100 radio stations in exchange for
commercial inventory or airtime, which they in turn sold to national network
advertisers. They also provide consulting and entertainment marketing services
to corporate clients with music business interests.
OPERATING STRATEGY
SFX Entertainment's principal objectives are (a) to maximize revenue
and cash flow growth opportunities by being a leading promoter and producer of
live entertainment and (b) to own and/or operate leading live entertainment
venues in the United States. SFX Entertainment's specific strategies include
the following:
Own and/or Operate Leading Live Entertainment Venues in the Nation's
Top 50 Markets
A key component of SFX Entertainment's strategy is to own and/or
operate a network of leading live entertainment venues in the nation's top 50
markets. SFX Entertainment 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 SFX Entertainment's venues by providing centralized access to a
nationwide network of venues. After consummation of the Pending Acquisitions,
SFX Entertainment will own and/or operate the largest network of venues used
principally for music concerts and other live entertainment events in the
United States, with 40 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
SFX Entertainment 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 17% of total revenues for the nine months ended September 30,
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 SFX Entertainment'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 SFX
Entertainment's existing venues and venues to be acquired in the Pending
Acquisitions currently have no sponsorship arrangements in many of the
available categories (including naming rights). SFX Entertainment 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.
D-37
<PAGE>
Exploit Synergies of the Acquisition Businesses
SFX Entertainment plans to maximize revenues by exploiting synergies
among its existing businesses and the Acquisition Businesses. SFX
Entertainment believes that it can utilize the best business practices of the
respective Acquisition Businesses on a national scale. For example, the
Atlanta-based regional Music Midtown Festival, created and promoted by
Concert/Southern (one of the Acquisition Businesses), is a highly successful
music festival concept that drew approximately 200,000 attendees in 1997; SFX
Entertainment believes that it can use the event as a model for other markets.
In addition, SFX Entertainment believes that the leading radio industry trade
publications of Network (another of the Acquisition Businesses) will enable
SFX Entertainment 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 SFX Entertainment.
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. SFX Entertainment believes
that it will be able to increase the utilization of its venues through its
ability to affect scheduling on a nationwide basis, its local knowledge,
relationships and expertise and its presentation of a variety of additional
events, including comedy acts, magic acts, motivational speeches, national
figure skating and gymnastics competitions and exhibitions and bull riding
competitions, among others. SFX Entertainment 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
SFX Entertainment 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, SFX Entertainment 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 SFX Entertainment will acquire through certain of
the Pending Acquisitions, when combined with SFX Entertainment's existing
audience data collection efforts, will permit highly-effective targeted
marketing, such as direct-mail and subscription series campaigns, which SFX
Entertainment believes will increase ticket pre-sales and overall sales in a
cost-efficient manner.
Strict Cost Controls; Nationally Coordinated Booking, Marketing &
Accounting
SFX Entertainment'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, SFX Entertainment believes
that its size after consummating the Pending Acquisitions 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 Acquisition
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. SFX Entertainment believes that the fragmented nature of the
industry presents attractive acquisition opportunities, and that its larger
size
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will provide it with improved access to the capital markets that will give it
a competitive advantage in implementing its acquisition strategy. Through
consolidation, SFX Entertainment will be better able to coordinate
negotiations with performer and talent agents, addressing what SFX
Entertainment believes is a growing desire among performers and talent agents
to deal with fewer, more sophisticated promoters. SFX Entertainment 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. SFX Entertainment may also pursue acquisitions of other
related or complementary venues or businesses.
PENDING ACQUISITIONS
In December 1997, SFX Entertainment entered into agreements to
acquire the live entertainment businesses summarized in the following table.
The consummation of the Pending Acquisitions is subject to a variety of
factors, including compliance with numerous conditions precedent, some of
which are outside of SFX Entertainment's control. See "Agreements Relating to
the Pending Acquisitions." There can be no assurance that the Pending
Acquisitions will be consummated on the terms described herein or at all. See
"Risk Factors--Risks Related to Pending Acquisitions."
<TABLE>
<CAPTION>
- ------------------ -------------------- -------------------------------- ---------------------------------------------
TOTAL
CONSIDERATION1 SELECTED
COMPANY ($ IN MILLIONS) BUSINESS(ES) VENUES2
- ------------------ -------------------- -------------------------------- ---------------------------------------------
<S> <C> <C> <C>
PACE $245.9 Music, theater and specialized American Theater
(INCLUDING motor sports event promotion Bayou Place Performance Hall
PAVILION and production. PACE is one of Blockbuster/SONY Music Entertainment
PARTNERS) the largest diversified promoters Centre on the Waterfront
and producers of live Charlotte Blockbuster Pavilion
entertainment in the United Cynthia Woods Mitchell Pavilion
States, having what SFX Desert Sky Blockbuster Pavilion
Entertainment believes is the Glen Helen Blockbuster Pavilion
largest U.S. distribution network Irvine Meadows Amphitheater
in each of its music, theater and Lakewood Amphitheater
specialized motor sports PNC Bank Arts Center
businesses. Pavilion Partners is SONY Music/Blockbuster Coral Sky
one of the leading owners of Amphitheater
amphitheaters in the United Star Lake Amphitheater
States. Starplex Amphitheater
Starwood Amphitheater
Walnut Creek Amphitheater
- ------------------ -------------------- -------------------------------- ---------------------------------------------
CONTEMPORARY $91.5 A fully-integrated live Memorial Hall
entertainment and special event Riverport Amphitheater
promoter and producer, venue Sandstone Amphitheater
owner and operator, ticket Starlight Theater
distributor and consumer West Fair Amphitheater
marketer. Westport Playhouse
Zoo Amphitheater
- ------------------ -------------------- -------------------------------- ---------------------------------------------
BGP $68.3 One of the oldest producers and Cal Expo Theater
promoters of, and owner- Concord Pavilion
operators of venues for, live Fillmore West Auditorium
entertainment in the United Greek Theater
States, and a leading promoter of Punchline Comedy Club (Sacramento)
live entertainment in the San Punchline Comedy Club (San Francisco)
Francisco Bay area. Seattle, WA--Under construction.
Shoreline Amphitheater
Warfield Theater
- ------------------ -------------------- -------------------------------- ---------------------------------------------
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<PAGE>
- ------------------ -------------------- -------------------------------- ---------------------------------------------
Total
Consideration1 Selected
COMPANY ($ in millions) Business(es) Venues2
- ------------------ -------------------- -------------------------------- ---------------------------------------------
NETWORK $62.0 Network Magazine Group N/A
MAGAZINE / SJS ("Network Magazine"), a
leading publisher of trade magazines
for the radio broadcasting industry,
and SJS Entertainment Corporation
("SJS"), a leading provider of
air-time research to the radio
broadcasting industry and independent
producer and distributor of
music-related radio programming and
related services.
CONCERT / $16.6 The leading promoter of live Chastain Park Amphitheater
SOUTHERN music events in the Atlanta, Cotton Club
Georgia metropolitan area. Roxy Theater
- ------------------ -------------------- -------------------------------- ---------------------------------------------
</TABLE>
(1) Includes the cash portion of purchase price, the negotiated value of
SFX Entertainment Class A Common Stock, if any, to be issued, and
debt or other liabilities, if any, to be repaid. Excludes certain
potential contingent consideration. See "Agreements Related to the
Pending Acquisitions." The approximately 4.2 million shares of SFX
Entertainment Class A Common Stock expected to be issued in
connection with certain of the Pending Acquisitions have been valued
by the applicable parties at $13.33 per share for purposes of
calculating the consideration to be given for the Pending
Acquisitions. This valuation is based on financial projections
developed jointly by SFX Entertainment and the relevant sellers.
There is presently no trading market for the SFX Entertainment Class
A Common Stock, and there can be no assurance that the assumptions
underlying the valuation will, in fact, be correct or that the
valuation will approximate the actual trading price of the SFX
Entertainment Class A Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Pending
Acquisitions."
(2) Includes venues owned and/or operated under lease or under exclusive
booking arrangements.
PACE
On December 12, 1997, SFX Entertainment executed an agreement (the
"PACE Agreement") to acquire PACE, for a total purchase price of $155.0
million (including the issuance of stock of SFX Entertainment valued by the
parties at approximately $20.0 million and the assumption of $25.5 million of
debt). PACE is one of the largest diversified promoters and producers of live
entertainment in the United States, having what SFX Entertainment 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 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 Theatrical (a)
presented approximately 300 weeks of theater in over 30 markets, including 31
subscription markets with 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, SFX
Entertainment has contracted to obtain 100% of Pavilion Partners, a
partnership that owns interests in 10 of the 41 venues to be owned by SFX
Entertainment, by acquiring one-third of Pavilion Partners
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<PAGE>
through the acquisition of PACE and the remaining two-thirds of Pavilion
Partners through separate agreements with Sony Sub and Blockbuster Sub, for a
combined consideration of $90.9 million (including the assumption of $49.8
million of debt related to the two-thirds interest). There can be no assurance
that SFX Entertainment will be able to consummate the acquisition of either or
both of Blockbuster Sub's and Sony Sub's interests in Pavilion partners; as a
result, SFX Entertainment may not obtain 100% ownership of Pavilion Partners.
If SFX Entertainment is unable to obtain 100% ownership of Pavilion Partners,
then SFX Entertainment may, among other things, be in breach of an exclusivity
provision contained in the Pavilion Partners partnership agreement, unless
that agreement can be amended. See "Risk Factors--Risks Related to the Pending
Acquisitions" and "Agreements Related to the Pending Acquisitions--PACE
Acquisition--Pavilion Acquisition."
Under certain circumstances, SFX Entertainment may be required to
sell either its motor sports or theatrical lines of business. See "Risk
Factors--Control of Motor Sports and Theatrical Businesses" and "Agreements
Related to the Pending Acquisitions--PACE Acquisition--Becker Employment
Agreement."
The agreement governing the partnership through which PACE holds its
interest in the Lakewood Amphitheater in Atlanta, Georgia contains a provision
(which, in management's view, will not materially affect SFX Entertainment's
business or prospects) 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 SFX Entertainment. However, SFX Entertainment will acquire an
interest in the Chastain Park Amphitheater, also in Atlanta, in the
Concert/Southern Acquisition. SFX Entertainment intends to seek a waiver of
the restrictive provision; however, it is possible that SFX Entertainment will
be unable to obtain the waiver.
Contemporary
On December 12, 1997, SFX Entertainment executed an agreement (the
"Contemporary Agreement") to acquire by merger and asset acquisition, the
music concert, live entertainment, event marketing, computerized ticketing and
related businesses of Contemporary for approximately $91.5 million (including
the issuance of stock of SFX Entertainment valued by the parties at
approximately $18.7 million). 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. See "Agreements Related to the Pending Acquisitions--Contemporary
Acquisition."
BGP
On December 11, 1997, SFX Entertainment executed an agreement (the
"BGP Agreement") to acquire BGP for total consideration of $68.3 million
(including the issuance of capital stock of SFX Entertainment valued by the
parties at $7.5 million or, at SFX Entertainment's option, an equivalent
amount in cash). Although SFX Entertainment has also agreed to repay $12.2
million of BGP debt, the sellers in the BGP Acquisition have agreed to have
working capital in BGP at closing at least equal to the amount of this assumed
debt. 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
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<PAGE>
Francisco Bay area. During 1997, more than 2.3 million people attended
approximately 1,450 events 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. See "Agreements Related to the Pending
Acquisitions--BGP Acquisition."
Network
On December 10, 1997, SFX Entertainment executed an agreement (the
"Network Agreement") to acquire Network for a total purchase price of $62.0
million (including the issuance of stock of SFX Entertainment valued by the
parties at approximately $10.0 million). In addition, SFX Entertainment has
the option to acquire an office building and related property for $2.4
million. Network Magazine 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 Magazine 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
Magazine is currently developing a consumer music magazine that will be
distributed free to customers at music retail locations. Network Magazine also
provides radio airplay and music retail research services to record labels,
artist managers, retailers and radio broadcasters. Network Magazine 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 Magazine 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 a leading 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 Magazine 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. See "Agreements Related to the Pending Acquisitions--Network
Acquisition."
Concert/Southern
On December 15, 1997, SFX Entertainment executed an agreement (the
"Concert/Southern Agreement") to acquire Concert/Southern Promotions for a
total cash purchase price of $16.6 million (including payment of the $1.6
million present value of a deferred liability). Concert/Southern is the
principal 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 Greg 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. See "Agreements Related to the Pending
Acquisitions--Concert/Southern Acquisition."
D-42
<PAGE>
SFX Entertainment expects to complete all of the Pending Acquisitions
as soon as practicable after the Financing and prior to the SFX Merger. SFX
Entertainment anticipates that it will consummate all of the Pending
Acquisitions in the first quarter of 1998. However, the timing and completion
of the Pending Acquisitions are subject to a number of conditions, certain of
which are beyond SFX Entertainment's control, and there can be no assurance
that the Pending Acquisitions will be completed during that time period or on
the terms described herein, or at all. See "Risk Factors--Risks Related to
Pending Acquisitions" and "Agreements Relating to the Pending Acquisitions."
In addition, there can be no assurance that the value attributed by the
parties to SFX Entertainment's capital stock will approximate the actual
trading price of the stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Pending Acquisitions."
PROPERTIES
SFX Entertainment's executive offices are at 650 Madison Avenue, New
York, New York 10022. After the consummation of the Spin-Off and the Pending
Acquisitions, in addition to the properties described in "--SFX
Entertainment's Live Entertainment Activities--Venue Operations," SFX
Entertainment will lease office space in Austin and Houston, Texas; Atlanta,
Georgia; Chicago, Illinois; Miami, Florida; Gaithersburg, Maryland; Burbank
and Santa Monica, California; Seattle, Washington; London, England; and St.
Louis, Missouri. These properties are generally leased for terms of 1 to 10
years.
EMPLOYEES
As of the date of the Spin-Off, SFX Entertainment expects to have
approximately 800 full-time employees. SFX Entertainment 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, SFX Entertainment has agreed to assume all obligations rising under
any employment agreements or arrangements between SFX 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'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 SFX Entertainment, including those to be retained
in connection with the Pending Acquisitions, are covered by collective
bargaining agreements. See "Management."
LITIGATION
Although SFX Entertainment 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 9.2% in Marquee; Mr. Sillerman is the chairman of its board of
directors, and Mr. Tytel is one of its director. SFX Entertainment anticipates
that, from time to time, it will enter into transactions and arrangements
(particularly, booking arrangements) with Marquee and Marquee's clients, and
it may compete with Marquee for specific concert promotion engagements. In any
transaction or arrangement with Marquee, Messrs. Sillerman and Tytel are
likely to have conflicts of interest as officers and directors of SFX
Entertainment. These transactions or arrangements will be subject to the
approval of the independent committees of SFX Entertainment and SFX, 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. After the consummation of the Contemporary Acquisition, SFX
Entertainment will produce 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."
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<PAGE>
In addition, prior to the consummation of the SFX Merger, Mr.
Sillerman and other members of SFX Entertainment's management team will have
management obligations to both SFX and SFX Entertainment that may cause them
to have conflicts of interest. See "Management--Employment Agreements and
Arrangements with Certain Officers and Directors" and "Certain Relationships
and Related Transactions--Potential Conflicts of Interest."
Pursuant to the employment agreement entered into between Brian
Becker and SFX Entertainment in connection with the PACE Acquisition, Mr.
Becker has the option, exercisable within 15 days after the second anniversary
of the consummation of the PACE Acquisition, to purchase SFX Entertainment's
then existing motor sports line of business (or, if that line of business has
been sold, SFX Entertainment'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 SFX Entertainment in evaluating
proposals for the acquisition of either line of business. See "Agreements
Related to the Pending Acquisitions--PACE Acquisition--Becker Employment
Agreement."
SEASONALITY
SFX Entertainment'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 Recent
Acquisitions, SFX Entertainment generated approximately 70% of its revenues in
the second and third quarters for the 12 months ending September 30, 1997. SFX
Entertainment'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 SFX Entertainment promotes largely occur
in the second and third quarters. To the extent that SFX Entertainment's
entertainment marketing and consulting relate to musical concerts, they also
predominantly generate revenues in the second and third quarters. Therefore,
the seasonality of SFX Entertainment's business causes (and will probably
continue to cause) a significant variation in SFX Entertainment's quarterly
operating results. These variations in demand could have a material adverse
effect on the timing of SFX Entertainment's cash flows and, therefore, on its
ability to service its obligations with respect to its indebtedness. However,
SFX Entertainment believes that this variation may be somewhat offset with the
acquisition of typically non-summer seasonal businesses in the Pending
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. SFX Entertainment
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, SFX Entertainment's marketing and
consulting operations compete with advertising agencies and other marketing
organizations. SFX Entertainment and the Acquisition 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 SFX Entertainment's
competitors have substantially greater resources than SFX Entertainment.
Certain of SFX Entertainment's competitors may also operate on a less
leveraged basis, and have greater operating and financial flexibility, than
SFX Entertainment. 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 SFX Entertainment. There can be no
assurance that SFX Entertainment will be able to compete successfully in this
market or against these competitors.
REGULATORY MATTERS
The business of SFX Entertainment is not generally subject to
governmental regulation. However, if SFX Entertainment 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.
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Significant acquisitions may also be subject to the requirements of the HSR
Act. Other types of licenses, approvals and permits from governmental or
quasi-governmental agencies might also be required for other opportunities
that SFX Entertainment may pursue in the future, although SFX Entertainment
has no agreements or understandings with respect to these opportunities at
this time. There can be no assurance that SFX Entertainment 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
initial public offerings. 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
SFX Entertainment'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 SFX Entertainment's revenues, growth strategies, future
profitability and operating results, or that otherwise could cause actual
results to differ materially from those expressed in or implied by any
forward-looking statement, include the following: lack of operating history as
an independent public company; failure to consummate any or all of the Pending
Acquisitions; failure to derive anticipated benefits from the Pending
Acquisitions; 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. SFX
Entertainment 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.
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THE SPIN-OFF
BACKGROUND AND REASONS FOR THE SPIN-OFF
SFX was formed in 1992 to acquire, own and operate radio stations.
SFX'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
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 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 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 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 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's broadcast cash flow.
Despite its continuing activity in the radio industry, SFX explored
the option of maximizing shareholder value on a shorter time horizon through
the sale or merger of SFX 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 determined that the SFX Merger was superior to the other
proposals SFX had received because (a) it offered the highest value to the
holders of SFX's Class A common stock, (b) it would permit SFX to spin off the
concert and live entertainment business to its stockholders, thereby allowing
the stockholders 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's Class A common
stock to effectively have a separate class vote on the transaction. On August
24, 1997, SFX executed the SFX Merger Agreement with SFX Buyer.
On January 15, 1998, the board of directors of SFX 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's determination that the concert and live
entertainment business offers attractive acquisition opportunities, SFX
Entertainment has already agreed to consummate the Pending Acquisitions for an
aggregate purchase price of approximately $484.3 million, consisting of
approximately $352.8 million in cash, $75.3 million in assumed liabilities and
the issuance of approximately 4.2 million shares SFX Entertainment Common
Stock with an attributed negotiated value of $56.2 million. There can be no
assurance that the value attributed by the parties to SFX Entertainment's
capital stock will approximate the actual trading price of the stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Management intends to finance
these acquisitions through the Financing, which in anticipated to consist of
$275.0 million in privately-placed debt securities and a $350.0 million credit
facility; management anticipates being able to close the Pending Acquisitions
before the Spin-Off. See "Description of Indebtedness."
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The 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's stockholders to realize a significant premium for
SFX'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 SFX Entertainment to have its own publicly
traded equity security to finance its own growth opportunities. By
distributing the SFX Entertainment Common Stock to SFX's stockholders, SFX's
board of directors believes that there will be a greater potential for
increasing the long-term value of the investment of SFX's stockholders in the
Entertainment Business. SFX's board of directors believes that the Spin-Off
will enable investors to evaluate better 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, SFX Entertainment will amend and restate its
certificate of incorporation to, among other things, increase its authorized
capital stock and will issue to SFX, in exchange for the issued and
outstanding shares of stock of SFX Entertainment then held by SFX, the number
of shares of SFX Entertainment's common stock necessary to consummate the
Spin-Off. Assuming that SFX's stockholders approve Proposal 3 in the Proxy
Statement (a proposal that will allow the Spin-Off to occur as currently
structured), the Spin-Off will be a dividend distribution to the holders of
record at the close of business on the Spin-Off Record Date (a date to be
determined by the board of directors of SFX) of the outstanding shares of
SFX's common stock, Series D preferred stock, interests in SFX's director
deferred stock ownership plan and certain warrants and will be made as
follows:
o holders of SFX's Class A common stock will receive 1 share of SFX
Entertainment Class A Common Stock per share held;
o holders of SFX's Class B common stock will receive 1 share of SFX
Entertainment Class B Common Stock per share held;
o holders of SFX's Series D preferred stock will receive the number of
shares of SFX Entertainment Class A Common Stock obtained by
multiplying the number of shares held by 1.0987 (rounded down to the
next whole share);
o SFX will place in escrow with the Escrow Agent an aggregate of
approximately [636,289] shares of SFX Entertainment Class A Common
Stock for delivery to the holders of the warrants granted by SFX to
Sillerman Communications Management Corporation (the "SCMC Warrants")
and to the underwriters of Multi-Market Radio, Inc.'s ("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--SFX Entertainment
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 SFX Entertainment Class A Common Stock as adjustments to
their interests under SFX's director deferred stock ownership plan.
See "Description of Capital Stock" for a description of the SFX Entertainment
Class A Common Stock and the SFX Entertainment Class B Common Stock.
Fractional shares of SFX Entertainment Common Stock will not be delivered in
the Spin-Off.
The distribution of shares of SFX Entertainment Common Stock in the
Spin-Off will be made on the distribution date to be set by the Board, which,
in any event, will be before the closing of the SFX Merger (the "Spin-Off
Distribution Date"). The Spin-Off is subject to further action by the Board of
Directors, which must set the Spin-Off Record Date and the Spin-Off
Distribution Date and declare the dividend effectuating the Spin-Off. All
shares of SFX Entertainment Common Stock will be fully paid, nonassessable and
free of preemptive rights.
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On the Spin-Off Distribution Date, SFX will deposit with [Chase
Mellon], as the Distribution Agent, certificates representing the aggregate
number of shares of SFX Entertainment Class A Common Stock and SFX
Entertainment Class B Common Stock issuable to holders of SFX's common stock,
Series D preferred stock and interests in SFX's director deferred stock
ownership plan (approximately [14,200,000] shares of SFX Entertainment Class A
Common Stock and 1,043,037 shares of SFX Entertainment Class B Common Stock).
SFX will instruct the Distribution Agent to distribute the SFX Entertainment
Common Stock to holders of SFX's common stock, Series D preferred stock and
interests in SFX'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's common stock and
Series D preferred stock will be returned to SFX Entertainment and
subsequently canceled.
On the Spin-Off Distribution Date, SFX will also deposit with [Chase
Mellon], as Escrow Agent, certificates representing the aggregate number of
shares of SFX Entertainment Class A Common Stock that the holders of Warrants
would have been entitled to received as a result of their ownership of SFX'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 SFX Entertainment 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 SFX Entertainment and
subsequently canceled.
The receipt of shares of SFX Entertainment Common Stock in the
Spin-Off will be taxable to the recipients of shares. See "Certain Federal
Income Tax Consequences."
The Spin-Off will be accounted for by SFX Entertainment based on the
historical cost of related assets. SFX will record the Spin-Off as a
nonmonetary distribution to stockholders, also at historical cost.
Following the Spin-Off and other transactions described in this
Prospectus, approximately 81 million shares of SFX Entertainment Class A
Common Stock (including 2 million shares to be reserved for issuance pursuant
to SFX Entertainment's stock option plan), 8 million shares of SFX
Entertainment Class B Common Stock and 25 million shares of SFX Entertainment
preferred stock will remain unissued.
NO HOLDER OF ANY CLASS OR SERIES OF SFX STOCK WILL BE REQUIRED TO PAY
ANY CASH OR OTHER CONSIDERATION FOR THE SHARES OF SFX ENTERTAINMENT COMMON
STOCK TO BE RECEIVED IN THE SPIN-OFF OR TO SURRENDER OR EXCHANGE SHARES OF SFX
STOCK (OTHER THAN IN REGARD TO THE EXCHANGE AS PART OF THE SFX MERGER AS
DESCRIBED IN THE PROXY STATEMENT) OR TO TAKE ANY OTHER ACTION IN ORDER TO
RECEIVE SFX ENTERTAINMENT 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. For a
discussion of United States regulatory approvals with respect to the SFX
Merger, see "Proposal 1: The Merger--Regulatory Matters" in the Proxy
Statement.
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AGREEMENTS BETWEEN SFX ENTERTAINMENT AND SFX
For the purpose of effecting the Spin-Off and governing certain of
the relationships between SFX Entertainment and SFX after the Spin-Off, SFX
Entertainment, SFX and SFX Buyer have entered or will enter into the various
agreements described below. The material features of the Distribution
Agreement are summarized below, and a form of the Distribution Agreement is
attached as Annex F to the Proxy Statement. The Tax Sharing Agreement and the
proposed employee benefits agreement (the "Employee Benefits Agreement"), the
material features of which are also summarized below, have been filed with the
Securities and Exchange Commission (the "SEC") as exhibits to SFX
Entertainment's Registration Statement on Form S-1, File No. 333-43287 (the
"SFX Entertainment Registration Statement"). The following descriptions do not
purport to be complete and are qualified in their entirety by reference to the
actual agreements.
DISTRIBUTION AGREEMENT
Method of Effecting the Spin-Off
The Distribution Agreement provides for the distribution of shares of
SFX Entertainment Common Stock to the holders of record on the Spin-Off Record
Date of SFX's common stock, Series D preferred stock, interests in SFX's
director deferred stock ownership plan and, upon exercise, 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, SFX Entertainment will assume (a) certain of SFX's leases and
employment agreements, (b) debt and liabilities incurred by SFX Entertainment
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 The Sillerman
Companies, Inc., 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 ("TSC"),
provides services to Triathlon and (e) any other debt and liabilities that SFX
Entertainment deems appropriate. SFX is obligated to release SFX Entertainment
and its subsidiaries from all other debt and accrued liabilities.
SFX Entertainment will be entitled to all of SFX's accounts
receivable relating to SFX's live entertainment business. SFX will transfer to
SFX Entertainment, prior to the Spin-Off:
o an airplane lease;
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's radio stations
operating in Myrtle Beach;
o the employment agreements of certain employees of SFX; and
o all other assets used primarily by SFX Entertainment.
SFX Entertainment will assume all of SFX'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.
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Transferred Employees
If the Spin-Off occurs prior to the closing date of the SFX Merger,
SFX's senior management and certain other employees of SFX will devote as much
time as they deem reasonably necessary to conduct the operations of SFX
Entertainment, while continuing to serve in their present capacities with SFX.
At the time of consummation of the SFX Merger, SFX Entertainment will assume
all obligations arising under any employment agreement or arrangement between
SFX or any of its subsidiaries and the employees who are transferred to SFX
Entertainment other than rights, if any, under those employment agreements to
receive options after a change of control and all existing rights of
indemnification. See "Management."
Working Capital
Pursuant to the Distribution Agreement (and as required by the SFX
Merger Agreement), SFX Entertainment and SFX have agreed to allocate funds
between them for working capital. If the Spin-Off occurs prior to the
consummation of the SFX Merger, then, on the date of the Spin-Off, SFX's
management will allocate working capital between SFX Entertainment and SFX,
and SFX will pay to SFX Entertainment any positive amount allocated to SFX
Entertainment. In any event, at least five business days before the
consummation of the SFX Merger, SFX must provide SFX Entertainment 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 must pay to SFX
Entertainment 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 SFX Entertainment must pay to SFX 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 must deliver to SFX Entertainment an
audited statement of Working Capital as of the date of consummation of the SFX
Merger. If SFX Entertainment does not object to SFX's Working Capital
statement within fifteen days following delivery thereof, then the Working
Capital reflected on SFX's Working Capital statement will be the "Final
Working Capital." If SFX Entertainment 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 or SFX Entertainment, 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 SFX Entertainment notifies SFX 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's common stock
outstanding immediately prior to the consummation of the SFX Merger, and SFX
must promptly distribute (a) the appropriate amount to the appropriate
holders, immediately prior to the consummation of the SFX Merger, of SFX'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
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 who exercised their securities on and after the consummation of
the time of consummation of the SFX Merger and prior to the final payment
date. If SFX Entertainment elects to treat any portion of the Final Working
Capital as an SFX Merger Consideration Adjustment, then SFX Entertainment must
pay SFX 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 is equal to the
amount that would have been paid or received if the SFX Merger Consideration
Adjustment had not been made.
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<PAGE>
"Working Capital" means the sum of all current assets of SFX and its
consolidated subsidiaries minus the sum of all current liabilities of SFX and
its consolidated subsidiaries, as of the point in time immediately prior to
the consummation of the SFX Merger, adjusted (without duplication) by:
(a) increasing Working Capital by 50% (up to $1.0 million) of
all fees and expenses incurred by SFX in connection with
acquiring consents from holders of SFX'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'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 common stock outstanding immediately prior to
the time of consummation of the SFX Merger (excluding up to
250,838 shares of SFX's common stock subject to a right of
repurchase granted by SFX 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
outstanding immediately prior to the SFX Merger consummation
plus (B) the aggregate exercise price of all warrants
underlying unit purchase options of SFX outstanding
immediately prior to the SFX Merger consummation plus (C)
the aggregate base price of all SARs of SFX 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's common stock subject to a
right of repurchase by SFX granted in connection with an
acquisition;
(e) increasing Working Capital by all permitted radio-related
capital expenditures paid by SFX 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 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;
(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 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's preferred stock); and
(k) reducing Working Capital by the amount of SFX'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:
(i) the difference between (A) indebtedness of SFX and
its subsidiaries, less (B) the difference between
$70.0 million and any amounts (other than the
reimbursement of expenses) actually
D-51
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received by SFX 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's Series C preferred stock (which
SFX anticipates will be $2.0 million),
(iii) the aggregate liquidation preference amount of
SFX'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.
Working Capital will not include any asset transferred to SFX
Entertainment or any of its subsidiaries, any liability assumed by SFX
Entertainment or any liability to which none of SFX 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 September 30, 1997, Working Capital payable by SFX to SFX
Entertainment would have been approximately $2.1 million. The actual amount of
Working Capital as of the closing of the SFX Merger may differ substantially
from the amount in existence as of September 30, 1997, and will be a function
of, among other things, the operating results of SFX through the date of the
SFX Merger and the actual cost of consummating the SFX Merger and the related
transactions.
Acquisitions and Capital Improvements
SFX and SFX Entertainment have agreed that SFX Entertainment may,
from time to time, (a) acquire additional businesses engaged in the
Entertainment Business or (b) make capital improvements on assets owned or
leased by it or its subsidiaries. In each case, SFX must loan SFX
Entertainment the funds with which to consummate acquisitions and capital
improvements. However, all amounts so borrowed by SFX Entertainment must be
repaid on the date of the Spin-Off. SFX 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 in connection with
the acquisitions or capital improvements.
If SFX Entertainment makes such additional acquisitions or capital
improvements, it will be required to obtain financing to repay the amounts
that it borrows from SFX, which financing may take the form of public or
private sales of debt or equity securities, bank credit or other financing.
See "--Working Capital." However, there can be no assurance that SFX
Entertainment will be able to obtain such financing on advantageous terms, or
at all. If SFX Entertainment obtains a loan from SFX and is unable to obtain
financing to repay SFX as of the date of the Spin-Off, SFX will be in breach
of the SFX Merger Agreement.
As of January 15, 1998, SFX had advanced approximately $6.5 million
to SFX Entertainment for use in connection with certain acquisitions and
capital expenditures. SFX Entertainment intends to repay these amounts from
the proceeds of the Financing. SFX may advance additional amounts to SFX
Entertainment for these purposes before the consummation of the Spin-Off.
Release and Indemnification
Pursuant to the Distribution Agreement, SFX has agreed to release SFX
Entertainment and its subsidiaries and affiliates (other than SFX and its
subsidiaries) and all persons who at any time prior to the Spin-Off
Distribution Date were stockholders, directors, agents or employees of SFX
Entertainment or its subsidiaries from any and all claims
D-52
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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, SFX
Entertainment has agreed to release SFX, its affiliates (other than SFX
Entertainment 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 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 SFX Entertainment to indemnify,
defend and hold SFX and its subsidiaries (other than SFX Entertainment 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 or any of its subsidiaries (other than SFX Entertainment and its
subsidiaries) may be or become subject that relate to the assets, business,
operations, debts or liabilities of SFX Entertainment and its
subsidiaries(including liabilities to be assumed by SFX Entertainment as
contemplated in the Distribution Agreement), whether arising prior to,
concurrent with or after the Spin-Off or as a result of the failure to obtain
all necessary third party consents to the Spin-Off.
The Distribution Agreement requires SFX to indemnify, defend and hold
the SFX Entertainment Group and each of its directors, officers, employees and
agents harmless from and against any liabilities (other than income tax
liabilities) to which the SFX Entertainment Group may be or become subject
that relate to the assets, business, operations, debts or liabilities of SFX
or its subsidiaries (other than the SFX Entertainment Group), whether arising
prior to, concurrent with or after the Spin-Off.
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).
SFX Entertainment Registration Statement
SFX Entertainment has represented to SFX that the SFX Entertainment
Registration Statement will not, at the time it becomes effective, 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 SFX Entertainment
Registration Statement, in light of the circumstances under which they are
made, not misleading.
Related Agreements
SFX and SFX Entertainment 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 and SFX
Entertainment 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 will assign to SFX
Entertainment 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 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 SFX Entertainment.
D-53
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Conditions to the Spin-Off
Pursuant to the Distribution Agreement, the obligations of SFX
Entertainment and SFX to consummate the Spin-Off will be subject to the
fulfillment or waiver of each of the following conditions:
o SFX's board of directors must be satisfied that SFX'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 SFX Entertainment Registration Statement must be declared
effective by the SEC, and no stop order may be issued or pending with
respect thereto;
o the SFX Entertainment Class A Common Stock must be accepted for
listing or trading, subject to official notice of issuance, on a
national exchange or 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 SFX Entertainment and SFX must enter into the Tax Sharing Agreement
and the Employee Benefits Agreement (described below); 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'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 and SFX Entertainment
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 and SFX Entertainment, including the employment of employees to
be transferred to SFX Entertainment pursuant to the Distribution Agreement. No
adjustments will be made to the initial allocation of working capital between
SFX and SFX Entertainment if the SFX Merger Agreement is terminated in
accordance with its terms.
Amendment or Modification
SFX and SFX Entertainment can only amend the Distribution Agreement
by written agreement with the consent of SFX Buyer (which must not be
unreasonably withheld).
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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. 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 and SFX Entertainment will enter into the
Tax Sharing Agreement. Under the Tax Sharing Agreement, SFX Entertainment will
agree to pay to SFX the amount of the tax liability of SFX and SFX
Entertainment combined, to the extent properly attributable to SFX
Entertainment for the period up to and including the Spin-Off, and will
indemnify SFX for any tax adjustment made in subsequent years that relates to
taxes properly attributable to SFX Entertainment during the period prior to
and including the Spin-Off. SFX, in turn, will indemnify SFX Entertainment for
any tax adjustment made in years subsequent to the Spin-Off that relates to
taxes properly attributable to the SFX during the period prior to and
including the Spin-Off. SFX Entertainment will be responsible for any taxes of
SFX resulting from the Spin-Off, to the extent that the taxes result from gain
on the distribution that exceeds the net operating losses of SFX and SFX
Entertainment available to offset gain resulting from the Spin-Off.
EMPLOYEE BENEFITS AGREEMENT
[To come.]
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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 SFX Entertainment Common Stock as a result of the Spin-Off should
be taxable to the recipient as a distribution from SFX 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
SFX Entertainment Common Stock would be the fair market value of the SFX
Entertainment Common Stock at the time of the Spin-Off, and a stockholder's
holding period for SFX Entertainment Common Stock received in the Spin-Off
will begin on the day following the Spin-Off.
The receipt of the SFX Entertainment Common Stock should be taxable
to the holders of shares of SFX stock as a dividend to the extent of SFX's
current or accumulated earnings and profits (determined as of the end of SFX's
taxable year, which will occur on the date of the SFX Merger). Any amount of
SFX Entertainment Common Stock that exceeds the above-mentioned earnings and
profits of SFX would first be treated as a non-taxable return of capital to
the extent of each stockholder's tax basis in shares of SFX 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 SFX Entertainment Common Stock
were to exceed the stockholder's tax basis in shares of SFX stock, the excess
would be treated as long-term or short-term capital gain from the sale or
exchange of shares of SFX stock, depending on the period the stockholder held
the shares of SFX stock. Although SFX 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. 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 SFX Entertainment Common Stock could give
rise to ordinary income.
With respect to corporate stockholders, the portion of the SFX
Entertainment 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 SFX Entertainment
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 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 stock surrendered in exchange therefor (generally, the amount paid for the
shares of SFX 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 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 stock is
more than one year but not more than 18 months will, in general, be subject to
no more than a 28% tax on any gain. If an SFX stockholder owns more than one
block of shares of SFX stock, the cash received must be allocated ratably
among the blocks in the proportion that the number of shares of SFX stock in a
particular block bears to the total number of shares of SFX stock owned by the
stockholder.
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Although, as stated above, the receipt by an SFX stockholder of cash
and SFX Entertainment Common Stock should be treated as if only the cash
payment was received as payment for the shares of SFX stock, while the receipt
of SFX Entertainment Common Stock is taxable to the recipient as a
distribution from SFX under Section 301 of the Tax Code, and although SFX 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 stock for both
cash and SFX Entertainment 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 SFX Entertainment Common Stock received
plus the amount of cash received and (b) the tax basis in the shares of SFX
stock surrendered in exchange therefor (without adjustment for any portion of
the distribution of SFX Entertainment 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 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 stock. By contrast, if SFX 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).
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AGREEMENTS RELATED TO THE PENDING ACQUISITIONS
The following is a summary of the material terms of the agreements
relating to the Pending Acquisitions. This summary is not intended to be
complete and is subject to, and qualified in its entirety by reference to the
agreements, which are filed as exhibits to the SFX Entertainment Registration
Statement and are incorporated herein by reference.
The approximately 4.2 million shares of SFX Entertainment Class A
Common Stock expected to be issued in connection with certain of the Pending
Acquisitions have been valued by the applicable parties at $13.33 per share
for purposes of calculating the consideration to be given for the Pending
Acquisitions. This valuation is based on financial projections developed
jointly by SFX Entertainment and the relevant sellers. There is presently no
trading market for the SFX Entertainment Class A Common Stock. There can be no
assurance that the assumptions underlying the valuation will, in fact, be
correct or that the valuation will approximate the actual trading prices of
the SFX Entertainment Class A Common Stock.
PACE ACQUISITION
General
On December 12, 1997, SFX Entertainment entered into the PACE
Agreement, a stock purchase agreement with PACE and the shareholders of PACE
(the "PACE Sellers"), wherein SFX Entertainment agreed to purchase the
outstanding capital stock of PACE for approximately $109.5 million in cash
(the "PACE Cash Payment"), the assumption of $25.5 million in debt and the
issuance of 1.5 million shares of SFX Entertainment Class A Common Stock
valued by the parties at $20.0 million (the "PACE Stock Consideration"). The
PACE Cash Payment will be delivered to the PACE Sellers at closing while the
PACE Stock Consideration will be issued to the PACE Sellers at the time of the
Spin-Off. The PACE Cash Payment includes a $1.5 million premium in respect of
shares held by Becker Interests Limited Partnership. SFX has irrevocably and
unconditionally guaranteed the full and timely performance of all of SFX
Entertainment's obligations under the PACE Agreement. This guarantee is in
place until the latter of (a) delivery of the PACE Cash Payment or (b)
delivery of the PACE Stock Consideration.
The PACE Agreement provides that closing will take place no later
than the latter to occur of (a) 10 business days following satisfaction or
waiver of the conditions to the obligations of the parties contained in the
agreement or (b) the earlier of (i) 60 days after PACE has obtained, or is
deemed to have obtained, all necessary third party consents or (ii) March 1,
1998, provided that the date is not earlier than February 23, 1998.
Representations and Warranties
Each of PACE and the PACE Sellers has made representations and
warranties in the PACE Agreement with respect to, among other things:
o the due organization and good standing of PACE;
o that each PACE Seller has good title to his or her shares of PACE
common stock;
o that the PACE Agreement is a valid and binding obligation of PACE and
each of the PACE Sellers; and
o that, with certain disclosed exceptions, performance of the PACE
Agreement will not conflict with the provisions of any other
agreement to which PACE or any PACE Seller is a party.
In addition, SFX Entertainment has made representations and warranties in the
agreement with respect to, among other things:
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o its due organization and good standing;
o that the PACE Agreement is a valid and binding obligation of SFX
Entertainment;
o that, with certain disclosed exceptions, performance of the agreement
will not conflict with the provisions of any other agreement to which
SFX Entertainment is a party; and
o that the PACE Stock Consideration will be duly authorized and, when
issued and delivered, will be duly issued, fully paid and
non-assessable.
All representations and warranties in the PACE Agreement, except certain
representations and warranties of the PACE Sellers' concerning their title to
the shares of PACE and of PACE with respect to state and federal income taxes,
will expire on the earlier to occur of (a) 18 months following consummation of
the PACE Acquisition and (b) 60 days following the completion of the first
audit of PACE's financial statements that occurs after closing.
Indemnification
The PACE Sellers have agreed to indemnify SFX Entertainment, each of
its officers, directors and agents and each person who controls SFX
Entertainment against certain losses (the "PACE Damages"), including those
losses arising from (a) any breach of the representations and warranties made
by PACE or the PACE Sellers in the agreement, (b) any breach of the covenants
or agreements made by PACE or the PACE Sellers in the agreement or (c) any
liabilities with respect to the Excluded Assets (as defined in the PACE
Agreement). Except for damages arising from a breach of a representation,
warranty or covenant made by a PACE Seller on the PACE Seller's behalf, each
PACE Seller's liability under the PACE Agreement is limited to his or her
proportional share of the PACE Sellers' aggregate liability. The maximum
aggregate liability of the PACE Sellers to indemnify SFX Entertainment is
limited to (a) $2 million with respect to breaches of representations or
warranties of PACE disclosed to SFX Entertainment on or before _______ __,
1998 and (b) $10 million with respect to PACE Damages (including damages
described in (a)). SFX Entertainment is not entitled to receive
indemnification from the PACE Sellers, except to the extent that the aggregate
amount of damages incurred by SFX Entertainment exceeds $750,000 (in which
case SFX Entertainment will be indemnified from the first dollar of damages).
SFX Entertainment has agreed to indemnify the PACE Sellers against
losses arising out of or based on the breach of any of the representations,
warranties, covenants or agreements made by SFX Entertainment in the PACE
Agreement. In addition, SFX Entertainment has agreed to indemnify and hold
harmless each present and former employee, officer or director of PACE to the
fullest extent permitted under applicable law against any damages in
connection with any action or omission occurring prior to consummation of the
PACE Acquisition except for damages arising from a claim by SFX Entertainment
for indemnification under the agreement or a claim among or between the PACE
Sellers or PACE optionholders related solely to transactions contemplated by
the PACE Agreement. The maximum aggregate liability of SFX Entertainment to
indemnify the PACE Sellers is limited to $10 million with respect to breaches
of SFX Entertainment's representations and warranties. However, there is no
such limitation to SFX Entertainment's liability with respect to any breach by
SFX Entertainment of any of the covenants or agreements contained in the PACE
Agreement.
Closing Conditions
The consummation of the PACE Acquisition is subject to certain
closing conditions, including (a) the absence of governmental action that
would restrain, enjoin or otherwise prohibit completion of the PACE
Acquisition, (b) the absence of any injunction or order of specific
performance that purports to prohibit the PACE Acquisition and (c) expiration
or termination of any applicable waiting period under the HSR Act.
The obligation of SFX Entertainment to consummate the PACE
Acquisition is subject to certain conditions precedent, including:
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o the truth and accuracy of all representations and warranties of PACE
and the PACE Sellers contained in the agreement as of December 24,
1997 (the "PACE Reps and Warranties Condition");
o each of PACE's and the PACE Sellers' performance of and compliance
with, in all material respects, their respective obligations and
covenants and conditions contained in the agreement;
o the absence of any Material Adverse Effect (as defined in the PACE
Agreement) affecting PACE on or before December 24, 1997 (the "PACE
Material Adverse Effect Condition");
o repayment by certain insiders of PACE to PACE of certain loans;
o PACE's receipt from Sony Sub and Blockbuster Sub of a waiver of
certain provisions of Pavilion Partners' partnership agreement; and
o execution by each holder of options to purchase common stock of PACE
(the "PACE Stock Options") of an option redemption agreement.
In accordance with the provisions of the PACE Agreement, PACE obtained the
consent of Blockbuster Sub upon entering into the Blockbuster Agreement (as
defined below), wherein PACE agreed to purchase substantially all of
Blockbuster Sub's interest in Pavilion Partners. If PACE does not earlier
obtain the actual consent of Sony Sub, the consent will, nonetheless, be
deemed to have been obtained by PACE if SFX Entertainment has not terminated
the PACE Agreement on or before January 30, 1998.
On December 29, 1997, SFX Entertainment received certificates from an
officer of PACE and Allen J. Becker as representative of the PACE Sellers (the
"PACE Sellers' Representative") with respect to the fulfillment of the PACE
Reps and Warranties Condition and the PACE Material Adverse Effect Condition.
As a result of the delivery of these certificates, these two conditions are
deemed to be satisfied.
SFX Entertainment has agreed to waive the condition to closing that
the PACE Sellers deliver all of the outstanding shares of PACE, if the PACE
Sellers deliver 85% of the shares at closing. If only 85% of the outstanding
shares of PACE are delivered at closing, then SFX Entertainment intends to
effect a cash-out merger of the remaining stockholders of PACE.
PACE Acquisition Facility
SFX Entertainment has agreed that, at any time up to consummation of
the PACE Acquisition, it will make available to PACE up to an aggregate of
$25.0 million to be used by PACE to fund certain acquisitions (the "PACE
Acquisition Facility"). SFX Entertainment does not currently anticipate having
to extend this facility. PACE will have the option to immediately repay,
without interest, any amounts advanced under the PACE Acquisition Facility or
convert those amounts into a full recourse term loan (the "PACE Term Loan") if
the PACE Agreement is terminated for any reason other than failure of the PACE
Sellers to (a) deliver their stock certificates at closing or (b) satisfy all
of the conditions to SFX Entertainment's obligation to consummate the
acquisition caused by wilful breach by, or gross negligence of, the PACE
Sellers in the performance of their obligations under the agreement. The PACE
Term Loan will have a five-year term commencing on the date funds were first
advanced under the PACE Acquisition Facility. For the first two years, the
PACE Term Loan will bear interest at an annual rate equal to SFX
Entertainment's blended cost of funds and escalate 1% per annum each
anniversary thereafter. Interest on the PACE Term Loan will only be payable in
arrears for the first two years of its term followed by amortization based on
available cash flow from the assets acquired with the PACE Term Loan proceeds
(the "PACE Term Loan Assets"). The PACE Term Loan will be secured by a first
priority lien on PACE Term Loan Assets and the Pavilion Partners Option (as
defined below) and, except with respect thereto, will be subordinate to loans
made by PACE's senior bank lender.
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If the PACE Term Loan is not fully paid and discharged within 60 days
after any event of default under the PACE Term Loan, then SFX Entertainment
will have an option (the "Pavilion Partners Option") to require PACE to sell
to SFX Entertainment 100% of its partnership interest in Pavilion Partners, a
general partnership between PACE and Amphitheater Entertainment Partners
("AEP") that owns or operates several amphitheaters. The transferability of
PACE's interest in Pavilion Partners is subject to the consent of AEP, which
may be withheld by AEP in its sole discretion for any reason or no reason. SFX
Entertainment's ability to exercise the Pavilion Partners Option is
conditioned on, without further recourse against PACE or the PACE Sellers, SFX
Entertainment obtaining the consent of AEP.
Except as described below, any amounts borrowed under the PACE
Acquisition Facility will be immediately due and payable if the parties fail
to consummate the PACE Acquisition due to the PACE Sellers' failure to (a)
deliver their stock certificates at closing or (b) satisfy all of the
conditions to SFX Entertainment's obligation to consummate the acquisition and
the failure is caused by wilful breach by, or gross negligence of, the PACE
Sellers in the performance of their obligations under the agreement and SFX
Entertainment is not in breach of the PACE Agreement and has satisfied (or is
prepared to satisfy) all of the conditions precedent to the PACE Sellers'
obligation to close. In that event, SFX Entertainment has agreed that, for a
period of 60 days following the acceleration, it will not exercise or pursue
any remedies available to it by reason of PACE's failure to pay the
accelerated amounts. If the PACE Acquisition Facility should be accelerated as
described above, the aggregate amount borrowed pursuant to the PACE
Acquisition Facility will bear and interest rate of 3% above the interest rate
then in effect (which will be increased by 1/4% each month thereafter) and SFX
Entertainment will have the option to either (a) avail itself of any remedies
at its disposal, including foreclosing on the PACE Term Loan Assets or (b)
exercise the Pavilion Partners Option and offset the outstanding balance of
amounts borrowed under the PACE Acquisition Facility against the price paid
for PACE's interest in Pavilion Partners. If, on termination of the PACE
Agreement, PACE provides SFX Entertainment with written notice that PACE does
not have the right to convert amounts borrowed into the PACE Term Loan (or
irrevocably waives its right to such a conversion), then amounts borrowed
under the PACE Acquisition Facility will not become due and payable until
after 60 days following the failure to consummate the PACE Acquisition.
If the PACE Agreement is terminated and SFX Entertainment is in
breach or not prepared to satisfy all conditions precedent to the PACE
Sellers' obligation to close, any amounts borrowed under the PACE Acquisition
Facility will be converted into the PACE Term Loan. In that event, the PACE
Term Loan will be secured by a first priority lien on the PACE Term Loan
Assets, however, SFX Entertainment will have no rights to the Pavilion
Partners Option.
Termination
The PACE Agreement may be terminated:
o by mutual consent of SFX Entertainment and the PACE Sellers'
Representative; or
o if the PACE Acquisition is not consummated on or before March 1, 1998
(unless extended by the parties), except that, if the acquisition is
not consummated solely because any applicable waiting period under
the HSR Act has not expired or been terminated, then the date may be
extended to May 31, 1998 (unless further extended by the parties).
If the PACE Agreement has not been previously terminated and closing has not
occurred prior to April 1, 1998, the PACE Cash Payment will increase after
that date at an annual rate of 9%.
SFX Entertainment has agreed that, at closing, Allen J. Becker will
be appointed as a member of and Chairman of the Board of PACE for a term to
expire on the earlier of (a) the fifth anniversary of closing or (b) the
termination of Brian Becker's employment agreement (discussed below) for any
reason other than death or disability of Brian Becker. Pursuant to the Brian
Becker's employment agreement, Brian Becker will remain as Chief Executive
Officer of PACE
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for a five year period following closing and, at closing, will be appointed as
member of PACE's Board of Directors for 2 years and 15 days following the
closing of the PACE Acquisition.
Amendments to PACE's Bylaws
SFX Entertainment has also agreed that, prior to consummation of the
PACE Acquisition, PACE may amend its bylaws to provide for the following
(collectively, the "PACE Bylaw Provisions"):
o for a period of one year after closing, any proposed sale by SFX
Entertainment of either of PACE's theatrical or motor sports line of
business will require the majority approval of PACE's Board of
Directors and the affirmative vote of either Brian or Allen Becker;
o if either one of PACE's theatrical or motor sports line of business
has been previously sold, the requirement of majority approval of
PACE's Board of Directors and the affirmative vote of either of Brian
or Allen Becker for the sale of the remaining line of business will
be extended to the fifteenth day following the second anniversary of
closing;
o in any event, SFX Entertainment may not, within the first two years
and 15 days following closing of the acquisition, consummate the sale
of either line of business without providing at least 30 days'
written notice to PACE's Board of Directors and notifying the
potential purchaser of Brian Becker's right of first refusal for that
line of business (see "--Becker Employment Agreement");
o no member of PACE's Board of Directors may be removed therefrom
except for death, disability or with adequate cause; and
o for a period of two years and fifteen days following closing, the
unanimous vote of PACE's Board of Directors will be required to alter
any PACE Bylaw Provisions.
SFX Entertainment has further agreed that, prior to closing, PACE may amend
its Articles of Incorporation to prohibit any amendment or removal of the PACE
Bylaw Provisions without the unanimous approval of PACE's Board of Directors.
Future Acquisitions
The PACE Agreement provides that it is the intention of SFX
Entertainment to acquire additional businesses in the theatrical and motor
sports lines of business to be acquired and managed by PACE. However, if the
revenues from the theatrical and motor sports lines of business in any
acquired company do not constitute a majority of the acquired company's
revenues, then SFX Entertainment may hold the acquired company outside of
PACE, but the management of the acquired company's theatrical and motor sports
businesses will report to Brian E. Becker. In addition, SFX Entertainment has
agreed that within 30 days of the latter to occur of consummation of the PACE
Acquisition and the Contemporary Acquisition, SFX Entertainment will
contribute to PACE all of Contemporary's ownership interest, direct or
indirect, in the assets of United Sports of America. Pursuant to the Becker
Employment Agreement (as defined herein), Mr. Becker, beginning on the second
anniversary date of that agreement and exercisable for 15 days, will have the
option to acquire PACE's motor sports line of business (or, if that line of
business was previously sold, PACE's theatrical line of business) at its fair
market value. Mr. Becker also has a right of first refusal on those lines of
business. See "--Becker Employment Agreement."
Bonuses
SFX Entertainment has agreed that, from closing until the earlier of
(a) 396 days after completion of the Spin-Off or (b) the second anniversary of
consummation of the PACE Acquisition, it will, in the sole discretion of Allen
J. Becker, pay a severance payment or series of payments to each and every
At-Will Employee (as defined in the PACE
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Agreement) whose employment is terminated based on any of the causes set forth
in the PACE Agreement. The aggregate amount of these severance payments must
not exceed $1.0 million.
Options
If the Spin-Off has not been completed on or before July 1, 1998,
each PACE Seller will have the option, exercisable within the first 10 days
thereafter, to require SFX Entertainment to pay to him or her $13.33 in cash
in lieu of the each share of PACE Stock Consideration to which the PACE Seller
may otherwise be entitled. If the Spin-Off has not been completed on or prior
to the first day of each third month after July 1, 1998, each PACE Seller will
have such an option exercisable within the first 10 days thereafter.
SFX Entertainment delivered to the PACE Sellers' Representative an
internally generated report concerning the projected range of fair value of
the PACE Stock Consideration. The report was based on certain assumptions
concerning the completion of the Pending Acquisitions prior to the Spin-Off.
If the average selling price per share of the SFX Entertainment Class A Common
Stock is less than $13.33 per share during the five-day period immediately
following completion of the Spin-Off, then, within 10 days after completion of
the Spin-Off, SFX Entertainment must deliver an updated report to each PACE
Seller who did not exercise his or her option (as described above). If the
updated report reflects an adverse change to the range of fair value from the
range of fair value shown in the initial report, then SFX Entertainment must
include in the updated report a written offer to those PACE Sellers to provide
an additional cash payment or additional shares of SFX Entertainment Class A
Common Stock, which each PACE Seller will have the option of taking, as
consideration for the adverse change. The sole remedy for any PACE Seller who
does not wish to accept SFX Entertainment's offer is the assertion of a claim
under the dispute resolution procedures specified in the PACE Agreement.
The PACE Agreement provides further that each PACE Seller has 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 SFX
Entertainment to purchase up to one-third of the PACE Stock Consideration
received by the 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.
Releases
Each PACE Seller has executed a release and waiver of any and all
claims that the PACE Seller may have against (a) any other PACE Seller, PACE
or SFX Entertainment that relates to the transactions or agreements by which
the PACE Seller acquired ownership of shares of PACE or PACE Stock Options and
any claims that each PACE Seller may have by reason of being a shareholder of
PACE and (b) any other PACE Seller, PACE or the Sellers' Representative as to
the transactions contemplated by the PACE Agreement.
Pavilion Acquisition
SFX Entertainment has agreed to obtain 100% ownership of Pavilion
Partners, a partnership that owns interests in 10 amphitheaters. This
acquisition will consist of (a) acquiring one-third of Pavilion Partners
through the acquisition of PACE and (b) acquiring the remaining two-thirds of
Pavilion Partners through separate agreements with Sony Sub and Blockbuster
Sub to acquire AEP (a 50-50 partnership between Sony Sub and Blockbuster Sub
that owns two-thirds of Pavilion Partners), for a combined consideration of
$90.9 million (including the assumption of $49.8 million of debt related to
the two-thirds interest).
On December 19, 1997, PACE and its wholly-owned subsidiary, SM/PACE,
Inc., entered into a purchase agreement (the "Blockbuster Agreement") with
Viacom, Inc. and Blockbuster Sub (collectively, the "Blockbuster Group"),
wherein PACE agreed to purchase the Blockbuster Group's interest in AEP (the
"Blockbuster Acquisition") for an aggregate purchase price of approximately
$13.7 million in cash. This amount includes $9.5 million in respect of the
purchase of a Blockbuster Sub note receivable payable by Pavilion Partners
(secured by a lien on the Charlotte
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Amphitheater) and the assumption of approximately $2.9 million of certain
liabilities of the Blockbuster Group owed to Pavilion Partners. In addition,
the PACE Group will be required under the Blockbuster Agreement to cause the
Blockbuster Group to be released from liability from its direct obligations
with respect to indebtedness of Pavilion Partners for borrowed funds.
Consummation of transactions contemplated by the Blockbuster
Agreement is subject to the receipt by PACE of (a) the consent of Sony Sub to
the amendment and restatement of each of the Pavilion Partners partnership
agreement and AEP's partnership agreement, (b) the consent of PACE's lender to
the extent necessary to complete the transaction without violating PACE's
credit agreement and (c) any other consents reasonably necessary for closing.
The Blockbuster Agreement may be terminated by mutual agreement of the parties
or by any party if closing does not occur by May 31, 1998.
Pursuant to a letter agreement (the "Sony Agreement"), dated December
22, 1997, PACE has agreed to purchase all of Sony Sub's interest in AEP for
$27.5 million in cash plus the assumption of all of Sony Sub's obligations and
liabilities arising under Pavilion Partners and AEP's respective partnership
agreements. In addition, PACE will be required under the Sony Agreement to
cause Sony Sub and its parent corporation to be released from liability for
their direct contractual obligations in connection with the business of
Pavilion Partners.
The closing must occur no later than (a) five business days after the
consummation of the PACE Acquisition and (b) the date of closing of the
Blockbuster Acquisition or (c) March 30, 1998 (which may be extended to May
31, 1997 if the closing of the PACE Acquisition or the acquisition of Sony
Sub's interest in AEP does not occur on or before March 30, 1998 solely
because an applicable HSR Act waiting period has not expired or been
terminated). If the closing does not occur by March 30, 1998, the purchase
price will be increased at an annual rate of 8%, compounded monthly.
Pursuant to the Sony Agreement, Sony Sub has given all consents
necessary for consummation of the PACE Acquisition and the acquisition of
Blockbuster Group's interest in AEP; however, those consents--as well as the
remainder of the Sony Agreement--are conditioned on (a) HSR approval for the
transaction, (b) the closing of the PACE Acquisition and (c) unless the
Blockbuster Acquisition has occurred earlier, receipt of the Blockbuster
Group's consent to the transfer of Sony Sub's AEP partnership interest as
required by the AEP partnership agreement. Sony Sub's consent to the PACE
Acquisition can be withdrawn if the acquisition of Sony Sub's interest in AEP
does not occur on or before the contractual closing date for any reason other
than Sony Sub's breach.
Becker Employment Agreement
As a condition to the execution of the PACE Agreement, SFX
Entertainment 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 the closing of the PACE Acquisition. Mr. Becker will continue as
President and Chief Executive Officer of PACE. In addition, for the term of
his employment, Mr. Becker will serve as (a) a member of SFX Entertainment's
Office of the Chairman, (b) an Executive Vice President of SFX Entertainment
and (c) a director of each of PACE and SFX Entertainment (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.
SFX Entertainment has agreed that it will not sell either the
theatrical or motor sports line of business of PACE prior to the first
anniversary of the PACE Acquisition. If SFX Entertainment sells either line of
business after the first anniversary, 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, SFX
Entertainment 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 Agreement) will also be immediately exercisable
as of such closing. If that Mr. Becker does not exercise his right
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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 SFX Entertainment 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, Mr. Becker will have the option (the "Becker Second Year
Option"), exercisable within 15 days thereafter, to elect to one or more of
the following: (a) put any stock or portion thereof (including any vested and
unvested options to purchase stock) and/or any compensation to be paid to Mr.
Becker to SFX Entertainment; (b) become a consultant to SFX Entertainment 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 SFX
Entertainment for Cause (as defined in the Becker Employment Agreement), (b)
by SFX Entertainment 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 SFX
Entertainment any time in SFX Entertainment'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 SFX Entertainment, (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 SFX Entertainment or (g) the failure by SFX Entertainment 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, SFX Entertainment 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, SFX Entertainment 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.
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 SFX Entertainment
(or its affiliates) or solicit any of its employees to leave SFX Entertainment
(or its affiliates). However, these restrictions will not apply if Mr. Becker
exercises his rights, or SFX Entertainment breaches its obligations, with
respect to the Becker Right of First Refusal or the Becker Second Year Option
SFX Entertainment 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 SFX Entertainment or any of its
affiliates.
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CONTEMPORARY ACQUISITION
General
SFX Entertainment has entered into a merger and asset purchase
agreement dated as of December 12, 1997 (the "Contemporary Agreement") with
Contemporary and certain individuals and their trusts. Pursuant to the
Contemporary Agreement, SFX Entertainment has agreed to acquire certain
concert, production and promotion event marketing, computerized ticketing and
related businesses through both:
o the merger of Contemporary International Productions Corporation
("Contemporary International") into SFX Entertainment (the
"Contemporary Merger"); and
o the acquisition by a wholly-owned subsidiary of SFX Entertainment of
substantially all of the assets, excluding certain cash and
receivables, of the remaining members of Contemporary prior to
January 1, 1998 (the "Contemporary Asset Acquisition").
The aggregate consideration to be paid in the Contemporary
Acquisition is approximately $91.5 million, comprised of $72.8 million in cash
and approximately 1,402,851 shares of SFX Entertainment Class A Common Stock
valued by the parties at $18.7 million. However, if the Spin-Off is not
consummated before the closing of the Contemporary Acquisition, then SFX
Entertainment must issue shares of a redeemable convertible preferred stock of
SFX Entertainment ("SFX Entertainment Preferred Stock") that is convertible at
the time of the Spin-Off into the required shares of SFX Entertainment Class A
Common Stock. Any SFX Entertainment Preferred Stock will be automatically
redeemed as of July 1, 1998, unless previously converted into shares of SFX
Entertainment Class A Common Stock. The aggregate redemption price for the
shares of the SFX Entertainment Preferred Stock would be their then fair
market value, but in no event less than $18.7 million, and would be guaranteed
by SFX in certain circumstances. The SFX Entertainment Preferred Stock is
adjustable for certain dividends paid on the SFX Entertainment Class A Common
Stock, recapitalizations, stock splits and similar transactions, if any. The
consideration to be paid in the Contemporary Acquisition is subject to certain
adjustments, including a reduction of $10.5 million in the purchase price if
Contemporary does not acquire the remaining 50% interest in the Riverport
Amphitheater Joint Venture. Simultaneously with the execution of the
Contemporary Agreement, SFX Entertainment deposited $2.0 million with an
escrow agent to be applied to the purchase price at closing. The deposit will
be payable to Contemporary as liquidated damages if Contemporary terminates
the agreement because of a material violation or breach of any representation,
warranty, covenant or agreement of SFX Entertainment or because of the failure
of certain conditions under the Contemporary Agreement.
The shares of SFX Entertainment Class A Common Stock issuable in
connection with the Contemporary Merger will be "restricted securities" under
Rule 144 of the Securities Act when issued, but SFX Entertainment has agreed
to use its best efforts to cause the shares to be registered with the SEC for
resale. SFX Entertainment will have the ability to suspend use of the
registration statement for up to 30 days in any 12-month period for offerings
of securities by SFX Entertainment and for up to 45 days in any 12-month
period for other valid reasons.
The Contemporary Acquisition will be deemed to be was effective as of
January 1, 1998. Accordingly, as of January 1, 1998, SFX Entertainment, in
general, will be deemed to have received the benefits of and assumed the
liabilities and obligations with respect to the businesses of Contemporary,
although SFX Entertainment will not assume actual operational responsibility
for Contemporary until the closing. The Contemporary Acquisition is expected
to close on the fifth business day following the fulfillment or waiver of the
conditions to closing, but in no event after February 15, 1998 (subject to
extension for 30 days to cover breaches of representations, warranties,
covenants or agreements, and until April 30, 1998 to obtain approval under the
HSR Act). Simultaneously with the closing of the Contemporary Acquisition, it
is currently expected that Contemporary will acquire the 50% interest in the
Riverport Amphitheater Joint Venture, which it currently does not own
(although the acquisition is not a condition to the closing).
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In the Contemporary Asset Acquisition, SFX Entertainment will acquire
substantially all of the non-cash assets of the constituent companies of
Contemporary other than Contemporary International, which is being merged into
SFX Entertainment. SFX Entertainment will also assume substantially all of the
ordinary course of business obligations and liabilities of those companies
incurred or to be performed after December 31, 1997. SFX Entertainment is not
assuming liabilities for (a) tax, environmental, ERISA, workers' compensation
or pension liabilities incurred prior to January 1, 1998, (b) liabilities or
obligations for severance or similar payments arising as a result of the
Contemporary Acquisition, (c) any liabilities or obligations that are not
directly incident to the business or assets of Contemporary, (d) any
indebtedness for borrowed money, (e) any amount payable to any affiliate of
Contemporary (other than certain liabilities incurred after January 1, 1998 or
expressly assumed by SFX Entertainment), and (f) any liabilities arising out
of or in connection with any litigation pending against Contemporary prior to
January 1, 1998.
Representations and Warranties
Contemporary and SFX Entertainment have each made certain
representations and warranties to the other in the Contemporary Agreement.
Other than representations and warranties with regard to tax matters, which
survive for the statute of limitations applicable to the relevant
representation or warranty, all representations and warranties made by the
parties to the Contemporary Agreement survive the closing of the Contemporary
Acquisition until the completion of the consolidated audit of the Contemporary
businesses for the two year period ended December 31, 1997.
Indemnification
Contemporary has agreed to indemnify and hold harmless SFX
Entertainment against any and all losses that it may suffer by reason of (a)
the breach by Contemporary of any representation or warranty contained in the
Contemporary Agreement or related agreements, (b) the failure of Contemporary
to perform any agreement or covenant required under the Contemporary Agreement
or related agreements or (c) any liability or debt of Contemporary not
expressly assumed by SFX Entertainment by the terms of the Contemporary
Agreement. SFX Entertainment has agreed to indemnify and hold harmless
Contemporary against any and all losses that it may suffer as a result of (a)
the breach by SFX Entertainment of any representation or warranty contained in
the Contemporary Agreement or related agreements, (b) the failure of SFX
Entertainment to perform any agreement or covenant required under the
Contemporary Agreement or related agreements or (c) the liabilities expressly
assumed by SFX Entertainment by the terms of the Contemporary Agreement.
Neither SFX Entertainment nor Contemporary will be entitled to be indemnified
pursuant to the Contemporary Agreement unless and until the aggregate of all
losses incurred by either party, as the case may be, exceeds $500,000, at
which time the indemnifying party will be obligated to indemnify the
indemnified party (a) if the indemnifying party is SFX Entertainment, for the
first dollar of losses and (b) if the indemnifying party is Contemporary, for
all losses in excess of $100,000. This threshold limitation does not apply in
certain circumstances. Absent fraud and except with respect to certain tax
representations and warranties and other matters, the liability of
Contemporary for indemnification under the Contemporary Agreement will not
exceed an aggregate amount equal to the sum of $3.1 million plus one-half of
the shares of SFX Entertainment Class A Common Stock received by the trusts in
the Contemporary Merger. If notice of any indemnification claim is given after
six months following the closing of the Contemporary Merger, then
Contemporary's liability will be limited to $3.1 million.
Covenants
Contemporary has also agreed to certain pre-closing covenants,
including, among other things, not to:
o make any capital expenditures in excess of $50,000;
o enter into any operating lease calling for net increased rentals in
excess of five percent (5%) annually per lease (over present rentals)
o acquire any assets or properties except in the ordinary course of
business and consistent with past practice;
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o purchase, sell, assign or transfer any of the assets or properties
relating to its business to be acquired that are valued in excess of
$50,000; or
o enter into any new material contract or agreement or any amendment,
modification or termination of any existing material contract
relating to its assets, properties or business to be acquired, except
in the ordinary course of business and consistent with past practice
and in any event not requiring payment in excess of $50,000, other
than talent contracts.
In addition, Contemporary has agreed to satisfy out of the cash proceeds of
the Contemporary Acquisition (a) its expenses incurred in connection with the
Contemporary Acquisition, (b) all monetary liens on assets of Contemporary,
other than liens permitted under the agreement, and (c) any liabilities of
Contemporary that SFX Entertainment will not assume as a result of the
Contemporary Acquisition. All covenants and agreements made by the parties,
unless waived in writing, survive the closing.
Conditions to Closing
The closing of the Contemporary Acquisition is subject to certain
closing conditions, including:
o the accuracy of the representations and warranties and the compliance
with the covenants of Contemporary;
o the receipt of all governmental authorizations, approvals, consents
and waivers, including any authorizations required under the HSR Act;
o the receipt of consents and approvals required under certain existing
agreements of the parties;
o the absence of any action, suit, proceeding or investigation before
any court, administrative agency or governmental authority seeking to
restrain, prohibit or invalidate the consummation of the Contemporary
Merger or the Contemporary Asset Acquisition;
o the execution of employment agreements with certain employees of
Contemporary; and
o the best efforts of Contemporary to deliver estoppel certificates
from each landlord under any lease, and non disturbance and/or
recognition agreements from each mortgagee or superior lessor of a
leased property, relating to the Sandstone Amphitheater, the Westport
Playhouse and the American Theatre.
As a condition to Contemporary's obligations under the Contemporary Agreement,
if the Spin-Off does not occur prior to the closing, then SFX must provide to
the trusts that own Contemporary International a guarantee (which may be
extinguished at the time of the Spin-Off) of the redemption price for the SFX
Entertainment Preferred Stock. Additionally, the closing of the Contemporary
Asset Acquisition is conditioned on the consummation of the Contemporary
Merger.
Termination
The Contemporary Agreement may be terminated at any time prior to the
closing date:
o by the mutual consent of the parties;
o by any of the parties on February 15, 1998, if the other party
materially violates or breaches any representation, warranty,
covenant or agreement or any closing condition, and if the material
violation or breach is not cured within a reasonable period not to
exceed the later of March 17, 1998 or 30 days after receipt of
written notice from the other party; or
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o if, through no fault of the terminating party, the conditions to
closing have become impossible to satisfy or a court has permanently
enjoined the closing and the related order has become final and is
not subject to appeal.
Neither party may terminate the agreement if the Contemporary Acquisition for
failure to consummate by February 15, 1998, if the failure to consummate
results solely from the applicable waiting periods under the HSR Act not
having expired or been terminated; in that case, either party may terminate
the agreement only if the Contemporary Acquisition is not consummated on or
before April 30, 1998. If the closing is delayed beyond February 15, 1998 as
described in the preceding sentence, then, notwithstanding the occurrence of
an event that has a material adverse effect on the business of Contemporary,
SFX Entertainment will be required to close the Contemporary Acquisition when
the waiting period under the HSR Act terminates (unless the termination has
not occurred by April 30, 1998) unless the material adverse effect is the
result of the intentional acts or intentional omissions of Contemporary or its
affiliates or an act or omission of Contemporary or one of its affiliates that
constitutes gross negligence in which case SFX Entertainment will have the
right, without any liability, to refuse to close or may proceed to close the
Contemporary Acquisition, subject to receiving reimbursement for the material
adverse effect of as much as $3.1 million in cash and up to one-half of the
SFX Entertainment Class A Common Stock received by the individuals and trusts
in the transaction.
Future Payment Obligations
If any individual or trust that is a party to the Contemporary
Agreement owns any shares of SFX Entertainment Class A Common Stock received
in the Contemporary Acquisition on the second anniversary of the closing date,
and if the average trading price of the stock over the 20-day period ending on
that date is less than $13.33 per share (subject to adjustment to compensate
for recapitalizations of SFX Entertainment or dividends to holders of SFX
Entertainment Class A Common Stock), then SFX Entertainment will make a
one-time cash payment to that individual or trust. The payment will equal to
the product of (a) the quotient of the difference between (i) the actual
average trading price per share over the 20-day trading period and (ii) $13.33
(or the price as adjusted under the agreement) divided by two, multiplied by
(b) the number of shares of SFX Entertainment Class A Common Stock received by
that individual or trust in the Contemporary Acquisition and owned as of the
second anniversary date.
BGP ACQUISITION
General
SFX Entertainment, through its wholly-owned subsidiary BGP
Acquisition, LLC ("BGP Acquisition Sub"), has entered into a stock purchase
agreement dated as of December 11, 1997 (the "BGP Agreement") with all of the
shareholders (the "BGP Sellers") of BGP. Pursuant to the BGP Agreement, SFX
Entertainment has agreed to purchase all of the outstanding capital stock of
BGP for an aggregate purchase price of approximately $68.3 million in cash,
subject to reduction on a dollar-for-dollar basis to the extent if BGP's Long
Term Debt exceeds its Net Working Capital (both as defined in the BGP
Agreement).
If the Spin-Off occurs before the closing of the BGP Acquisition,
then SFX Entertainment may elect, in its sole discretion, to distribute up to
562,640 shares of SFX Entertainment Class A Common Stock to the BGP Sellers in
lieu of $7.5 million in cash. Similarly, if the Spin-Off does not occur before
the closing, then SFX Entertainment may elect, in its sole discretion, to
distribute options to purchase up to an aggregate of 562,640 shares of SFX
Entertainment Class A Common Stock to the BGP Sellers in lieu of up to $7.5
million in cash. SFX Entertainment may be required, subject to certain
conditions, to repurchase the shares or options issued as consideration in the
BGP Acquisition, if, by June 30, 1998, the shares (a) are not registered with
the SEC, (b) are not listed with a nationally recognized exchange or (c) are
subject to any lock-up period.
SFX will guarantee the payment of the cash portion of the purchase
price in the BGP Acquisition.
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Representations and Warranties
The BGP Sellers have made certain standard and customary
representations and warranties to SFX Entertainment with respect to BGP,
including, among other things, the completeness of the disclosure provided in
connection with the agreement. Similarly, the BGP Sellers have made certain
representations and warranties to SFX Entertainment with respect to
themselves, including, among other things, their competency to enter into the
transaction, the absence of conflicts, required consents and approvals, title
to the stock to be acquired, the absence of options or similar rights in the
capital stock of BGP and legal proceedings. In addition, BGP Acquisition Sub
and SFX Entertainment have made certain representations and warranties to each
BGP Seller with respect to, among other things, its authority to enter into
the transaction, the absence of defaults, the absence of legal proceedings,
required consents and the capitalization of SFX Entertainment. SFX
Entertainment has also represented and warranted to the BGP Sellers that it
will have net assets of not less than $100.0 million as of the closing date of
the BGP Acquisition. Except for representations and warranties relating to tax
matters, which survive for the applicable statute of limitations periods, the
representations and warranties of the parties contained in the BGP Agreement
survive until the first anniversary of the closing of the BGP Acquisition.
Indemnification
The BGP Sellers have agreed to indemnify, defend and hold harmless
BGP Acquisition Sub from and against any losses based on, arising out of or
otherwise resulting from (a) any inaccuracy in any representation or breach of
any warranty of the BGP Sellers, (b) the breach or nonfulfillment of any
covenant, agreement or other obligation of the BGP Sellers, which breach
remains uncured for 30 days following written notice thereof or (c) certain
disclosed liabilities. SFX Entertainment has agreed to indemnify, defend and
hold harmless the BGP Sellers from and against any losses based on, arising
out of or otherwise resulting from (a) any inaccuracy in any representation or
breach of any warranty of BGP Acquisition Sub or (b) the breach or
nonfulfillment of any covenant, agreement or other obligation of BGP
Acquisition Sub (except those under the employee agreements required as a
condition to closing). Other than with respect to the payment of the purchase
price and tax liabilities, neither the BGP Sellers nor BGP Acquisition Sub is
entitled to indemnification under the BGP Agreement unless the aggregate
amount of losses suffered by either party exceeds $325,000, in which event
either party, as the case may be, will be entitled to indemnification for the
sum of (a) $137,500 plus (b) the amount by which the aggregate amount of
losses exceeds $325,000, up to and including (i) in the case of the BGP
Sellers, an amount equal to the payments at any time, received by the BGP
Sellers, severally, from BGP Acquisition Sub pursuant to the BGP Agreement and
(ii) in the case of BGP Acquisition Sub an amount equal to the payments, at
any time, made by BGP Acquisition Sub to the BGP Sellers, in the aggregate,
pursuant to the BGP Agreement. The BGP Sellers have also agreed to indemnify
BGP Acquisition Sub against certain tax liabilities in excess of the sum of
$100,000 plus the amount determined to be Excess Working Capital (as defined
in the BGP Agreement) and to indemnify BGP Acquisition Sub and BGP against all
other tax liabilities in excess of Excess Working Capital.
Each party to the BGP Agreement has waived any consequential,
exemplary or special damages incurred in connection with the agreement.
Covenants
The BGP Sellers have agreed that, until the closing of the BGP
Acquisition, they will or will cause BGP to, among other things: (a) conduct
the operation of BGP's business in the ordinary course, (b) use their best
efforts to preserve BGP's business relationships with clients, customers,
accounts, agents, distributors, suppliers and others having business dealings
with BGP and (c) not participate in any discussions, communications or
negotiations with any persons (other than SFX Entertainment) with respect to
any direct or indirect acquisition of any material portion of the assets,
properties or common stock of BGP. On or prior to the closing of the
acquisition, certain key personnel of BGP will enter into employment
agreements with BGP Acquisition Sub; each BGP Seller that will not be a party
to such an employment agreement has agreed not to compete, directly or
indirectly, with the business of BGP for a period of two years following the
closing. In addition, the BGP Sellers have agreed not to use the names "Bill
Graham Presents" or "Fillmore" or any other similar name following the
closing.
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Conditions to Closing
The closing of the BGP Acquisition is subject to certain closing
conditions, including:
o the accuracy of the representations and warranties contained in the
BGP Agreement as of the closing;
o the receipt of all consents (including any required under the HSR
Act) required to be obtained in connection with the acquisition;
o the absence of any action, suit, claim, proceeding or investigation
that questions the validity or legality of the acquisition or that
could reasonably be expected to have a material adverse effect on the
ability to consummate the acquisition;
o the execution of employment agreements between SFX Entertainment and
certain key employees of BGP;
o receipt by the BGP Sellers of confirmation that the base price used
in the determination of the number of shares of SFX Entertainment
Common Stock that may be distributed in lieu of cash consideration in
the acquisition is the lowest price used by Mr. Sillerman in his
personal acquisition of SFX Entertainment Common Stock;
o the absence of any material changes in BGP since October 31, 1997;
o the satisfaction or mutual termination of all obligations (other than
any obligation under the by-laws of BGP) between any BGP Seller and
BGP, the general unconditional releases by each BGP Seller of BGP
from any and all liabilities, and the release of all security
interests held by any party except SFX Entertainment in any property
of BGP;
o the receipt of written waivers of each of the BGP Sellers' rights
under any shareholder or other agreement entered into with other
shareholders of BGP or BGP itself;
o the acknowledgment of the BGP Sellers that, other than certain
materials specifically excluded, the posters, handbills and other
archive materials referenced in the January 2, 1995 agreement between
Bill Graham Enterprises, Inc. and the heirs of William Graham are
assets of BGP are to be transferred to SFX Entertainment;
o the termination of the Buy-Sell Agreement (as defined in the BGP
Agreement); and
o the execution of written leases with the Fillmore Auditorium and the
Warfield Theater.
Termination
The BGP Agreement may be terminated by (a) mutual consent of the
parties, (b) either party if the closing does not occur by January 29, 1998
and the terminating party does not cause the delay (or February 12, 1998 if
the conditions to closing have not been fulfilled by January 29, (c) SFX
Entertainment if there has been a material misrepresentation or material
breach in the representations, warranties or covenants of the BGP Sellers or
if there has been any material failure on the part of any of the BGP Sellers
to comply with their obligations under the BGP Agreement, (d) the BGP Sellers
if there has been a material misrepresentation or material breach in the
representations, warranties or covenants of SFX Entertainment or if there has
been any material failure on the part of SFX Entertainment to comply with its
obligations under the BGP Agreement or (e) either party if any court of
competent jurisdiction issues an order, decree or ruling or takes any other
action enjoining or otherwise prohibiting the transactions contemplated by the
BGP Agreement and the order, decree, ruling or other action becomes final and
non-appealable. The termination rights described in clauses (b) through (d)
above are subject to a 30 day cure period.
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Restriction on Asset Sales
SFX Entertainment has agreed that it will not sell all, or
substantially all, of the assets of BGP (as of December 11, 1997), for a
period of three years following the closing of the BGP Acquisition 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 SFX Entertainment
from any third party.
NETWORK ACQUISITION
General
SFX Entertainment and its wholly-owned subsidiary SFX Entertainment
Network Group, L.L.C. ("Network Sub"), entered into a stock and asset purchase
agreement dated as of December 10, 1997 (the "Network Agreement'), with the
holders of all of the outstanding capital stock of each of The Album Network,
Inc. ("Album Network") and SJS (collectively, the "Network Sellers") and The
Network 40, Inc. ("Network 40"), wherein SFX Entertainment has agreed to (a)
acquire all of the outstanding capital stock of each of Album Network and SJS
and (b) purchase substantially all of the assets and properties, and assume
substantially all of the liabilities and obligations, of Network 40, for an
aggregate purchase price of $52.0 million in cash (the "Network Cash
Consideration") to be delivered at closing and approximately 750,000 shares of
SFX Entertainment Class A Common Stock valued by the parties at $10.0 million
(the "Network Stock Consideration") to be delivered at the time of the
Spin-Off. The Network Sellers will retain all working capital (as defined in
the Network Agreement) of the acquired businesses in excess of $500,000;
however, if this working capital is less than $500,000, the Network Cash
Consideration will be reduced by the amount of the deficit. If the Spin-Off
has not occurred prior to June 30, 1998, at the option of the Network Sellers,
SFX Entertainment may be required to pay $10 million (plus interest at a rate
of 10% per annum from the date of closing) in cash in lieu of the issuance of
the Network Stock Consideration. The Network Cash Consideration has been
guaranteed by SFX.
In addition to the Network Cash Consideration and the Network Stock
Consideration, SFX Entertainment is obligated to make an additional payment to
the Network Sellers by March 20, 1999 based on the aggregate EBITDA (as
defined in the Network Agreement) generated by Album Network, SJS and the
assets purchased from Network 40 in 1998 (the "Network Earn-Out EBITDA"). The
additional payment will range from a minimum of $4.0 million if the Network
Earn-Out EBITDA is $9.0 million to a maximum of $14.0 million if the Network
Earn-Out EBITDA is greater than $11.0 million and will be payable in shares of
SFX Entertainment Class A Common Stock (based on the average daily closing
price of SFX Entertainment Class A Common Stock for the 20 trading days prior
to March 15, 1999) except (a) if the Network Earn-Out EBITDA is less than $9.6
million, SFX Entertainment may choose to make the additional payment in cash
or (b) if the Spin-Off has not occurred by March 20, 1999, the additional
payment must be made in cash. SFX has guaranteed full and prompt payment of
the Network Cash Consideration upon the satisfaction by the Network Sellers of
all conditions precedent to the obligation of SFX Entertainment to consummate
the Network Acquisition and receipt of any approvals required under the HSR
Act.
SFX Entertainment has agreed that, within 60 days after the
completion of the Spin-Off, it will file with the SEC a registration statement
covering all shares of the Network Stock Consideration. The Network Sellers
may not assign their registration rights without SFX Entertainment's written
consent. In addition, if the Network Earn-Out EBITDA payment is made in shares
of SFX Entertainment Class A Common Stock, then SFX Entertainment must file
with the SEC, within 60 days after the issuance of the Network Earn-Out EBITDA
shares, a registration statement covering all of those shares.
Representations and Warranties
The Network Sellers have made certain representations and warranties
to SFX Entertainment in the Network Agreement that, among other things, (a)
the Network Agreement is a valid, legal and binding obligation of, and
enforceable in accordance with its terms against, each of the Network Sellers,
(b) except for certain disclosed exceptions, performance of the Network
Agreement will not, directly or indirectly, violate any material agreement to
which any of
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the Network Sellers or the acquired companies is a party, (c) except for
certain disclosed exceptions, no material consents from third paries are
necessary to consummate the Network Acquisition and (d) since the date of the
balance sheets provided to SFX Entertainment, none of Network 40, Album
Network or SJS has suffered a material adverse change in their respective
business, operations, properties, assets or condition. Each of SFX
Entertainment and Network Sub has made certain representations and warranties
to each Network Seller with respect to, among other things, (a) its authority
to enter into the transaction, (b) the absence of certain legal proceedings,
(c) that the Network Agreement is a valid, legal and binding obligation of,
and enforceable in accordance with its terms against, each of SFX
Entertainment and Network Sub, (d) required consents and (e) the
capitalization of SFX Entertainment. The representations and warranties of the
parties contained in the Network Agreement survive until June 30, 1999, except
for representations and warranties relating to corporate authority and
trustees' authority, authorization, validity of the agreement, capitalization,
further actions to perfect conveyances and good standing, which survive for
the applicable statute of limitations periods.
Office Purchase/Lease
SFX Entertainment has the option, exercisable on or prior to the
later to occur of three days after the receipt of all approvals under the HSR
Act and 10 days prior to closing, to agree to enter into a purchase and sale
agreement with the Network Sellers to purchase an office building and related
property used in the conduct of the business of Network 40 and Album Network
for an aggregate purchase price of $2.4 million (which is not part of the
Network Cash Consideration), including reimbursement of certain costs of the
Network Sellers. Consummation of the purchase will be conditioned on, among
other things, a due diligence review of the real estate by SFX Entertainment.
If SFX Entertainment elects not to purchase the real estate, then it will
lease the real estate to the Network Sellers for a period of 10 years at Fair
Market Rent (as defined in the Network Agreement). The long-term lease will
provide that SFX Entertainment will have a right of first offer with regard to
sales of all or substantially all of the real estate. If SFX Entertainment
declines to accept such an offer and, within one year therefrom, the Network
Sellers accept a similar offer that is 95% or less in value than the offer
rejected by SFX Entertainment, then SFX Entertainment will have a right of
first refusal with regard to the accepted offer.
Covenants
The Network Sellers have agreed that, prior to the closing of the
Network Acquisition, they will, among other things: (a) conduct the operation
of the businesses to be acquired in the ordinary course, (b) use their best
efforts to preserve the business relationships of the businesses to be
acquired, (c) report periodically to SFX Entertainment, (d) satisfy all legal
conditions applicable to the proposed transactions, (e) repay all indebtedness
of related parties, (f) not participate in any discussions, communications or
negotiations with any person with respect to any direct or indirect
acquisition of any material portion of the assets, properties or capital stock
of Network 40, Album Network, or SJS and (g) cause Network 40 and Bullet
Productions, Inc. to merge, with Network 40 as the surviving corporation.
Indemnification
The Network Sellers and SFX Entertainment have agreed to enter into
indemnification agreements at closing whereby they agree to indemnify each
other and their successors and assigns from and against any losses resulting
from (a) any inaccuracy in any representation or breach of any warranty under
the Network Agreement and (b) the breach or nonfulfillment of any covenant,
agreement or other obligation under the Network Agreement. Other than with
respect to the payment of the Network Cash Consideration, the Network Stock
Consideration and the Network Earn-Out EBITDA payment, neither the Network
Sellers nor SFX Entertainment is entitled to indemnification unless the
aggregate amount of losses suffered by the party seeking indemnification
exceeds $250,000; in that case, that party will be indemnified from the first
dollar.
D-73
<PAGE>
Conditions to Closing
The consummation of the Network Acquisition is subject to certain
closing conditions, including (a) the accuracy of the representations and
warranties contained in the Network Agreement as of the closing (except where
made as of a certain date), (b) the receipt of all material consents
(including any required under the HSR Act) required to be obtained in
connection with the Network Acquisition, (c) the absence of any action, suit,
claim, proceeding or investigation that challenges or requests relief with
respect to the proposed transactions or may have the effect of delaying or
interfering with the proposed transactions and (d) the execution of the
employment agreements with each of the Network Sellers and indemnification
agreements described above.
Closing and Termination
The consummation of the Network Acquisition will be on a date
selected by SFX Entertainment (but no earlier than January 31, 1998, and no
later than the date of the consummation of the Spin-Off). SFX Entertainment
anticipates consummating the Network Acquisition in the first quarter of 1998.
The Network Agreement may be terminated by (a) mutual consent of the
parties, (b) either party if the closing does not occur by March 1, 1998 and
the terminating party does not cause the delay or (c) either party if the
other party has materially breached any of its obligations under the agreement
and if the breach remains uncured for a 30-day period.
CONCERT/SOUTHERN ACQUISITION
General
SFX Entertainment, through its wholly-owned subsidiary SFX Concerts,
Inc., has entered into the purchase and sale agreement dated December 15,
1997, (the "Concert/Southern Agreement") with:
o Southern Promotions, Inc., High Cotton, Inc. and Cooley and Conlon
Management, Inc. (collectively, the "Concert/Southern Sale
Companies"), and certain shareholders of the Concert/Southern Sale
Companies;
o Buckhead Promotions, Inc., Northern Exposure, Inc., Pure Cotton, Inc.
and Interfest, Inc. (collectively, the "Concert/Southern Asset
Companies"); and
o Concert/Southern Chastain Promotions Joint Venture and Roxy Ventures
Joint Venture (collectively, the "Concert/Southern Joint Ventures").
Pursuant to the Concert/Southern Agreement, SFX Entertainment has agreed to
purchase all of the outstanding capital stock of the Concert/Southern Sale
Companies and substantially all of the assets of the Concert/Southern Asset
Companies and the Concert/Southern Joint Ventures excluding, among other
things, cash and receivables, for a purchase price of $16.6 million payable in
cash at closing. In addition, SFX Entertainment will assume the obligations of
the Concert/Southern Asset Companies and the Concert/Southern Joint Ventures
arising under (a) certain real estate contracts, (b) all other contracts
arising in the ordinary course of business and (c) any other contracts entered
into by the closing date that do not involve an obligation of $10,000 or more
or $40,000 in the aggregate, unless SFX Entertainment expressly agrees to do
otherwise.
Representations and Warranties
The Concert/Southern Joint Ventures, the Concert/Southern Asset
Companies and the stockholders of the Concert/Southern Sale Companies
(collectively, the "Concert/Southern Sellers") have made certain customary
representations and warranties to SFX Entertainment in the Concert/Southern
Agreement with respect to, among other things, their organization and
authority to enter into the agreement, capitalization, title to shares,
absence of conflicting
D-74
<PAGE>
agreements or required consents, government authorizations, subsidiaries,
taxes, personal property, real property, contracts, status of contracts,
environmental matters, copyrights, trademarks and similar rights, personnel
information, financial statements, liabilities, absence of certain changes or
events, title to properties, litigation, compliance with laws, insurance,
accuracy of information, accounts receivable, payola/plugola and the business
of the Concert/Southern companies. SFX Entertainment has made certain
customary representations and warranties to the Concert/Southern Sellers with
respect, among other things, organization and standing, authorization and
binding obligation, litigation and compliance with laws, investment intent and
the accuracy of information.
Indemnification
Each of SFX Entertainment and the Concert/Southern Sellers have
agreed to indemnify the other for losses resulting, directly or indirectly,
from a breach of any of its representations, warranties, covenants or
agreements contained in the Concert/Southern Agreement or any instrument or
certificate delivered pursuant thereto. The Concert/Southern Agreement
provides that the representations and warranties of the Concert/Southern
Sellers and SFX Entertainment contained therein will continue in force for a
period of 12 months following the closing of the acquisition, after which time
the indemnification obligations of the parties will be limited to claims
asserted during the 12-month period. Neither the Concert/Southern Sellers nor
SFX Entertainment will have any liability to the other for breach of any
representation, warranty, covenant, agreement of the other party, except to
the extent that the aggregate of all claims by the other party for breaches
exceeds $100,000, in which case the party seeking indemnification will be paid
from the first dollar.
Covenants
The Concert/Southern Sellers have also agreed that, until the closing
of the acquisition, they will, among other things:
o use all reasonable efforts to preserve relationships with customers,
suppliers, employees and others;
o provide SFX Entertainment with monthly unaudited statements of
revenue and expenses; and
o provide SFX Entertainment with access to all books, records and other
facilities of the operating facilities.
The Concert/Southern Sellers have also agreed not to, other than in the
ordinary course of business:
o sell or dispose of any assets except the property located on Monroe
Drive in Atlanta, Georgia;
o grant any general increases in salaries or bonus (other than certain
specified bonuses);
o provide any pensions, retirement or other employee benefits unless
required by law; and
o permit any insurance policies to be canceled or terminated.
Except as required by the Joint Venture Agreement with the Woodruff Arts
Center, none of the Concert/Southern Sellers will directly or indirectly
solicit or enter into any agreements regarding any merger, sale of shares of
capital stock, or sale of assets involving any of the operating entities of
Concert/Southern.
Conditions to Closing
The closing of the acquisition is subject to certain conditions,
including the accuracy and compliance with the representations, warranties and
covenants, the obtaining of requisite governmental consents, the resignation
of all officers and directors of each of the operating entities of the
Concert/Southern Sellers, receipt of all third party consents to the material
contracts of the operating entities and to all other contracts assigned or
transferred to SFX Entertainment,
D-75
<PAGE>
and the absence of adverse proceedings. SFX Entertainment must also have
entered into (a) employment agreements with Messrs. Alex Cooley and Peter
Conlon and (b) an agreement with Mr. Stephen Selig, III with respect to
certain preferred tickets for promotions in Atlanta on terms to be mutually
determined by SFX Entertainment and Mr. Selig. In addition, receipt of the
Robert W. Woodruff Arts Center, Inc.'s consent to the sale or its waiver of
its rights to purchase the assets subject to the Concert/Southern Agreement is
a condition to closing.
Closing and Termination
Consummation of the Concert/Southern Acquisition will occur on the
later of (a) 5 business days following the expiration or termination of all
waiting periods that are applicable to the acquisition pursuant to the HSR Act
or (b) March 31, 1998, unless extended to June 30, 1998 in connection with the
parties' HSR Act filings.
The Concert/Southern Agreement may be terminated:
o by the mutual written consent of the Concert/Southern Sellers and SFX
Entertainment;
o by either party if the closing has not occurred by March 31, 1998
(which will be extended to June 30, 1998 if either party receives a
request for additional information in connection with their HSR Act
filing);
o by either party any judgment, final decree or order that would
prevent or make unlawful the closing is in effect;
o by a non-breaching party if the other breaches the agreement in any
material respect and fails to cure the breach within 30 calendar
days;
o by either of SFX Entertainment or the Concert/Southern Sellers if the
conditions related to governmental consents and lack of adverse
proceedings of the other party are not satisfied;
o by SFX Entertainment if there is an uncured breach of the
Concert/Southern Sellers' representations and warranties with regard
to compliance with environmental laws (however, if the remedy for the
breach requires the expenditure of greater than an aggregate of
$75,000, then the Concert/Southern Agreement may be terminated at the
option of the Concert/Southern Sellers); or
o by SFX Entertainment if the any of the purchased assets with a value
greater than $50,000 is damaged and is not restored or replaced by
the Concert/Southern Sellers.
If the Concert/Southern Agreement is terminated as a result of a material
breach by SFX Entertainment of its obligations thereunder, then SFX
Entertainment must pay the Concert/Southern Sellers liquidated damages in the
amount of $2.0 million.
D-76
<PAGE>
LISTING AND TRADING OF SFX ENTERTAINMENT CLASS A COMMON STOCK
SFX Entertainment has applied to list the SFX Entertainment Class A
Common Stock on the Nasdaq National Market under the symbol "____" but, even
if the application is approved, may seek listing elsewhere There is currently
no public trading market for SFX Entertainment Class B Common Stock. See "Risk
Factors--No Prior Market for SFX Entertainment Stock." [A when-issued trading
market (one in which shares can be traded before certificates are actually
available or issued) is expected to develop in the SFX Entertainment Class A
Common Stock on or about the Spin-Off Record Date.] Trading prices of the
shares of SFX Entertainment Class A Common Stock, before or after the
Spin-Off, cannot be predicted. The SFX Entertainment Class B Common Stock is
not expected to be publicly traded.
As of the Spin-Off Distribution Date, SFX Entertainment expects to
have approximately _______ holders of record of the SFX Entertainment Class A
Common Stock, based on the number of holders of record of SFX's Class A common
stock, Series D preferred stock and Warrants on _________ ___, 1998. The
Transfer Agent and Registrar for the SFX Entertainment Class A Common Stock
will be [Chase Mellon]. On _______ ___, 1998, approximately ___ million
options and warrants (including the Warrants) to acquire shares of SFX's Class
A common stock were outstanding and exercisable prior to the Spin-Off Record
Date for shares of SFX's Class A common stock. If these options and warrants
are exercised prior to the Spin-Off Record Date, an additional approximately
____ million shares of SFX Entertainment Class A Common Stock will be issued
in the Spin-Off. In addition, it is anticipated that the board of directors of
SFX Entertainment will, subsequent to the Spin-Off, grant an aggregate of up
to [793,633] shares of SFX Entertainment Class A Common Stock to holders as of
the Spin-Off Record Date of stock options or SARs of SFX, whether or not
vested and will grant an aggregate of 290,000 shares of SFX Entertainment Class
A Common Stock to certain officers pursuant to their 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's Options and SARs."
Shares of SFX Entertainment Common Stock distributed to SFX
stockholders in the Spin-Off will be freely transferable, except for shares
received by persons who may be deemed to be "affiliates" of SFX Entertainment
under the Securities Act. See "Principal Stockholders." Persons who may be
deemed to be affiliates of SFX Entertainment generally include individuals or
entities that control, are controlled by or are under common control with SFX
Entertainment, and may include certain officers and directors of SFX
Entertainment as well as principal stockholders of SFX Entertainment, if any.
Persons who are affiliates of SFX Entertainment may sell their shares of SFX
Entertainment Common Stock only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act, such as the exemptions afforded by Section
4(2) of the Securities Act and Rule 144 thereunder.
DIVIDEND POLICY
SFX Entertainment has no present plans to declare any dividends on
the SFX Entertainment Common Stock. The terms of the debt incurred in the
Financing and otherwise are likely to restrict SFX Entertainment's ability to
pay dividends on the SFX Entertainment 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.
D-77
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1997, (i) the
historical capitalization of SFX Entertainment, (ii) the pro forma
capitalization of SFX Entertainment to reflect the Financing and the
consummation of the Pending Acquisitions and (iii) the pro forma
capitalization of SFX Entertainment to reflect the Financing, the Pending
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 Party
Transactions--Issuance of Stock to Holders of SFX'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>
SEPTEMBER 30, 1997
--------------------------------------------
(IN THOUSANDS)
PRO FORMA FOR
FINANCING,
PENDING
PRO FORMA FOR ACQUISITIONS,
FINANCING SPIN-OFF AND
AND PENDING SFX
ACQUISITIONS(2) MERGER(3)
ACTUAL(1) (UNAUDITED) (UNAUDITED)
---------- --------------- ---------------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS..................................... $ 7,094 $ 60,390 $ 62,535
========== =============== ===============
DEBT:
Note Offering................................................. -- 275,000 275,000
Senior Credit Facility ....................................... -- 205,869 205,869
Other long-term debt.......................................... 16,453 16,453 16,453
---------- --------------- ---------------
TOTAL DEBT .................................................. 16,453 497,322 497,322
---------- --------------- ---------------
TEMPORARY EQUITY(4): -- 16,500 16,500
STOCKHOLDERS' EQUITY(5):
Preferred Stock, $.01 par value, 1,000 shares authorized,
none issued and outstanding as of September 30, 1997 actual
and pro forma ............................................... -- -- --
Class A Common Stock, $.01 par value, 1,000 shares
authorized, issued and outstanding as of September 30, 1997
actual, approximately 4,200,000 issued and outstanding pro
forma for the Financing and Pending Acquisitions and
approximately 18,700,000 issued and outstanding pro forma
for Financing, Pending Acquisitions, Spin-Off and SFX
Merger....................................................... -- 42 187
Class B Common Stock, $.01 par value, 1,000 shares
authorized, issued and outstanding as of September 30, 1997
actual and approximately 1,700,000 shares issued and
outstanding pro forma for Financing, Pending Acquisitions,
Spin-Off and
SFX Merger................................................... -- -- 17
Additional paid-in capital ................................... 97,726 137,384 139,367
Retained earnings(6) ......................................... 3,652 3,652 3,652
---------- --------------- ---------------
Total stockholders' equity .................................. 101,378 141,078 143,223
---------- --------------- ---------------
Total capitalization......................................... $117,831 $654,900 $657,045
========== =============== ===============
</TABLE>
- ------------
(1) Reflects the consolidated historical balance sheet of SFX Entertainment
adjusted to reflect the contribution by SFX to SFX Entertainment's
capital of an intercompany payable incurred in connection with the
Recent Acquisitions. Only includes working capital associated with the
entertainment business.
(2) The cash portion of the purchase price in the Pending Acquisitions is
subject to increase under certain circumstances, including, in
particular, if SFX Entertainment is unable to issue shares of its
capital stock to certain of the sellers by virtue of having failed to
consummate the Spin-Off or for any other reason. In that case, the
aggregate cash consideration that would be owed to the sellers in the
Pending Acquisitions would increase by approximately $56.2 million,
resulting in a corresponding increase in debt and decrease in
stockholders' equity. In addition, the agreements relating to the
Pending Acquisitions provide for certain other purchase price
adjustments and future contingent payments in certain circumstances.
See "Risks Related to Pending Acquisitions" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Pending Acquisitions" and "--Liquidity and Capital
Resources--Pending Acquisitions" and "Agreements Related to the Pending
Acquisitions."
D-78
<PAGE>
(3) The Distribution Agreement provides that SFX will transfer any positive
Working Capital in existence at the closing of the SFX Merger to SFX
Entertainment, and that if Working Capital is negative at that time,
SFX Entertainment will pay the amount of such shortfall to SFX. As of
September 30, 1997 the amount of positive Working Capital would have
been $2,145,000 and such amount is reflected in the cash to be acquired
by SFX Entertainment pursuant to the Distribution Agreement. The actual
amount of Working Capital as of the closing of the SFX Merger may
differ substantially from the amount in existence on September 30,
1997, and will be a function of, among other things, the operating
results of SFX through the date of the SFX Merger at the actual cost of
consummating the SFX Merger and the related transactions and amounts
advanced to SFX Entertainment by SFX prior to the Spin-Off. 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 options. See
"Management--Employment Agreement and Arrangements with Certain
Officers and Directors" and "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX's Options
and SARs."
(4) The PACE Agreement provides that each PACE Seller shall have 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 SFX Entertainment to purchase up to one-third of
the SFX's 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.
(5) SFX has indicated that it will recapitalize SFX Entertainment prior to
the consummation of the Pending Acquisitions and the Spin-Off which
will allow for, among other things, an increase in the number of
authorized shares of common stock.
(6) Retained earnings on a pro forma basis for the Financing, the Pending
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 SFX Entertainment. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources--Future Charges to Earnings."
D-79
<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 SFX
Entertainment may differ materially from those discussed herein for the
reasons identified herein. SFX Entertainment 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 SFX Entertainment
and the Acquisition Businesses and the respective notes to such financial
statements included herein. The pro forma information is based upon tentative
allocations of purchase price for the Pending Acquisitions, and does not
purport to be indicative of the results that would have been reported had
such events actually occurred on the dates specified, nor is it indicative of
SFX Entertainment's future results if the aforementioned transactions are
completed. SFX Entertainment cannot predict whether the consummation of the
Pending Acquisitions will conform to the assumptions used in the preparation
of the Unaudited Pro Forma Condensed Combined Financial Statements.
Additionally, there can be no assurance that the Pending Acquisitions will be
consummated on the terms described herein, or at all.
The Unaudited Pro Forma Condensed Combined Balance Sheet at September 30,
1997 is presented as if SFX Entertainment had completed the Financing, the
Pending Acquisitions, the Spin-Off and the SFX Merger as of September 30,
1997.
The Unaudited Pro Forma Condensed Combined Statements of Operations for
the year ended December 31, 1996 and the nine months ended September 30, 1997
are presented as if SFX Entertainment had completed the Recent Acquisitions,
the Financing, the Pending Acquisitions, the Spin-Off and the SFX Merger as
of January 1, 1996.
The Unaudited Pro Forma Condensed Combined Financial Statements have been
prepared assuming that the approximately 4.2 million shares of SFX
Entertainment's Class A Common Stock are issued in connection with certain of
the Pending Acquisitions and have been valued by the parties at $13.33 per
share for purposes of calculating the consideration to be given for the
Pending Acquisitions. Such valuation is based upon certain financial
projections developed jointly by SFX Entertainment and the sellers. There is
presently no trading market for SFX Entertainment's Class A Common Stock, and
there can be no assurance that the assumptions upon which the valuation is
based will, in fact, be correct or that the valuation will approximate the
actual trading price of SFX Entertainment's Class A Common Stock.
The cash portion of the purchase price in the Pending Acquisitions is
subject to increase under certain circumstances, including, in particular, if
SFX Entertainment is unable to issue shares of its capital stock to certain
of the sellers by virtue of having failed to consummate the Spin-Off by July
1, 1998 or for any other reason. In such case, the aggregate cash
consideration that would be owed to the sellers in the Pending Acquisitions
would increase by approximately $56.2 million resulting in a corresponding
increase in debt and decrease in stockholder's equity. Although management
believes the Spin-Off is likely to occur, the Spin-Off is subject to certain
conditions, some of which are outside of management's control. There can be
no assurance that the Spin-Off will be consummated on the terms presently
contemplated, or at all. In addition, the agreements relating to the Pending
Acquisitions provide for certain other purchase price adjustments and future
contingent payments in certain circumstances. See "Risk Factors--Risks
Related to Pending Acquisitions," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Pending Acquisitions" and "Agreements Related to the Pending
Acquisitions."
Purchase accounting is based upon preliminary asset valuations, which are
subject to change.
D-80
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(in thousands)
<TABLE>
<CAPTION>
PRO FORMA FOR THE PENDING
ACQUISITIONS
----------------------------------
SFX PACE
ENTERTAINMENT AND CONTEMPORARY
(ACTUAL) PAVILION ACQUISITIONS ACQUISITION
I II III
------------- -------------------- ------------
<S> <C> <C> <C>
ASSETS:
Current assets ..... $ 12,189 $(150,730) $(72,800)
Property and
equipment, net..... 55,882 82,489 25,000
Intangible assets,
net................ 59,721 125,314 66,500
Other assets........ 7,678 34,706 --
------------- -------------------- ------------
TOTAL ASSETS........ $135,470 $ 91,779 $ 18,700
============= ==================== ============
LIABILITIES &
STOCKHOLDERS'
EQUITY:
Current
liabilities........ $ 11,333 $ 63,756 $ --
Deferred taxes...... 2,816 -- --
Senior Credit
Facility........... -- -- --
Note Offering....... -- -- --
Other long-term
debt (including
current portion) .. 16,453 -- --
Other liabilities .. 3,490 5,583 --
------------- -------------------- ------------
Total Liabilities .. 34,092 69,339 --
Minority interest .. -- 2,440 --
Temporary Equity ... -- 16,500 --
Stockholders'
Equity............. 101,378 3,500 18,700
------------- -------------------- ------------
TOTAL LIABILITIES &
STOCKHOLDERS'
EQUITY............. $135,470 $ 91,779 $ 18,700
============= ==================== ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA FOR
THE FINANCING,
PRO FORMA FOR THE PENDING ACQUISITIONS THE PENDING
----------------------------------------------- ACQUISITIONS,
CONCERT/ PRO FORMA THE SPIN-OFF
BGP NETWORK SOUTHERN PRO FORMA ADJUSTMENT FOR AND THE
ACQUISITION ACQUISITION ACQUISITION ADJUSTMENTS THE FINANCING SFX
IV V VI VII VIII MERGER
----------- ----------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets ..... $(54,222) $(44,510) $(16,615) $ 2,145 (a) $352,893 $117,326
(39,000)(b) 88,976
39,000
Property and
equipment, net..... 20,000 1,000 1,000 -- -- 185,371
Intangible assets,
net................ 50,179 61,701 15,151 10,000 (d) 427,566
39,000 (b)
Other assets........ 222 391 464 (1,610)(c) -- 41,851
----------- ----------- ----------- ----------- -------------- --------------
TOTAL ASSETS........ $ 16,179 $ 18,582 $ -- $ 10,535 $480,869 $772,114
=========== =========== =========== =========== ============== ==============
LIABILITIES &
STOCKHOLDERS'
EQUITY:
Current
liabilities........ $ 6,062 $ 8,468 $ -- $ -- $ -- $ 89,619
Deferred taxes...... 2,617 114 -- 10,000 (d) 15,547
Senior Credit
Facility........... -- -- -- -- 205,869 205,869
Note Offering....... -- -- -- -- 275,000 275,000
Other long-term
debt (including
current portion) .. -- -- -- -- 16,453
Other liabilities .. -- -- -- -- -- 9,073
----------- ----------- ----------- ----------- -------------- --------------
Total Liabilities .. 8,679 8,582 -- 10,000 480,869 611,561
Minority interest .. -- -- -- (1,610)(c) -- 830
Temporary Equity ... -- -- -- -- -- 16,500
Stockholders'
Equity............. 7,500 10,000 -- 2,145 (a) -- 143,223
----------- ----------- ----------- ----------- -------------- --------------
TOTAL LIABILITIES &
STOCKHOLDERS'
EQUITY............. $ 16,179 $ 18,582 $ -- $ 10,535 $480,869 $772,114
=========== =========== =========== =========== ============== ==============
</TABLE>
D-81
<PAGE>
I. Reflects the consolidated historical balance sheet of SFX Entertainment
adjusted to reflect the contribution by SFX to SFX Entertainment's capital of
an intercompany payable incurred primarily to complete the Recent
Acquisitions. Only includes working capital associated with the entertainment
business.
II. PACE AND PAVILION ACQUISITIONS
Reflects the PACE Acquisition and the separate acquisitions of the
remaining two partners' interests in Pavilion Partners. The PACE Acquisition is
not conditioned on the consummation of the Pavilion Acquisition.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 (IN THOUSANDS)
----------------------------------------------------------
PACE PAVILION PRO FORMA PACE
AS REPORTED AS REPORTED ADJUSTMENTS TOTAL (F)
------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets........................... $45,087 $ 30,178 $(109,500)(a) $(150,730)
(25,523)(a)
(9,507)(b)
(4,171)(b)
(27,500)(c)
(49,794)(e)
Property and equipment, net.............. -- 59,938 5,000 (a) 82,489
9,103 (b)
(19,052)(d)
27,500 (c)
Intangible assets, net................... 17,894 -- 107,420 (a) 125,314
Other assets............................. 26,856 12,660 9,507 (b) 34,706
(4,810)(d)
(9,507)(d)
------------- ------------- --------------- ------------
Total Assets............................. $89,837 $102,776 $(100,834) $ 91,779
============= ============= =============== ============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities...................... $43,171 $ 17,254 $ 2,000 (b) $ 63,756
2,932 (b)
(1,601)(d)
Deferred taxes........................... -- -- -- --
Long-term debt (including current
portion)................................ 25,523 57,700 (25,523)(a) --
(7,906)(d)
(49,794)(e)
Other liability.......................... 4,063 1,520 -- 5,583
------------- --------------- ------------
Total Liabilities........................ 72,757 76,474 (79,892) 69,339
Minority interest........................ -- 2,440 -- 2,440
Temporary Equity......................... -- -- 16,500 (a) 16,500
Stockholders' Equity..................... 17,080 23,862 (17,080)(a) 3,500
20,000 (a)
(16,500)
(23,862)(d)
- ---------------------------------------- ------------- ------------- --------------- ------------
Total Liabilities & Stockholders'
Equity.................................. $89,837 $102,776 $(100,834) $ 91,779
============= ============= =============== ============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) To reflect the PACE Acquisition for $109,500,000 in cash, the issuance
of 1,500,000 shares of SFX Entertainment's Class A Common Stock valued
by the parties at $20,000,000, the assumption of debt of $25,523,000
which is expected to be repaid shortly after closing, 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 $107,420,000, and the elimination of stockholder's
equity of $17,080,000. Pursuant to the terms of the PACE Agreement,
additional consideration is required to be paid by SFX Entertainment if
the deemed value of SFX Entertainment's Class A Common Stock is below
$13.33 per share at the time of the Spin-Off under certain
circumstances.
D-82
<PAGE>
The PACE Agreement further provides that each PACE Seller shall have 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 SFX Entertainment to purchase up to
one-third of SFX Entertainment's 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 Option ($16,500,000) has been
presented as temporary equity on the pro forma balance sheet.
Pursuant to the PACE Agreement, certain notes receivables and loans
made to key executives will be repaid in connection with the closing of
the PACE Acquisition. Such repayment has not been reflected herein.
(b) To reflect the acquisition of an additional 33.33% indirect interest in
Pavilion Partners from Blockbuster for $4,171,000 in cash, the
assumption of $2,932,000 in 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 at its current outstanding balance,
including accrued interest of, $9,507,000. This note will be eliminated
in consolidation upon 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 Sony for $27,500,000 in cash.
(d) To eliminate PACE's equity method investment in Pavilion Partners
following the acquisition of 100% of Pavilion Partners and to eliminate
Pavilion's historical equity. Also reflects the elimination of the
$7,906,000 intercompany notes receivable and accrued interest of
$1,601,000 acquired from Blockbuster. There can be no assurance that SFX
Entertainment will be able to consummate the acquisition of either or
both of Blockbuster's and Sony's respective interests in Pavilion
Partners and, as a result, SFX Entertainment may not obtain 100% of
Pavilion Partners. See "Agreements Related to Pending Acquisitions--PACE
Acquisition--Pavilion Acquisition."
(e) To reflect the repayment of Pavilion Partners' third party debt at the
closing of the Pavilion Acquisition.
(f) SFX Entertainment has agreed to lend PACE up to $25,000,000 for
potential acquisitions to be made by PACE whether or not the PACE
Acquisition is consummated. None of these acquisitions are considered
probable. As a result, none of such loans or acquisitions have been
reflected in the pro forma adjustment.
See "Agreements Related to Pending Acquisitions--PACE Acquisition."
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.
The Contemporary Acquisition is not conditioned upon the consummation of the
acquisition of such 50% interest.
D-83
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 (IN THOUSANDS)
-------------------------------------------------------------
RIVERPORT
CONTEMPORARY AMPHITHEATER PRO FORMA CONTEMPORARY
AS REPORTED PARTNERS ADJUSTMENTS(A) ACQUISITION
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets........................... $13,375 $ 2,603 $(72,800) $(72,800)
(15,978)
Property and equipment, net.............. 2,838 11,355 10,807 25,000
Intangible assets, net................... -- -- 66,500 66,500
Other assets............................. 7,430 8 (1,205) --
(6,233)
-------------- -------------- -------------- --------------
Total Assets............................. $23,643 $13,966 $(18,909) $ 18,700
============== ============== ============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities...................... $ 7,786 $ 1,022 $ (8,808) $ --
Other long-term debt (including current
portion)................................ 1,578 -- (1,578) --
Other liabilities........................ 5,390 478 (5,868) --
-------------- -------------- -------------- --------------
Total Liabilities........................ 14,754 1,500 (16,254) --
Stockholders' Equity..................... 8,889 12,466 18,700 18,700
(21,355)
-------------- -------------- -------------- --------------
Total Liabilities & Stockholders'
Equity.................................. $23,643 $13,966 $(18,909) $ 18,700
============== ============== ============== ==============
</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 not already owned by Contemporary
and the issuance of 1,402,851 shares of SFX Entertainment's Class A
Common Stock valued by the parties at $18,700,000, the related
increase in the fair value allocated to fixed assets of $10,807,000,
the related excess of the purchase price paid over the fair value of
net tangible assets of $66,500,000, and the adjustment to eliminate
$15,978,000 of current assets, $1,205,000 of other assets, $8,808,000
of current liabilities, $1,578,000 of notes payable, $5,868,000 of
other liabilities, and stockholders' equity of $21,355,000, and to
reflect the elimination of Contemporary Group's $6,233,000 equity
investment in Riverport Amphitheather Partners. Pursuant to the
Contemporary Agreement, SFX Entertainment has eliminated certain cash
and receivables from current assets, accounts payable and accrued
expenses from current liabilities, and other assets and other
liablilties (principally, deferred revenue), which will not be
acquired or assumed by SFX Entertainment upon closing the Contemporary
Acquisition. Adjustment to eliminate Contemporary's historical
stockholders' equity and replace it with the value of the equity
securities to be issued by SFX Entertainment in connection with the
Contemporary Acquisition has also been made.
If Contemporary is unable to complete this acquisition of the
remaining 50% interest in Riverport Amphitheater Partners, the cash
consideration paid by SFX Entertainment for Contemporary will be
reduced by $10,500,000.
The acquisition agreement provides that in the event the Contemporary
Acquisition is consummated prior to the consummation of the Spin-Off,
1,402,851 shares of preferred stock of SFX Entertainment will be issued
to the sellers. Such preferred stock is to be converted into an equal
number of shares of SFX Entertainment's 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, SFX
Entertainment has agreed to make certain payments to any Contemporary
sellers that own shares of SFX Entertainment's Class A Common Stock on
the second anniversary of the closing of the Contemporary Acquisition
if the average trading price of such stock on the 20-day period ending
on such period is less than $13.33 per share. See "Agreements Related
to the Pending Acquisitions--Contemporary Acquisition."
D-84
<PAGE>
IV. BGP ACQUISITION
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 (IN THOUSANDS)
--------------------------------------------
PRO FORMA BGP
AS REPORTED ADJUSTMENTS ACQUISITION
------------- -------------- -------------
<S> <C> <C> <C>
ASSETS:
Current assets........................... $18,759 $(60,800)(a) $(54,222)
(12,181)(b)
Property and equipment, net.............. 9,233 10,767 (a) 20,000
Intangible assets, net .................. 1,460 48,719 (a) 50,179
Other assets............................. 222 -- 222
------------- -------------- -------------
Total Assets............................. $29,674 $(13,495) $ 16,179
============= ============== =============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities...................... $ 6,062 $ -- $ 6,062
Deferred taxes .......................... 2,617 -- 2,617
Other long-term debt (including current
portion)................................ 12,181 (12,181)(b) --
------------- -------------- -------------
Total Liabilities........................ 20,860 (12,181) 8,679
Stockholders' Equity..................... 8,814 (8,814)(a) 7,500
7,500 (a)
------------- -------------- -------------
Total Liabilities & Stockholders'
Equity.................................. $29,674 $(13,495) $ 16,179
============= ============== =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) To reflect the BGP Acquisition for $60,800,000 in cash and the issuance
of 563,000 shares of SFX Entertainment's Class A Common Stock valued at
$7,500,000, the related increase in fair value allocated to fixed
assets of $10,767,000 and the related excess of the purchase price paid
over the fair value of net tangible assets of $48,719,000, and the
elimination of $8,814,000 of stockholders' equity.
(b) To reflect the repayment of BGP's long-term debt at closing. Although
SFX Entertainment is assuming $12,200,000 of long-term debt, BGP is
required to have working capital at least equal to such liabilities at
the closing of the BGP Acquisition. The purchase price will be reduced
dollar-for-dollar to the extent that long-term debt exceeds working
capital.
See "Agreements Related to the Pending Acquisitions--BGP Acquisition."
V. NETWORK ACQUISITION
The Network Acquisition consists of the separate acquisitions of Network
Magazine and SJS. Each of these acquisitions is conditioned on the concurrent
closing of the other.
D-85
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 (IN THOUSANDS)
----------------------------------------------------------
NETWORK
MAGAZINE SJS PRO FORMA NETWORK
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets.......................... $ 3,127 $4,325 $(52,000)(a) $(44,510)
1,516 (b)
(1,478)(c)
Property and equipment, net............. 304 334 362 (a) 1,000
Intangible assets, net.................. -- -- 63,217 (a) 61,701
(1,516)(b)
Other assets............................ 299 92 -- 391
------------- ------------- -------------- -------------
Total Assets............................ $ 3,730 $4,751 $ 10,101 $ 18,582
============= ============= ============== =============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities..................... $ 3,659 $4,809 -- $ 8,468
Deferred taxes.......................... 114 -- -- 114
Long-term debt (including current
portion)............................... 1,478 -- (1,478)(c) --
------------- ------------- -------------- -------------
Total Liabilities....................... 5,251 4,809 (1,478) 8,582
Stockholders' Equity.................... (1,521) (58) 1,579 (a) 10,000
10,000 (a)
------------- ------------- -------------- -------------
Total Liabilities & Stockholders'
Equity................................. $ 3,730 $4,751 $ 10,101 $ 18,582
============= ============= ============== =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) To reflect the Network Acquisition for $52,000,000 in cash and the
issuance of 750,188 shares of SFX Entertainment's Class A Common Stock
valued by the parties at $10,000,000, the related increase in fair
value allocated to fixed assets of $362,000, and the related excess of
the purchase price paid over the fair value of net tangible assets of
$63,217,000, and the elimination of stockholders' deficiency of
$1,579,000.
SFX Entertainment's purchase agreement for Network Magazine and SJS
provides that the purchase price will be increased by $4,000,000 if
total 1998 EBITDA for Network and SJS as defined equals or exceeds
$9,000,000; by an additional $4 for each $1 increase in such EBITDA
between $9,000,000 and $10,000,000 and by an additional $6 for each $1
increase in such EBITDA between $10,000,000 and $11,000,000 (up to a
maximum of $14,000,000 of additional consideration). The additional
consideration is payable in shares of SFX Entertainment's Class A
Common Stock or, in certain circumstances, in cash. The pro forma
financial statements assume that no additional consideration is paid.
(b) To reflect a net working capital adjustment as required in the Network
Acquisition agreement. Pursuant to the Network Agreement, the final
cash purchase price of Network Magazine and SJS shall be adjusted for
any difference between net working capital, as defined, and $500,000.
The working capital adjustment is calculated as the difference between
current assets and current liabilities of Network Magazine and SJS at
closing.
(c) To reflect the repayment of Network Magazine's long-term debt at
closing.
SFX Entertainment's purchase agreement for Network Magazine and SJS
provides SFX Entertainment with an option to acquire an office building
in Burbank, California, which currently serves as Network Magazine's
headquarters, at a cost of approximately $2,400,000. This potential
transaction has not been reflected on the pro forma balance sheet.
See "Agreements Related to the Pending Acquisitions--Network
Acquisition."
D-86
<PAGE>
VI. CONCERT/SOUTHERN ACQUISITION
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 (IN THOUSANDS)
--------------------------------------------
CONCERT/
PRO FORMA SOUTHERN
AS REPORTED ADJUSTMENTS ACQUISITION
------------- -------------- -------------
<S> <C> <C> <C>
ASSETS:
Current assets........................... $1,921 $(16,615)(a) $(16,615)
(1,921)(a)
Property and equipment, net.............. 360 640 (a) 1,000
Intangible assets, net................... -- 15,151 (a) 15,151
Other assets............................. 919 (455)(a) 464
------------- -------------- -------------
Total Assets............................. $3,200 $ (3,200) $ --
============= ============== =============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities...................... $1,254 $ (1,254)(a) $ --
------------- -------------- -------------
Total Liabilities........................ 1,254 (1,254) --
Stockholders' Equity..................... 1,946 (1,946)(a) --
------------- -------------- -------------
Total Liabilities & Stockholders'
Equity.................................. $3,200 $ (3,200) $ --
============= ============== =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) To reflect the Concert/Southern Acquisition for $16,615,000 in cash;
the related increase in fair value allocated to fixed assets of
$640,000, the related excess of the purchase price paid over the fair
value of net tangible assets of $15,151,000; and the adjustments to
eliminate $1,921,000 of current assets, $1,254,000 of current
liabilities, stockholders' equity of $1,946,000 and a $455,000
investment in a non-entertainment affiliated entity not being acquired
by SFX Entertainment. Pursuant to the Concert/Southern Agreement, SFX
Entertainment has eliminated certain cash and receivables from current
assets and accounts payable and other accrued expenses from current
liabilities, which will not be acquired or assumed by SFX Entertainment
upon closing the Concert/Southern Acquisition. Adjustment to eliminate
Concert/Southern's historical combined stockholders' equity and replace
it with the value of the equity securities to be issued by SFX
Entertainment in connection with the Concert/Southern Acquisition has
also been made.
See "Agreements Related to the Pending Acquisitions--Concert/Southern
Acquisition."
VII. PRO FORMA ADJUSTMENTS FOR PENDING ACQUISITIONS
(a) The Distribution Agreement provides that SFX will pay any positive
Working Capital in existence at the closing of the SFX Merger to SFX
Entertainment, and that if Working Capital is negative at that time, SFX
Entertainment will pay the amount of such shortfall to SFX. As of
September 30, 1997 the amount of positive Working Capital would have
been $2,145,000 and such amount is reflected in the cash to be acquired
by SFX Entertainment pursuant to the Distribution Agreement. The actual
amount of Working Capital as of the closing of the SFX Merger may differ
substantially from the amount in existence on September 30, 1997, and
will be a function of, among other things, the operating results of SFX
through the date of the SFX Merger and the actual cost of consummating
the SFX Merger and the related transactions. Additionally, SFX
Entertainment will be responsible for any taxes resulting from the
Spin-Off to the extent such taxes result from any gain on the
distribution. See "Agreements Between SFX Entertainment and SFX."
(b) To reflect estimated costs associated with the Pending Acquisitions and
the Financing and the related transactions. Consists of approximately
(i) $6 million in fees and expenses in connection with the Pending
Acquisitions, (ii) $17.3 million in fees in connection with the
Spin-Off, the Consent Solicitations and other required consents and
(iii) $15.8 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 SFX Entertainment
relating to the Financing, the Pending Acquisitions, the Spin-Off and
the SFX Merger.
D-87
<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.
VIII. PRO FORMA ADJUSTMENTS FOR THE FINANCING
Represents assumed borrowings to finance the Pending Acquisitions
including the proposed private placement and credit facility. There can be no
assurance that SFX Entertainment will be able to enter into or obtain financing
under the proposed credit facility, on acceptable terms, or at all. SFX
Entertainment anticipates using $352.8 million of proceeds to finance the cash
portion of the Pending Acquisitions, $90 million for the repayment of debt
assumed in the Pending Acquisitions and $39 million for the payment of
estimated costs associated with the Pending Acquisitions and the Financing and
related transactions. The repayment of assumed debt includes $25.5 million in
connection with the PACE Acquisition, $49.8 million in connection with the
Pavilion Acquisition, $12.2 million in connection with the BGP Acquisition and
$1.4 million in connection with the Network Acquisition.
D-88
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
FOR
RECENT
PRO FORMA FOR RECENT ACQUISITIONS
ACQUISITIONS ------------
---------------------- PACE
SFX AND
ENTERTAINMENT PRO FORMA PAVILION
(ACTUAL) ADJUSTMENTS ACQUISITIONS
I II PRO FORMA III
------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Revenue...................... $74,396 $12,293 $86,689 $229,480
Operating expenses........... 63,045 12,236 75,281 205,365
Depreciation & amortization . 4,041 1,084 5,125 4,476
Corporate expenses (1)....... 1,307 -- 1,307 --
------------- ----------- --------- ------------
Operating income (loss) ..... 6,003 (1,027) 4,976 19,639
Interest expense............. 956 (956) 1,291 4,803
1,291
Other (income) expenses ..... (213) -- (213) 1,594
Equity (income) loss from
investments................. (1,344) -- (1,344) (5,321)
------------- ----------- --------- ------------
Income/(loss) before income
tax expense................. 6,604 (1,362) 5,242 18,563
Income tax expense
(benefit)................... 2,952 1,649 4,601 3,751
------------- ----------- --------- ------------
Net income (loss)............ $ 3,652 $(3,011) $ 641 $ 14,812
============= =========== ========= ============
Accretion on temporary
equity .....................
Net loss applicable to
common shares ..............
Net loss per common share ...
Weighted average common
shares outstanding (2)......
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA FOR PENDING ACQUISITIONS PRO FORMA
-------------------------------------------------------------- FOR THE RECENT
ACQUISITIONS,
THE FINANCING,
THE PENDING
PRO FORMA ACQUISITIONS,
CONCERT/ ADJUSTMENTS THE SPIN-OFF
CONTEMPORARY BGP NETWORK SOUTHERN PRO FORMA FOR THE AND THE
ACQUISITION ACQUISITION ACQUISITION ACQUISITION ADJUSTMENTS FINANCING SFX
IV V VI VII VIII IX MERGER
------------ ----------- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue...................... $85,570 $65,448 $20,563 $13,093 $ -- $ -- $500,843
Operating expenses........... 75,784 59,312 13,893 10,631 -- -- 440,266
Depreciation & amortization . 1,081 611 207 57 16,821 (a) -- 28,378
Corporate expenses (1)....... -- -- -- -- 1,500 (b) -- 2,807
------------ ----------- ----------- ----------- ----------- ----------- -------------
Operating income (loss) ..... 8,705 5,525 6,463 2,405 (18,321) -- 29,392
Interest expense............. 227 837 196 -- -- (6,063)(a) 32,206
-- 30,915 (b)
Other (income) expenses ..... (170) (764) (123) (57) (1,046)(c) -- (779)
Equity (income) loss from
investments................. -- -- -- (34) 1,046 (c) -- (5,653)
------------ ----------- ----------- ----------- ----------- ----------- -------------
Income/(loss) before income
tax expense................. 8,648 5,452 6,390 2,496 (18,321) (24,852) 3,618
Income tax expense
(benefit)................... -- 2,133 135 -- (7,120)(d) -- 3,500
------------ ----------- ----------- ----------- ----------- ----------- -------------
Net income (loss)............ $ 8,648 $ 3,319 $ 6,255 $ 2,496 (11,201) $(24,852) 118
============ =========== =========== =========== =========== =========== =============
Accretion on temporary
equity ..................... (2,475)(e) (2,475)
-------------
Net loss applicable to
common shares .............. $(13,676) $(2,357)
=========== =============
Net loss per common share ... $(.12)
=============
Weighted average common
shares outstanding (2)...... 20,400
=============
</TABLE>
- ------------
(1) Net of fees from Triathlon of $1,693,000. These fees will vary, above
the minimum level of $500,000, based on the level of acquisition and
financing activities of Triathlon. SCMC previously assigned its rights
to receive fees payable under this agreement to SFX. Pursuant to the
terms of the Distribution Agreement, SFX will assign its rights to
receive such fees to SFX Entertainment. 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 SFX Entertainment's 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.
D-89
<PAGE>
NOTES TO PRO FORMA INCOME STATEMENTS:
I. Represents SFX Entertainment's actual operating results for the nine
months ended September 30, 1997.
EBITDA for the nine months ended September 30, 1997 was $10,044,000
and $57,770,000 for SFX Entertainment 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, SFX
Entertainment 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 SFX Entertainment's operating performance or liquidity
which is calculated in accordance with GAAP. Cash flows from
operating, investing and financing activities for SFX Entertainment
for the nine months ended September 30, 1997 were $789,000,
($71,997,000) and $78,302,000, 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 $67,300,000
for the nine months ended September 30, 1997. The adjustments include
the expected cost savings in connection with the Pending Acquisitions
associated with the elimination of duplicative staffing and general
and administrative expenses of $3,800,000, and include equity income
from investments of $5,700,000. While management believes that such
cost savings are achievable, SFX Entertainment's ability to fully
achieve such cost savings is subject to numerous factors, certain of
which may be beyond SFX Entertainment's control.
II. SFX Entertainment 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 acquisition by SFX Entertainment.
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. The PACE Acquisition is not conditioned on
the consummation of either part of the Pavilion Acquisition.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS)
---------------------------------------------------------
PACE
AND
PACE PAVILION PRO FORMA PAVILION
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITIONS
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue ............................... $137,616 $91,114 $ 750 (a) $229,480
Operating expenses..................... 131,473 75,319 (1,427)(b) 205,365
Depreciation & amortization............ 1,462 3,014 -- 4,476
Other expenses......................... 447 -- (447)(c) --
------------- ------------- ------------- --------------
Operating income....................... 4,234 12,781 2,624 19,639
Interest expense....................... 1,517 3,286 -- 4,803
Other expenses......................... 64 1,530 -- 1,594
Equity (income) loss from investments . (6,949) (1,654) 3,282 (d) (5,321)
------------- ------------- ------------- --------------
Income/(loss) before income tax
expense............................... 9,602 9,619 (658) 18,563
Income tax expense..................... 3,751 -- -- 3,751
------------- ------------- ------------- --------------
Net income (loss)...................... $ 5,851 $ 9,619 $ (658) $ 14,812
============= ============= ============= ==============
</TABLE>
D-90
<PAGE>
------------
PRO FORMA ADJUSTMENTS:
(a) To reflect non-cash revenue resulting from SFX Entertainment 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 $520,000 of certain officer's bonuses and
wages which will not be paid under SFX Entertainment's new employment
contracts and of $907,000 of non-recurring costs incurred in connection
with PACE's previously planned initial public offering, which has since
been canceled.
(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. PACE currently owns 33 1/3% in Pavilion Partners and
has agreed to acquire the remaining 66 2/3% interest in Pavilion
Partners pursuant to the Blockbuster Acquisition and Sony Acquisition.
There can be no assurance that SFX Entertainment will be able to
consummate the acquisition of either or both of Blockbuster's and Sony's
respective interests in Pavilion Partners and, as a result, SFX
Entertainment may not obtain 100% of Pavilion Partners. See "Agreements
Related to Pending Acquisitions--PACE Acquisition--Pavilion
Acquisition."
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.
The Contemporary Acquisition is not conditioned upon the consummation of the
acquisition of such 50% interest.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS)
----------------------------------------------------------
CONTEMPORARY RIVERPORT PRO FORMA CONTEMPORARY
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITION
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue ............................... $71,141 $14,429 $ -- $85,570
Operating expenses..................... 66,764 11,223 (2,203)(a) 75,784
Depreciation & amortization............ 498 583 -- 1,081
-------------- ------------- ------------- --------------
Operating income....................... 3,879 2,623 2,203 8,705
Interest expense....................... 153 74 -- 227
Other income........................... (122) (48) -- (170)
Equity (income) from investments ...... (1,298) -- 1,298 (b) --
-------------- ------------- ------------- --------------
Income (loss) before income tax
expense............................... 5,146 2,597 905 8,648
Income tax expense..................... -- -- -- --
-------------- ------------- ------------- --------------
Net income (loss)...................... $ 5,146 $ 2,597 $ 905 $ 8,648
============== ============= ============= ==============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officer's salary and bonuses and
other consulting expenses which will not be paid under SFX
Entertainment's new employment and other contracts.
(b) Reflects the elimination of Contemporary's equity income in Riverport
Amphitheater Partners. Contemporary has entered into an agreement to
acquire its partners' 50% interest in this venture. If Contemporary is
unable to complete this acquisition of the remaining 50% interest in
Riverport Amphitheater Partners, the cash consideration paid by SFX
Entertainment for Contemporary will be reduced by $10,500,000.
D-91
<PAGE>
The Contemporary Agreement provides that in the event the Contemporary
Acquisition is consummated prior to the consummation of the Spin-Off,
1,402,851 shares of preferred stock of SFX Entertainment will be issued to
the sellers. Such preferred stock is to be converted into an equal number of
shares of SFX Entertainment's 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 SFX Entertainment at its fair
market value, but in no event less than $18,700,000. See "Agreements Related
to the Pending Acquisition--Contemporary Acquisition."
V. BGP ACQUISITION
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN
THOUSANDS)
--------------------------------------------
AS REPORTED PRO FORMA BGP
(A) ADJUSTMENTS ACQUISITION
-------------- ------------- -------------
<S> <C> <C> <C>
Revenue ........................ $65,448 $ -- $65,448
Operating expenses.............. 59,312 -- 59,312
Depreciation & amortization .... 611 -- 611
-------------- ------------- -------------
Operating income ............... 5,525 -- 5,525
Interest expense................ 837 -- 837
Other income.................... (764) -- (764)
-------------- ------------- -------------
Income before income tax
expense........................ 5,452 -- 5,452
Income tax expense.............. 2,133 -- 2,133
-------------- ------------- -------------
Net income...................... $ 3,319 $ -- $ 3,319
============== ============= =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) Reflects BGP's unaudited operating results for the nine months ended
October 31, 1997.
VI. NETWORK ACQUISITIONS
The Network Acquisitions consist of the separate acquisitions of Network
Magazine and SJS. Each of these acquisitions is conditioned on the concurrent
closing of the other.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS)
--------------------------------------------------------------
THE NETWORK
MAGAZINE SJS PRO FORMA NETWORK
AS REPORTED (A) AS REPORTED (A) ADJUSTMENTS ACQUISITIONS
--------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue ............................... $12,047 $10,737 $(2,221)(c) $20,563
Operating expenses..................... 11,878 10,717 (6,481)(b) 13,893
(2,221)(c)
Depreciation & amortization............ 119 88 -- 207
--------------- --------------- ------------- --------------
Operating income (loss)................ 50 (68) 6,481 6,463
Interest expense....................... 163 33 -- 196
Other income........................... (43) (80) -- (123)
--------------- --------------- ------------- --------------
Income (loss) before income tax
expense............................... (70) (21) 6,481 6,390
Income tax expense .................... -- 135 -- 135
--------------- --------------- ------------- --------------
Net (loss) income ..................... $ (70) $ (156) $ 6,481 $ 6,255
=============== =============== ============= ==============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) SFX Entertainment's purchase agreement for Network Magazine and SJS
provides that the purchase price will be increased by $4,000,000 if
total 1998 EBITDA as defined equals $9,000,000; by an additional $4 for
each $1 increase in EBITDA between $9,000,000 and $10,000,000 and by an
additional $6 for each $1 increase in EBITDA between $10,000,000 and
$11,000,000 (maximum of $14,000,000 additional consideration). The
additional consideration is payable in stock or cash at SFX
Entertainment's option. The pro forma statement of operation assumes
that no additional consideration is paid.
(b) Reflects the elimination of certain officers' bonuses and wages which
will not be paid under SFX Entertainment's new employment contracts.
(c) Reflects the elimination of transactions between Network Magazine and
SJS.
D-92
<PAGE>
VII. CONCERT/SOUTHERN ACQUISITION
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN
THOUSANDS)
-------------------------------------------
CONCERT/
PRO FORMA SOUTHERN
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------- -------------
<S> <C> <C> <C>
Revenue .............................. $13,093 $ -- $13,093
Operating expenses.................... 11,097 (466)(a) 10,631
Depreciation & amortization........... 57 -- 57
------------- ------------- -------------
Operating income...................... 1,939 466 2,405
Interest expense...................... -- -- --
Other income.......................... (57) -- (57)
Equity loss (income) from
investments.......................... 11 (45)(b) (34)
------------- ------------- -------------
Income before income tax expense ..... 1,985 511 2,496
Income tax expense.................... -- -- --
------------- ------------- -------------
Net income............................ $ 1,985 $ 511 $ 2,496
============= ============= =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' bonuses and wages which
will not be paid under SFX Entertainment's new employment contracts.
(b) Reflects the elimination of equity income of a non-entertainment
affiliated entity which is not being acquired by SFX Entertainment.
VIII. PRO FORMA ADJUSTMENTS:
(a) Reflects the increase in depreciation and amortization resulting from
the preliminary purchase accounting treatment of the Pending
Acquisitions. SFX Entertainment 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 following
completion of the Pending Acquisitions.
(c) 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.
(d) Represents an adjustment to the provision for 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 and includes a benefit of
approximately $6,000,000 related to the pro forma loss carryforward of
approximately $16,000,000 from the twelve months ended December 31,
1996. The above provision also reflects the non-deductibility of
approximately $12,000,000 of goodwill amortization, tax savings related
to the pro forma adjustments for the Financing and state taxes of
approximately $3,500,000.
(e) Represents the accretion on the Fifth Year Put Option issued to the
PACE Sellers in connection with the PACE Acquisition.
IX. PRO FORMA FOR THE FINANCING:
(a) Represents the elimination of existing interest expense for the Pending
Acquisitions.
(b) Reflects interest expense associated with the proposed private placement
of debt securities, the proposed credit facility and other debt and
deferred compensation costs related to the Pending Acquisitions. The
interest rates assumed in the proposed private placement of debt
securities and proposed credit facility are 9% and 8% per annum,
respectively. A one-quarter percent increase or decrease in the assumed
weighted average interest rate for the Financing would change the annual
pro forma interest expense by approximately $886,000. There can be no
assurance that SFX Entertainment will be able to consummate the
Financing on acceptable terms, or at all.
D-93
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA FOR RECENT ACQUISITIONS
DELSENER/ ------------------------------------
SLATER MEADOWS/
ACQUISITION SUNSHINE PRO FORMA
(PREDECESSOR) ACQUISITIONS ADJUSTMENTS
I II VIII PRO FORMA
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Revenue............... $50,361 $54,423 $ -- $104,784
Operating expenses ... 50,686 46,632 (6,078)(a) 91,240
Depreciation &
amortization......... 747 3,072 3,014 (b) 6,833
Corporate expenses
(1).................. -- -- 1,000 (c) 1,000
----------- ------------ ----------- ---------
Operating income
(loss)............... (1,072) 4,719 2,064 5,711
(4,354)(d)
Interest expense...... 60 4,294 1,780 (e) 1,780
Other (income)
expenses............. (198) (168) -- (366)
Equity (income) loss
from investments..... (525) -- -- (525)
----------- ------------ ----------- ---------
Income (loss) before
income tax expense . (409) 593 4,638 4,822
Income tax expense
(benefit) ........... 106 1,155 893 2,154
----------- ------------ ----------- ---------
Net income (loss) ... $ (515) $ (562) $ 3,745 $ 2,668
=========== ============ =========== =========
Accretion on
temporary Equity.....
Net loss applicable
to common shares ...
Net loss per common
share ...............
Weighted average
common shares
outstanding (2) .....
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA FOR PENDING ACQUISITIONS PRO FORMA
---------------------------------------------------------------------------- FOR THE RECENT
ACQUISITIONS, THE
PRO FORMA FINANCING,
PACE CONCERT/ ADJUSTMENTS THE PENDING
AND PAVILION CONTEMPORARY BGP NETWORK SOUTHERN PRO FORMA FOR THE ACQUISITIONS,
ACQUISITIONS ACQUISITION ACQUISITION ACQUISITION ACQUISITION ADJUSTMENTS FINANCING THE SPIN-OFF AND
III IV V VI VII VIII IX THE SFX MERGER
------------ ------------ ----------- ----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............... $246,548 $71,545 $92,331 $24,556 $12,601 $ -- $ -- $552,365
Operating expenses ... 237,429 64,320 84,466 18,403 9,679 -- -- 505,537
Depreciation &
amortization......... 5,336 1,334 1,474 268 69 22,481 (f) -- 37,795
Corporate expenses
(1).................. -- -- -- -- -- 2,000 (g) -- 3,000
------------ ------------ ----------- ----------- ----------- ----------- ----------- ----------------
Operating income
(loss)............... 3,783 5,891 6,391 5,885 2,853 (24,481) -- 6,033
(7,391)(a)
Interest expense...... 5,456 383 1,258 294 -- -- 41,220 (b) 43,000
Other (income)
expenses............. (265) (216) (584) (42) (47) (312)(i) -- (1,832)
Equity (income) loss
from investments..... (3,227) -- -- -- 38 312 (i) -- (3,402)
------------ ------------ ----------- ----------- ----------- ----------- ----------- ----------------
Income (loss) before
income tax expense . 1,819 5,724 5,717 5,633 2,862 (24,481) (33,829) (31,733)
Income tax expense
(benefit) ........... (714) 35 1,272 303 -- (1,550)(h) -- 1,500
------------ ------------ ----------- ----------- ----------- ----------- ----------- ----------------
Net income (loss) ... $ 2,533 $ 5,689 $ 4,445 $ 5,330 $ 2,862 (22,931) $(33,829) (33,233)
============ ============ =========== =========== =========== =========== =========== ================
Accretion on
temporary Equity..... (3,300)(j) (3,300)
Net loss applicable
to common shares ... $(26,231) $(36,533)
Net loss per common
share ............... $ (1.84)
================
Weighted average
common shares
outstanding (2) ..... 20,400
================
</TABLE>
- ------------
(1) Net of fees from Triathlon of $3,000,000. These fees will fluctuate based
on the level of acquisition and financing activities of Triathlon. SCMC
previously assigned its rights to receive fees payable under this
agreement to SFX. Pursuant to the terms of the Distribution Agreement,
SFX will assign its rights to receive such fees to SFX Entertainment.
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 SFX Entertainment's 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.
94
<PAGE>
NOTES TO PRO FORMA INCOME STATEMENTS:
I. Represents the actual operating results of Delsener/Slater, the
predecessor, for the year ended December 31, 1996. The Company acquired
Delsener/Slater on January 2, 1997.
EBITDA for the year ended December 31, 1996 was ($325,000) and
$43,828,000 for Delsner/Slater and SFX Entertainment on 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, SFX Entertainment
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 SFX
Entertainment's operating performance or liquidity which is calculated in
accordance with GAAP. Cash flows from operating, investing and financing
activities for Delsener/Slater for the year ended December 31, 1996 were
$4,214,000, $(435,000) and $(1,431,000), 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 $58,200,000 for the year ended December 31,
1996. The adjustments include the elimination of non-recurring charges
including a litigation settlement recorded by PACE and Pavilion Partners of
$6,000,000, expected cost savings in connection with the Pending
Acquisitions associated with the elimination of duplicative staffing and
general and administrative expenses of $5,000,000, and include equity
income from investments of $3,400,000. While management believes that such
cost savings are achievable, SFX Entertainment's ability to fully achieve
such cost savings is subject to numerous factors, certain of which may be
beyond SFX Entertainment's control.
II. Represents the actual operating results of the Meadows Music Theater and
Sunshine Promotions for the year ended December 31, 1996. SFX
Entertainment aquired the Meadows Music Theater and Sunshine Promotions
on March 20, 1997 and June 24, 1997, respectively.
III. PACE AND PAVILION ACQUISITIONS
Reflects the PACE Acquisition and the separate acquisitions of two
partners' interest in a partnership that owns certain amphitheaters operated
by PACE. The PACE Acquisition is not conditioned on the consummation of the
Pavilion Acquisition.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
---------------------------------------------------------------------------------------
PACE
PACE PAVILION PAVILION PAVILION PRO FORMA AND PAVILION
AS REPORTED (A) 1 MONTH (B) 11 MONTHS (B) AS REPORTED ADJUSTMENTS ACQUISITIONS
--------------- ----------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue......................... $156,325 $5,259 $83,964 $89,223 $ 1,000(c) $246,548
Operating expenses.............. 155,533 5,199 77,267 82,466 (570)(d) 237,429
Depreciation & amortization .... 1,737 253 3,346 3,599 -- 5,336
Other expenses.................. 3,675 -- -- -- (3,675)(e) --
--------------- ----------- ------------- ------------- ------------- --------------
Operating (loss) income ........ (4,620) (193) 3,351 3,158 5,245 3,783
Interest expense................ 1,206 395 3,855 4,250 -- 5,456
Other income.................... (59) (123) (83) (206) -- (265)
Equity (income) loss from
investments.................... (3,048) 82 (129) (47) (132)(f) (3,227)
--------------- ----------- ------------- ------------- ------------- --------------
Income (loss) before income tax
expense........................ (2,719) (547) (292) (839) 5,377 1,819
Income tax (benefit)............ (714) -- -- -- -- (714)
--------------- ----------- ------------- ------------- ------------- --------------
Net (loss) income .............. $ (2,005) $ (547) $ (292) $ (839) $ 5,377 $ 2,533
=============== =========== ============= ============= ============= ==============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) Reflects PACE's audited operating results for fiscal year ended
September 30, 1996.
(b) Reflects Pavilion Partners' unaudited operating results for the one
month ended October 31, 1995 and the audited operating results for the
eleven months ended September 30, 1996. During 1996, Pavilion Partners
changed its fiscal year-end from October 31 to September 30.
PACE currently owns 33 1/3% in Pavilion Partners and has agreed to
acquire the remaining 66 2/3% interest from Pavilion Partners' two
partners, Blockbuster and Sony.
D-95
<PAGE>
(c) To reflect non-cash revenue resulting from SFX Entertainment 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.
(d) Reflects the elimination of $570,000 of certain officer's salary and
bonuses which will not be paid under SFX Entertainment's new employment
contracts.
(e) Reflects the elimination of non-recurring restricted stock compensation
to PACE executives.
(f) To eliminate PACE's income from its 33 1/3% equity investment in
Pavilion. PACE currently owns 33 1/3% in Pavilion Partners and has
agreed to acquire the remaining 66 2/3% interest in Pavilion Partners
pursuant to the Blockbuster Acquisition and Sony Acquisition. There can
be no assurance that SFX Entertainment will be able to consummate the
acquisition of either or both of Blockbuster's and Sony's respective
interests in Pavilion Partners and, as a result, SFX Entertainment may
not obtain 100% of Pavilion Partners. See "Agreements Related to Pending
Acquisitions--PACE Acquisition--Pavilion Acquisition."
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.
The Contemporary Acquisition is not conditioned upon the consummation of the
acquisition of such 50% interest.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
-----------------------------------------------------------
CONTEMPORARY RIVERPORT PRO FORMA CONTEMPORARY
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITION
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue................................. $59,852 $11,693 $ -- $71,545
Operating expenses...................... 58,189 9,168 (3,037)(a) 64,320
Depreciation & amortization............. 567 767 -- 1,334
-------------- ------------- ------------- --------------
Operating income ....................... 1,096 1,758 3,037 5,891
Interest expense........................ 213 170 -- 383
Other income............................ (159) (57) -- (216)
Equity (income) loss from investments .. (822) -- 822 (b) --
-------------- ------------- ------------- --------------
Income (loss) before income tax
expense................................ 1,864 1,645 2,215 5,724
Income tax expense ..................... 35 -- 35
-------------- ------------- ------------- --------------
Net income.............................. $ 1,829 $ 1,645 $ 2,215 $ 5,689
============== ============= ============= ==============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salary and bonuses which
will not expected be paid under SFX Entertainment's new employment and
other contracts.
(b) Reflects the elimination of Contemporary's equity income in Riverport
Amphitheater Partners. Contemporary had entered into an agreement to
acquire its partners' 50% interest in this venture. If Contemporary is
unable to complete this acquisition of the remaining 50% interest in
Riverport Amphitheater Partners, the cash consideration paid by SFX
Entertainment for Contemporary will be reduced by $10,500,000.
The Contemporary Agreement provides that in the event the Contemporary
Acquisition is consummated prior to the consummation of the Spin-Off,
1,402,851 shares of preferred stock of SFX Entertainment will be issued to
the Sellers. Such preferred stock is to be converted into an equal number of
shares of SFX Entertainment's 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 SFX Entertainment at its fair
market value, but in no event less than $18,700,000. See "Agreements Related
to the Pending Acquisitions--Contemporary Acquisition."
D-96
<PAGE>
V. BGP ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
--------------------------------------------
AS REPORTED PRO FORMA BGP
(A) ADJUSTMENTS ACQUISITION
-------------- ------------- -------------
<S> <C> <C> <C>
Revenue......................... $92,331 $ -- $92,331
Operating expenses.............. 87,520 (3,054)(b) 84,466
Depreciation & amortization .... 1,474 -- 1,474
-------------- ------------- -------------
Operating income ............... 3,337 3,054 6,391
Interest expense................ 1,258 -- 1,258
Other expense................... (584) -- (584)
-------------- ------------- -------------
Income before income tax
expense........................ 2,663 3,054 5,717
Income tax expense ............. 1,272 -- 1,272
-------------- ------------- -------------
Net income ..................... $ 1,391 $ 3,054 $ 4,445
============== ============= =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) Reflects BGP's audited operating results for the fiscal year ended
January 31, 1997.
(b) Reflects the elimination of certain officers' bonuses, wages,
partnership life insurance, profit sharing and other expenses which
will not be paid under SFX Entertainment's new employment contracts.
VI. NETWORK ACQUISITION
The Network Acquisition consists of the separate acquisitions of Network
Magazine and SJS. Each of these acquisitions is conditioned on the concurrent
closing of the other.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
-------------------------------------------------------------
THE NETWORK
MAGAZINE SJS PRO FORMA NETWORK
AS REPORTED (A) AS REPORTED (A) ADJUSTMENTS ACQUISITION
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue.......................... $14,767 $11,375 $(1,586)(c) $24,556
Operating expenses............... 14,275 11,259 (5,545)(b) 18,403
(1,586)(c)
Depreciation & amortization ..... 184 84 -- 268
--------------- --------------- ------------- -------------
Operating income ................ 308 32 5,545 5,885
Interest expense................. 291 3 -- 294
Other income..................... (42) -- -- (42)
--------------- --------------- ------------- -------------
Income before income tax
expense......................... 59 29 5,545 5,633
Income tax expense .............. 212 91 -- 303
--------------- --------------- ------------- -------------
Net (loss) income ............... $ (153) $ (62) $ 5,545 $ 5,330
=============== =============== ============= =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) Reflects Network Magazine's audited operating results for fiscal year
ended September 30, 1996. SFX Entertainment's purchase agreement for
Network Magazine and SJS provides that the purchase price will be
increased by $4,000,000 if total 1998 EBITDA as defined equals
$9,000,000; by an additional $4 for each $1 increase in EBITDA between
$9,000,000 and $10,000,000 and by an additional $6 for each $1 increase
in EBITDA between $10,000,000 and $11,000,000 (maximum of $14,000,000
additional consideration). The additional consideration is payable is
stock or cash at SFX Entertainment's option. The pro forma statement of
operations assumes that no additional consideration is paid.
(b) Reflects the elimination of certain officers' bonuses and wages which
will not be paid under SFX Entertainment's new employment contracts.
(c) Reflects the elimination of transactions between Network Magazine and
SJS.
D-97
<PAGE>
VII. CONCERT/SOUTHERN ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
-------------------------------------------
CONCERT/
PRO FORMA SOUTHERN
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------- -------------
<S> <C> <C> <C>
Revenue.......................... $12,601 $ -- $12,601
Operating expenses............... 10,873 (1,194)(a) 9,679
Depreciation & amortization ..... 69 -- 69
------------- ------------- -------------
Operating income ................ 1,659 1,194 2,853
Investment income................ (47) -- (47)
Equity loss from investments .... 27 11 (b) 38
------------- ------------- -------------
Income before income tax
expense......................... 1,679 1,183 2,862
Income tax expense .............. -- -- --
------------- ------------- -------------
Net income ...................... $ 1,679 $ 1,183 $ 2,862
============= ============= =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' bonuses and wages which
will not be paid under SFX Entertainment's new employment contracts.
(b) Reflects the elimination of equity loss of a non-entertainment
affiliated entity which is not being acquired by SFX Entertainment.
VIII. PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of non-recurring Delsener/Slater officers'
bonuses and wages which are not being paid under SFX Entertainment's
new employment contracts.
(b) Reflects the increase in depreciation and amortization related to the
Recent Acquisitions. SFX Entertainment amortizes goodwill over 15
years.
(c) To record corporate overhead charges of $4,000,000 related to the
Recent Acquisitions less the amount received in 1996 pursuant to the
Triathlon agreement of $3,000,000.
(d) Represents the elimination of existing interest expense for the Recent
Acquisitions.
(e) Reflects interest expense associated with the Meadows Music Theater and
Sunshine Promotions debt assumed.
(f) Reflects the increase in depreciation and amortization resulting from
the preliminary purchase accounting treatment of the Pending
Acquisitions. SFX Entertainment amortizes goodwill over 15 years.
(g) To record incremental corporate overhead charges associated with
incremental headquarters personnel that management estimates will be
necessary following completion of the Pending Acquisitions.
(h) Reflects estimated state and local income taxes. On a consolidated pro
forma basis, SFX Entertainment has a net operating loss for the year
ending December 31, 1996 of approximately $16,000,000 for which no
federal tax benefit has been provided.
(i) To reclassify the Delsener/Slater's equity income in the PNC Bank Arts
Center venue following the acquisition of Pavilion, which owns the
other 50% equity interest in the venue.
(j) Represents the accretion on the Fifth Year Put Option issued to the
PACE Sellers in connection with the PACE Acquisition.
IX. PRO FORMA FOR THE FINANCING:
(a) Represents the elimination of existing interest expense for the Pending
Acquisitions.
(b) Reflects interest expense associated with the proposed private placement
of debt securities and the proposed credit facility and other debt and
deferred compensation costs related to the Pending Acquisitions. The
interest rates assumed in the proposed private placement of debt
securities and the proposed credit facility are 9% and 8% per annum,
respectively. A one-quarter percent increase or decrease in the assumed
weighted average interest rate for the Financing would change the annual
pro forma interest expense by approximately $1.2 million. There can be
no assurance that SFX Entertainment will be able to consummate the
Financing on acceptable terms, or at all.
D-98
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(in thousands, except per share amounts)
The Selected Consolidated Financial Data of SFX Entertainment includes the
historical financial statements of Delsener/Slater and affiliated companies,
the predecessor of SFX Entertainment for each of the five years ended
December 31, 1996 and the nine months ended September 30, 1996, and the
historical financial statements of SFX Entertainment, for the nine months
ended September 30, 1997. The statement of operations data with respect to
Delsener/Slater for the years ended December 31, 1992 and 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 of SFX Entertainment, the Recent Acquisitions and the Pending
Acquisitions included herein. The financial information has been derived from
the audited and unaudited financial statements of SFX Entertainment, the
Recent Acquisitions and the Pending Acquisitions. The pro forma summary data
as of September 30, 1997 and for the year ended December 31, 1996 and the
nine months ended September 30, 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. Operating results
for the nine months ended September 30, 1997 are not necessarily indicative
of the results that may be achieved for the fiscal year ending December 31,
1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
PREDECESSOR (ACTUAL)
---------------------------------------------------------------
1996 (1)
PRO FORMA
1992 1993 1994 1995 1996 (UNAUDITED)
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................... $38,017 $46,526 $92,785 $47,566 $50,362 $552,365
Operating expenses........ 36,631 45,635 90,598 47,178 50,687 505,537
Depreciation &
amortization............. 758 762 755 750 747 37,795
Corporate expenses (2) ... -- -- -- -- -- 3,000
--------- --------- --------- --------- --------- -----------
Operating income (loss) .. 628 129 1,432 (362) (1,072) 6,033
Interest expense.......... (171) (148) (144) (144) (60) (43,000)
Other income.............. 74 85 138 178 198 1,832
Equity income (loss) from
investments ............. -- -- (9) 488 525 3,402
--------- --------- --------- --------- --------- -----------
Income (loss) before
income taxes............. 531 66 1,417 160 (409) (31,733)
Income tax (provision)
benefit.................. (32) (57) (5) (13) (106) (1,500)
--------- --------- --------- --------- --------- -----------
Net income (loss)......... $ 499 $ 9 $ 1,412 $ 147 $ (515) (33,233)
========= ========= ========= ========= ========= ===========
Accretion on temporary
equity (7)............... (3,300)
-----------
Net loss applicable to
common shares ........... $(36,533)
===========
Net loss per common
share.................... $ (1.84)
===========
Weighted average common
shares outstanding (9) .. 20,400
===========
OTHER OPERATING DATA:
EBITDA (3)................ $ -- $ -- $ 2,187 $ 388 $ (325) $ 43,828
========= ========= ========= ========= ========= ===========
Cash flow from:
Operating activities ... $ -- $ -- $ 2,959 $ (453) $ 4,214 $ --
Investing activities ... -- -- 0 0 (435) --
Financing activities ... -- -- (477) (216) (1,431) --
Ratio of earnings to
fixed charges (4)........ 4.1x 1.4x 10.8x 5.5x 2.9x --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
PREDECESSOR
-------------
1996 1997 (1)
ACTUAL 1997 PRO FORMA
(UNAUDITED) ACTUAL (UNAUDITED)
------------- ---------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................... $41,609 $74,396 $500,843
Operating expenses........ 42,930 63,045 440,266
Depreciation &
amortization............. 744 4,041 28,378
Corporate expenses (2) ... -- 1,307 2,807
------------- ---------- -----------
Operating income (loss) .. (2,065) 6,003 29,392
Interest expense.......... (60) (956) (32,206)
Other income.............. 143 213 779
Equity income (loss) from
investments ............. 525 1,344 5,653
------------- ---------- -----------
Income (loss) before
income taxes............. (1,457) 6,604 3,618
Income tax (provision)
benefit.................. (80) (2,952) (3,500)
------------- ---------- -----------
Net income (loss)......... $(1,537) $ 3,652 118
============= ========== ===========
Accretion on temporary
equity (7)............... (2,475)
-----------
Net loss applicable to
common shares ........... $ (2,357)
===========
Net loss per common
share.................... $ (.12)
Weighted average common
shares outstanding (9) .. 20,400
===========
OTHER OPERATING DATA:
EBITDA (3)................ $1,321 $10,044 $ 57,770
============= ========== ===========
Cash flow from:
Operating activities ... $2,761 $ 789 $ --
Investing activities ... 0 (71,997) --
Financing activities ... 684 78,302 --
Ratio of earnings to
fixed charges (4)........ -- 9.3x 1.3x
</TABLE>
D-99
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF SFX ENTERTAINMENT
(in thousands)
BALANCE SHEET DATA(5):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
PREDECESSOR (ACTUAL)
-------------------------------------
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(7) ........ -- -- -- --
Stockholders' equity........ 6,420 2,969 2,900 907
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
PRO FORMA
ACTUAL (UNAUDITED)(6)
-------- --------------
<S> <C> <C>
Current assets.............. $ 12,189 $117,326
Property and equipment,
net........................ 55,882 185,371
Intangible assets, net ..... 59,721 427,566
Total assets................ 135,470 772,114
Current liabilities......... 11,333 89,619
Long-term debt, including
current portion ........... 16,453 497,322
Temporary equity(7) ........ -- 16,500
Stockholders' equity........ 101,378 143,223(8)
</TABLE>
- ------------
(1) The Unaudited Pro Forma Statement of Operations Data for the year ended
December 31, 1996 and the nine months ended September 30, 1997 are
presented as if SFX Entertainment had completed the Recent
Acquisitions, the Financing, the Pending Acquisitions, the Spin-Off and
the SFX Merger as of January 1, 1996. There can be no assurance that
any of the Financing, the Pending Acquisitions, the Spin-Off and the
SFX Merger will be consummated on the terms assumed in preparing such
pro forma data or at all. See "Risk Factors--Risks Related to Pending
Acquisitions."
(2) Pro forma corporate expenses are reduced by $3,000,000 and $1,693,000
for fees earned from Triathlon for the year ended December 31, 1996 and
for the nine months ended September 30, 1997, respectively. The right
to receive such fees in the future are to be assigned to SFX
Entertainment by SFX in connection with the Spin-Off. Future fee 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) "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, SFX Entertainment 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 SFX Entertainment'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 $58,200,000 for the year
ended December 31, 1996 and $67,300,000 for the nine months ended
September 30, 1997. These adjustments include the elimination of
non-recurring charges including a litigation settlement recovered by
PACE and Pavilion Partners of $6,000,000 and $0, expected cost savings
in connection with the Pending Acquisitions associated with the
elimination of duplicative staffing and general and administrative
expenses of $5,000,000 and $3,800,000 and includes SFX Entertainment's
pro rata share of equity income from investments of $3,400,000 and
$5,700,000, for the year ended December 31, 1996 and the nine months
ended September 30, 1997, respectively.
While management believes that such cost savings and the elimination of
non-recurring expenses are achievable, SFX Entertainment's ability to
fully achieve such cost savings and to eliminate the non-recurring
expenses is subject to numerous factors certain of which may be beyond
SFX Entertainment's control.
(4) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consists of earnings before income taxes and fixed charges.
"Fixed charges" consists of interest on all indebtedness. Earnings were
insufficient to cover fixed charges by $932,000 for the nine months
ended September 30, 1996 and $28,331,000 on a pro forma basis for the
year ended December 31, 1996.
(5) The required 1992 balance sheet data for Delsener/Slater has not been
included herein due to the difficulty in preparing an accurate balance
sheet as of that date coupled with management's belief that such
information would not be of substantial use to a potential investor. The
difficulty in preparing an accurate balance sheet is due to the fact
that (i) Delsener/Slater was not audited at such time, (ii)
Delsener/Slater included a number of companies with different fiscal
year ends and (iii) the unaudited balance sheets of Delsener/Slater and
its related entities were not prepared in strict accordance with GAAP
reporting requirements as such entities were privately held. The lack of
usefulness of the information is due to the fact that (i)
Delsener/Slater is the predecessor of SFX Entertainment and therefore
its accounts were adjusted to a new basis upon its acquisition by SFX;
(ii) the balance sheet is principally comprised of cash, leasehold
improvements and accruals for bonuses to the prior owners and would not
include the operating lease for the Jones Beach Ampitheather, which
management believes is Delsener/Slater's most significant operating
agreement and (iii) the balance sheet of Delsener/Slater as of December
31 in any year contains a low level of assets relative to operating
income as the concert business is seasonal with most concerts occurring
in the summer and the promotion business does not require large amounts
of capital investment.
(6) The Unaudited Pro Forma Balance Sheet data at September 30, 1997 is
presented as if SFX Entertainment had completed the Financing, the
Pending Acquisitions, the Spin-Off and the SFX Merger as of September
30, 1997.
(7) The PACE Agreement provides that each PACE Seller shall have 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 SFX Entertainment to purchase up to one-third of
SFX Entertainment's 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 ($16,500,000)
has been presented as temporary equity on the pro forma balance sheet.
(8) Retained earnings on a pro forma basis for the Financing, the Pending
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 SFX Entertainment. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources--Future Charges to Earnings."
(9) Includes 500,000 shares of SFX Entertainment's Class A Common Stock
issued to the PACE Sellers in connection with the Fifth Year Put Option;
such shares are not included in calculating the net loss per common
share.
D-100
<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 SFX Entertainment 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. SFX Entertainment'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 SFX Entertainment's absence of a combined operating history, its potential
inability to integrate the Acquisition Businesses and risks related to the
Pending Acquisitions, control of the motor sports and theatrical businesses,
future acquisitions, inability to obtain future financings (including the
Financing), inability to successfully implement operating strategies
(including the achievement of cost savings), SFX Entertainment'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." SFX Entertainment 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 SFX
Entertainment, is measured, in part, by their ability to generate EBITDA.
"EBITDA" is defined as earnings before interest, taxes, other income, net
equity income (loss) from investments and depreciation and amortization.
Although EBITDA is not a measure of performance calculated in accordance with
generally accepted accounting principles ("GAAP"), SFX Entertainment 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 SFX
Entertainment's operating performance or liquidity that is calculated in
accordance with GAAP.
SFX Entertainment'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 SFX Entertainment and in
third-party venues. In connection with all of its live entertainment events,
SFX Entertainment 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
Pending Acquisitions, SFX Entertainment's music and ancillary businesses
comprised approximately 77%, theater comprised approximately 17% and
specialized motor sports comprised approximately 6% of SFX Entertainment's
total net revenues for the 12 months ended September 30, 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. After the
consummation of the Pending Acquisitions, SFX Entertainment will earn
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. After the consummation of the Pending Acquisitions, SFX
Entertainment will earn producing revenues by producing (a) Touring Broadway
Shows, (b) specialized motor events and (c) other proprietary and
non-proprietary entertainment events.
D-101
<PAGE>
RECENT ACQUISITIONS
SFX Entertainment entered the live entertainment business with SFX's
acquisition of Delsener/Slater, a New York-based concert promotion company, in
January 1997 for aggregate consideration of $27.6 million. Delsener/Slater has
long-term leases or is the exclusive promoter for many of the major concert
venues in the New York City metropolitan area, including the Jones Beach
Amphitheater, a 14,000-seat complex located in Wantagh, New York, and the PNC
Bank Arts Center (formerly known as the Garden State Arts Center), a
17,500-seat complex located in Holmdel, New Jersey. In March 1997,
Delsener/Slater acquired, for aggregate consideration of $23.8 million, 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
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, SFX Entertainment 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.
PENDING ACQUISITIONS
In December 1997, SFX Entertainment entered into agreements to
acquire PACE, Pavilion Partners, Contemporary, BGP, the Network Group and
Concert/Southern, all of which are expected to close during the first quarter
of 1998. The following table summarizes the payment terms of each of the
acquisitions:
<TABLE>
<CAPTION>
VALUE OF SFX
ENTERTAINMENT
CASH PURCHASE STOCK TO BE TOTAL
PRICE ISSUEDA ASSUMED DEBTB CONSIDERATION
ACQUIRED BUSINESS (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
- ------------------------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PACE $109.5c $20.0 $25.5 $155.0
Pavilion Partnersd 41.1 -- 49.8 90.9
Contemporary 72.8e 18.7e -- 91.5e
BGP 60.8f 7.5f --g 68.3
Network Group 52.0h 10.0h --i 62.0
Concert/Southern 16.6j -- --j 16.6
-------- ------------- ------------- -------------
Total $352.8 $56.2 $75.3 $484.3
</TABLE>
- ----------
a. The value ascribed to the SFX Entertainment Class A Common Stock in
the acquisition agreements is based on certain financial projections
developed jointly by SFX Entertainment and the sellers of the
Acquisition Businesses. There is presently no trading market for the
SFX Entertainment Class A Common Stock. There can be no assurance
that the assumptions underlying the valuation will, in fact, be
correct or that the valuation will approximate the actual trading
price of the SFX Entertainment Class A Common Stock.
b. Represents debt as of September 30, 1997, which the SFX Entertainment
has agreed to repay. The actual amount of debt will vary at the time
of closing of the Pending Acquisitions.
c. The cash portion of the purchase price will begin to bear interest at
an annual rate of 9% if the PACE Acquisition is not consummated before
April 1, 1998. If the Spin-Off has not been completed on or before
July 1, 1998, each PACE Seller will have the option of requiring SFX
Entertainment to pay $13.33 in cash in lieu of each share of SFX
Entertainment's stock to which that seller was entitled. SFX
Entertainment has also granted the current owners of PACE the right to
require SFX Entertainment 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 SFX
Entertainment Class A Common Stock is less than $13.33 per share, then
SFX Entertainment may be required to offer to provide an additional
cash payment or additional
D-102
<PAGE>
shares of SFX Entertainment Class A Common Stock. In addition, the
PACE Agreement provides that SFX Entertainment, at PACE's request,
will loan PACE up to $25.0 million prior to the closing of the PACE
Acquisition for specified acquisitions. Any loan made pursuant to
this requirement would be secured by the assets of the acquired
businesses. If the PACE Acquisition is not consummated, then, under
certain circumstances, the loan will convert into a five-year term
loan. Although SFX Entertainment does not currently anticipate having
to extend this facility to PACE, there can be no assurance that SFX
Entertainment will have sufficient sources of financing to extend the
facility, if required to do so. See "Agreements Related to the
Pending Acquisitions--PACE Acquisition."
d. Relates to the acquisition by SFX Entertainment of the indirect 66
2/3% ownership interest of Blockbuster Sub and Sony Sub in Pavilion
Partners not currently held by PACE. There can be no assurance that
SFX Entertainment will be able to consummate the acquisition of either
or both of Blockbuster Sub's and Sony Sub's respective interests in
Pavilion Partners, and, as a result, SFX Entertainment may not obtain
100% ownership of Pavilion Partners. Although the consummation of the
PACE Acquisition is a condition precedent to the acquisition of Sony
Sub's interest, the consummation of the Pavilion Acquisition is not a
condition precedent to the closing of the PACE Acquisitions. See
"Agreements Related to the Pending Acquisitions--PACE
Acquisition--Pavilion Acquisition."
e. If the Spin-Off is not completed before consummation of the
Contemporary Acquisition, then SFX Entertainment must issue shares of
its preferred stock that are convertible into shares of SFX
Entertainment Class A Common Stock at the Spin-Off (or, if not so
convertible by July 1, 1998, are redeemable for the stock's fair
market value, but no less than an aggregate of $18.7 million). If the
remaining 50% of Riverport Amphitheater Partnership is not acquired,
the purchase price will be reduced by $10.5 million. In addition,
pursuant to the terms of the Contemporary Agreement, SFX Entertainment
has agreed to make certain payments to any sellers who own shares of
SFX Entertainment Class A Common Stock on the second anniversary of
the closing of the Contemporary Acquisition, if the average trading
price of that stock over the 20-day period ending on that date is less
than $13.33 per share. See "Agreements Related to the Pending
Acquisitions--Contemporary Acquisition."
f. SFX Entertainment has the option to pay up to $7.5 million in cash in
lieu of an equivalent value of SFX Entertainment Class A Common
Stock. SFX Entertainment may also be required, subject to certain
conditions, to repurchase the shares (or, in certain cases, options)
to be issued to the sellers, if the shares, by June 30, 1998, are not
registered with the SEC, are not listed with a nationally recognized
exchange, or are subject to a lock-up period. See "Agreements Related
to the Pending Acquisitions--BGP Acquisition."
g. Although SFX Entertainment is assuming $12.2 million of long-term
debt, BGP is required to have working capital at least equal to the
amount of debt liabilities at the closing of the BGP Acquisition. The
purchase price will be reduced dollar-for-dollar to the extent that
long-term debt exceeds working capital. See "Agreements Related to
the Pending Acquisitions--BGP Acquisition."
h. If the Spin-Off is not completed by June 30, 1998, the sellers will
have the option to require SFX Entertainment to pay $10.0 million in
cash in lieu of SFX Entertainment Class A Common Stock. In addition,
pursuant to the Network Agreement, SFX Entertainment has agreed to
increase the purchase price for Network Magazine and SJS based on
actual 1998 EBITDA (as defined therein) 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 stock
or, in certain circumstances, in cash no later than March 20, 1999. In
addition, SFX Entertainment expects to exercise its option to acquire
an office building and related property for $2.4 million. See
"Agreements Related to the Pending Acquisitions--Network Acquisition."
i. Although SFX Entertainment has agreed to assume $1.4 million of debt
pursuant to the Network Agreement, Network has guaranteed SFX
Entertainment $500,000 in working capital to offset a portion of this
amount.
j. The Concert/Southern Agreement requires SFX Entertainment to pay to
the sellers compensation for a deferred liability of $2.0 million in
five equal annual payments or, at the sellers' option, the present
value of the payments at closing (approximately $1.6 million). SFX
Entertainment expects the sellers to elect to receive the present
value of the liability at closing, and this amount has been included
in the cash purchase price. See "Agreements Related to the Pending
Acquisitions--Concert/Southern Acquisition."
D-103
<PAGE>
The cash portion of the purchase price for each of in the Pending
Acquisitions is subject to increase under certain circumstances, including, in
particular, if SFX Entertainment is unable to issue shares of its capital
stock to certain of the sellers by virtue of having failed to consummate the
Spin-Off or for any other reason. In that case, the aggregate cash
consideration that would be owed to the sellers in the Pending Acquisitions
would increase, in the aggregate, by approximately $56.2 million (plus
interest in certain cases), resulting in a corresponding increase in debt and
decrease in stockholders' equity. Although management believes that the
Spin-Off is likely to occur, the Spin-Off is subject to certain conditions,
some of which are outside of management's control. There can be no assurance
that the Spin-Off will be consummated on the terms presently contemplated, or
at all. In addition, the agreements relating to the Pending 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 SFX Entertainment will be able to finance the
payments. See "Risk Factors--Risks Related to the Pending Acquisitions,"
"--Liquidity and Capital Resources" and "Agreements Related to the Pending
Acquisitions."
The Pending Acquisitions will be 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 SFX Entertainment's operating results in the future. These
expenses, however, do not result in an outflow of cash by SFX Entertainment
and do not impact EBITDA.
SFX Entertainment expects to complete all of the Pending Acquisitions
as soon as practicable after the Financing and prior to the Spin-Off and the
SFX Merger. SFX Entertainment anticipates that it will consummate all of the
Pending Acquisitions in the first quarter of 1998. However, the timing and
completion of the Pending Acquisitions are subject to a number of conditions,
certain of which are beyond SFX Entertainment's control, and there can be no
assurance that the Pending Acquisitions will be completed during that time
period, on the terms described herein, or at all. See "Risk Factors--Risks
Related to Pending Acquisitions" and "Agreements Related to the Pending
Acquisitions."
SPIN-OFF AND SFX MERGER
SFX was formed in 1992 principally to acquire and operate radio
broadcasting stations. In August 1997, SFX agreed to the SFX Merger and to the
Spin-Off. Before consummating the SFX Merger, SFX intends (a) to contribute
its concert and other live entertainment operations to SFX Entertainment and
(b) to distribute all of the outstanding shares of common stock of SFX
Entertainment to the holders of common stock, Series D preferred stock and
certain warrants of SFX pursuant to the Spin-Off. SFX Entertainment intends to
consummate the Financing and the Pending Acquisitions prior to consummation of
the Spin-Off and the SFX Merger. SFX intends to consummate the Spin-Off on or
prior to the consummation of the SFX Merger. The Spin-Off is subject to
certain conditions, including (a) the acceptance for listing or trading of the
SFX Entertainment Class A Common Stock, subject to official notice of
issuance, on a national exchange or The Nasdaq Stock Market and (b) the
receipt of all necessary third-party and stockholder consents to the Spin-Off
as presently contemplated (including the consents currently being sought of
the holders of SFX's Series E preferred stock and certain notes). There can be
no assurance that the conditions to the Spin-Off will be fulfilled, that the
Spin-Off will be consummated on the terms described in this Prospectus or at
all, or that the Pending Acquisitions will be consummated prior to the
Spin-Off on the terms described in this Prospectus or at all. See "Agreements
Between SFX Entertainment and SFX--Distribution Agreement."
Pursuant to the SFX Merger Agreement, if SFX fails or is otherwise
unable to consummate the Spin-Off prior to the consummation of the SFX Merger,
then SFX will be entitled to divest its interest in its live entertainment
business in an alternate type of transaction. If SFX fails to consummate the
Spin-Off or any alternate transaction prior to the SFX Merger, then SFX Buyer
may elect either to consummate the SFX Merger (increasing the amount of cash
consideration to be paid to SFX's stockholders in the SFX Merger by $42.5
million) or to terminate the SFX Merger Agreement. Additionally, part of the
aggregate consideration to be paid to the sellers in the Pending Acquisitions
is intended to consist of shares of SFX Entertainment Class A Common Stock. If
the Spin-Off does not occur, SFX Entertainment would be unable to issue shares
of its common stock to the sellers, and the aggregate cash consideration to be
paid in the Pending Acquisitions would increase by approximately $56.2
million. Although management believes that the Spin-Off is likely to occur,
the Spin-
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Off is subject to certain conditions, some of which are outside of
management's control. There can be no assurance that the conditions to the
Spin-Off will be fulfilled or that the Spin-Off will be consummated on the
terms contemplated or at all. See "Risk Factors--Risks Related to Pending
Acquisitions" and "Agreements Related to the Pending Acquisitions."
RESULTS OF OPERATIONS
General
SFX Entertainment's operations currently consist primarily of concert
promotion and venue operation. After consummation of the Pending Acquisitions,
SFX Entertainment's operations will 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. SFX Entertainment and the Acquisition Businesses also
engage in various other activities ancillary to their live entertainment
businesses.
Concert Promotion/Venue Operation
SFX Entertainment's concert promotion and venue operation business
consists primarily of the promotion of concerts and operation of venues
primarily for use in the presentation of musical events. SFX Entertainment's
primary source of revenues from its concert promotion activities is from
ticket sales at events promoted by SFX Entertainment. As a venue operator, SFX
Entertainment's primary sources of revenue are sponsorships, concessions,
parking and other ancillary services, derived principally from events promoted
by SFX Entertainment.
Revenue from ticket sales is affected primarily by the number of
events SFX Entertainment promotes, the average ticket price and the number of
tickets sold. The average ticket price depends on the popularity of the artist
whom SFX Entertainment 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 SFX Entertainment assumes the risk of ticket sales, although
profits per event would tend to be lower.
Operating margins can vary from period to period.
SFX Entertainment'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
In the PACE Acquisition, SFX Entertainment will acquire the
operations of PACE. PACE's theatrical operations are directed mainly towards
the promotion and production of Touring Broadway Shows, which generate
revenues primarily from ticket sales and sponsorships. PACE 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
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dependency on the success of any single touring production, PACE sells advance
annual subscriptions that provide the purchaser with tickets for all of the
shows that PACE intends to tour in the particular market during the touring
season. For the twelve months ended September 30, 1997, approximately 28% of
tickets for Touring Broadway Shows presented by PACE were sold through advance
annual subscriptions. Subscriptions for Touring Broadway Shows typically cover
approximately two-thirds of PACE'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.
PACE 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. PACE monitors the recoverability of these
investments on a regular basis, and SFX Entertainment may be required to take
write-offs if the original production closes or if SFX Entertainment
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
SFX Entertainment does not currently have any substantial motor
sports activities. The Acquired Businesses' 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, SFX Entertainment may be required to
sell either its motor sports or theatrical lines of business. See "Risk
Factors--Risks Related to Acquisitions" and "Agreements Related to the Pending
Acquisitions--PACE Acquisition--Becker Employment Agreement."
Other Businesses
SFX Entertainment's and the Acquisition Businesses' 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 playlist and audience data. Revenues generally vary based on
the overall advertising environment and competition.
SFX Entertainment and the Acquisition Businesses also provide
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.
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HISTORICAL RESULTS
The following analysis of the historical operations of SFX
Entertainment, including the Recent Acquisitions, but excluding the Pending
Acquisitions, includes, for comparative purposes, the historical operations of
Delsener/Slater (SFX Entertainment's predecessor) for the nine months ended
September 30, 1996 and for the years ended December 31, 1994, 1995 and 1996.
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended
September 30, 1996
SFX Entertainment's concert promotion revenue increased by 79% to
$74.4 million for the nine months ended September 30, 1997, compared to $41.6
million for the nine months ended September 30, 1996, as a result of the
acquisitions of Sunshine Promotions and the Meadows Music Theater lease, which
increased concert promotion revenue by $37.9 million. On a pro forma basis,
assuming that those acquisitions had been completed as of January 1, 1997,
concert promotion revenue for the nine months ended September 30, 1997 would
have been $86.7 million.
Concert promotion operating expenses increased by 47% to $63.0
million for the nine months ended September 30, 1997, compared to $42.9
million for the nine months ended September 30, 1996, primarily as a result of
the acquisitions of Sunshine Promotions and the Meadows Music Theater lease,
which increased concert operating expenses revenue by $31.4 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 $75.3 million for the nine months ended September 30, 1997.
Depreciation and amortization expense increased to $4.0 million for
the nine months ended September 30, 1997, compared to $744,000 for the nine
months ended September 30, 1996, due to the inclusion of $2.3 million of
depreciation and amortization expense related to the acquisitions of Sunshine
Promotions and the Meadows Music Theater lease and the additional depreciation
and amortization recorded in 1997 related to the purchase of Delsener/Slater
on January 2, 1997. In 1997, SFX Entertainment 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, general and administrative expenses were $1.3 million for
the nine months ended September 30, 1997, net of $1.7 million in fees received
from Triathlon, compared to zero for the nine months ended September 30, 1996.
These expenses represent the incremental costs of operating SFX
Entertainment's 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, and SFX will assign
its rights to receive the fees to SFX Entertainment, 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 $6.0 million for the nine months ended September
30, 1997, compared to a loss of $2.0 million in the nine months ended
September 30, 1996, due to the results discussed above.
Interest expense, net of investment income, was $743,000 in the nine
months ended September 30, 1997, compared to net interest income of $83,000
for the nine months ended September 30, 1996, primarily as a result of
assumption of additional debt related to the acquisitions of Sunshine
Promotions and the Meadows Music Theater lease.
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Equity income in unconsolidated subsidiaries increased 148% to $1.3
million from $525,000, primarily as a result of the investment in the PNC Bank
Arts Center.
Income tax expense increased to $3.0 million for the nine months
ended September 30, 1997, compared to $80,000 for the nine months ended
September 30, 1996, primarily as the result of higher operating income.
SFX Entertainment's net income increased to $3.7 million for the nine
months ended September 30, 1997, as compared to a net loss of $1.5 million for
the nine months ended September 30, 1996, due to the factors discussed above.
EBITDA increased to $10.0 million for the nine months ended September
30, 1997, compared to a negative $1.3 million for the nine months ended
September 30, 1996, as a result of the reduction in officers' salary expense
and improved operating results.
Year Ended December 31, 1996 Compared to the Year Ended
December 31, 1995
SFX Entertainment'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 4.8% to $41.6
million for the year ended December 31, 1996, compared to $39.7 million for
the year ended December 31, 1995, primarily as a result 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.
General and administrative expenses, including officers' salary
expenses, increased by 22% to $9.1 million for the year ended December 31,
1996, compared to $7.5 million for the year ended December 31, 1995, primarily
from higher officers' salary expense.
SFX Entertainment'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 $525,000
from $488,000, primarily as result of the investment in the PNC Bank Arts
Center, offset by lower income from SFX Entertainment's other equity
investments.
SFX Entertainment'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.
SFX Entertainment'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 $325,000 for the year ended December 31, 1996,
compared to $388,000 for the year ended December 31, 1995, primarily as a
result of higher officers' salary expense partially offset by lower general
and administrative expenses.
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Year Ended December 31, 1995 Compared to the Year Ended
December 31, 1994
SFX Entertainment's concert promotion revenue decreased by 49% to
$47.6 million for the year ended December 31, 1995, compared to $92.8 million
for the year ended December 31, 1994, primarily as a result of the larger
number of major stadium tours promoted in 1994.
Concert promotion operating expenses decreased by 52% to $39.7
million for the year ended December 31, 1995, compared to $83.4 million for
the year ended December 31, 1994, primarily as a result of the decrease in
concert activity described above.
Depreciation and amortization expense decreased by 1% to $750,000 for
the year ended December 31, 1995, compared to $755,000 for the year ended
December 31, 1994.
General and administrative expenses, including officers' salary
expenses, increased by 4% to $7.5 million for the twelve months ended December
31, 1995, compared to $7.2 million for the year ended December 31, 1994. This
increase resulted from higher general and administrative expenses partially
offset by lower officers' salary expense.
SFX Entertainment's operating loss was $362,000 for the year ended
December 31, 1995, compared to an operating income of $1.4 million for the
year ended December 31, 1994, due to the results discussed above.
Interest income, net of interest expense, was $34,000 in the year
ended December 31, 1995, compared to net interest expense of $6,000 for the
year ended December 31, 1994.
Equity income in unconsolidated subsidiaries increased to $488,000
from negative $9,000, primarily as a result of improved operating results of
Broadway Concerts, Inc., which subleases a venue in New York City.
SFX Entertainment's state and local income tax expense increased to
$13,000 for the year ended December 31, 1995, compared to $5,000 for the year
ended December 31, 1994.
SFX Entertainment's net income decreased to $147,000 for the year
ended December 31, 1995, compared to net income of $1.4 million for the year
ended December 31, 1994, due to the factors discussed above.
EBITDA decreased by 82% to $388,000 for the year ended December 31,
1995, compared to $2.2 million for the year ended December 31, 1994, primarily
as a result of decreased concert activity in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Following consummation of the Pending Acquisitions, SFX
Entertainment's principal need for funds will be to fund interest and debt
service payments, future acquisitions, related working capital needs and, to a
lesser extent, capital expenditures. SFX Entertainment anticipates that its
principal source of funds will be the Financing and cash flows from
operations.
Historical Cash Flows
Net cash provided by operations was $789,000 for the nine months
ended September 30, 1997.
Net cash used in investing activities for the nine months ended
September 30, 1997 was $72.0 million. Cash used in investing activities in
1997 related primarily to the Recent Acquisitions.
Net cash provided by financing activities for the nine months ended
September 30, 1997 was $78.3 million. For the nine months ended September 30,
1997, cash provided by financing activities related primarily to the funding
of the Recent Acquisitions by SFX.
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Recent Acquisitions
In 1997, SFX consummated the acquisitions of Delsener/Slater ($23.6
million in cash plus $4.0 million of deferred payments), the Meadows Music
Theater lease ($0.9 million in cash plus shares of SFX'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's Class A common
stock with a value of approximately $4.0 million and the assumption of $1.6
million of debt). The present value of the future payments that SFX
Entertainment is required to pay in connection wit the Recent Acquisitions is
approximately $3.5 million.
Pending Acquisitions
The aggregate purchase price of the Pending Acquisitions is expected
to be approximately $484.3 million, consisting of approximately $352.8 million
in cash, $75.3 million in assumed liabilities and the issuance of
approximately 4.2 million shares of SFX Entertainment Common Stock with an
attributed negotiated value of $56.2 million. In addition, SFX Entertainment
expects to incur approximately $6.0 million in fees and expenses related to
the Pending Acquisitions. SFX Entertainment has placed deposits in connection
with the Pending Acquisitions aggregating $2.0 million, which will be applied
against the purchase price at closing. Each of the agreements relating to the
Pending Acquisitions provides that, if the Spin-Off is not completed on or
before July 1, 1998, then the sellers may require SFX Entertainment to
repurchase the shares at a price of $13.33 per share. In that event, the cash
needed to fund the Pending Acquisitions would increase by $56.2 million and
SFX Entertainment's stockholders' equity would decrease, and debt would
increase, by a corresponding amount. Although management believes that the
Spin-Off is likely to occur, the Spin-Off is subject to certain conditions,
some of which are outside of management's control. There can be no assurance
that the Spin-Off will be consummated on the terms presently contemplated, or
at all. In addition, the agreements relating to the Pending Acquisitions
provide for certain other purchase price adjustments and future contingent
payments. See "--Pending Acquisitions." The price ascribed to the SFX
Entertainment Class A Common Stock in the acquisition agreements is based on
certain financial projections developed jointly by SFX Entertainment and the
sellers. There is presently no trading market for the SFX Entertainment Class
A Common Stock. There can be no assurance that the assumptions underlying the
valuation will, in fact, be correct or that the valuation will approximate the
actual trading price of the SFX Entertainment Class A Common Stock.
SFX Entertainment has also granted the current owners of PACE the
right to require SFX Entertainment 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 addition, SFX
Entertainment may be required to issue up to an additional $14.0 million of
shares of SFX Entertainment Class A Common Stock or, at SFX Entertainment's
option in certain circumstances, cash, if Network attains certain EBITDA
targets (as defined in the Network Agreement) for the year ended December 31,
1998. Further, SFX Entertainment may be required to pay additional cash
consideration to complete certain of the Pending Acquisitions, if the
transactions do not close by certain dates specified in the agreements. See
"Agreements Related to the Pending Acquisitions."
The PACE Agreement requires SFX Entertainment to make available to
PACE, at any time up to the consummation of the PACE Acquisition, up to $25.0
million to be used by PACE to fund certain acquisitions. SFX Entertainment
does not currently anticipate that it will be required to extend this credit
to PACE; however, if SFX Entertainment is required to make the loan, there can
be no assurance that SFX Entertainment will have sufficient cash or other
sources of liquidity to provide the required funds. See "Agreements Related to
the Pending Acquisitions--PACE Acquisition--PACE Acquisition Facility."
The timing and completion of the Pending Acquisitions is subject to a
number of closing conditions, certain of which are beyond SFX Entertainment's
control. No assurance can be given that SFX Entertainment will be able to
complete any of the Pending Acquisitions by the closing dates specified in the
acquisition agreements, that the Spin-off will be completed on or before July
1, 1998 or at all, or that SFX Entertainment will have sufficient cash or
other
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available sources of capital to make any or all of the future or contingent
payments described above. See "Agreements Related to the Pending Acquisitions."
Spin-Off
SFX Entertainment expects to incur approximately $17.2 million in
fees and expenses in connection with the Spin-Off. In addition, pursuant to
the SFX Merger Agreement, SFX Entertainment has agreed to assume SFX'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 SFX Entertainment 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, SFX Entertainment will be required to indemnify
SFX and each of its directors, officers and employees for any losses relating
to SFX Entertainment's assets and liabilities. Pursuant to the Tax Sharing
Agreement, SFX Entertainment may be responsible for any taxes of SFX resulting
from the Spin-Off, under certain circumstances. See "Agreements Between SFX
Entertainment and SFX." Pursuant to the Distribution Agreement, these payments
will reduce the amount of Working Capital which may be transferred from SFX to
SFX Entertainment or increase the amount of Working Capital payable by SFX
Entertainment to SFX.
Financing
SFX Entertainment expects to incur approximately $15.8 million in
fees and expenses related to the Financing.
Capital Expenditures
Capital expenditures totaled $2.4 million in the nine months ended
September 30, 1997. Capital expenditures in 1997 included cash paid for
building improvements, computer equipment, leasehold improvements and general
operating equipment. SFX Entertainment expects that capital expenditures in
the fourth quarter of 1998 and in 1998 will be substantially higher than
current levels, due to the planned capital expenditures of approximately $17.0
million for 1998 at existing venues (including $14.0 million initially planned
for the expansion and renovation of the Jones Beach Amphitheater and $3.0
million planned for the expansion and renovation of the PNC Bank Arts Center)
and capital expenditures requirements of the Acquisition Businesses, including
$10.0 million for the construction of a new amphitheater serving the Seattle,
Washington market. SFX Entertainment expects all other capital expenditures to
total less than $12.0 million in 1998.
Future Charges to Earnings
In connection with certain executive officers entering into
employment agreements with SFX Entertainment, the Board, on the recommendation
of its Compensation Committee, agreed to grant the executive officers an
aggregate of 650,000 shares of SFX Entertainment Class B Common Stock and
190,000 shares of SFX Entertainment Class A Common Stock. The shares will be
issued on or about the Spin-Off Distribution Date. SFX Entertainment will
record a non-cash compensation charge at the date of the grant equal to the
fair market value of the shares.
In addition, the Board, on the recommendation of its Compensation
Committee, also has approved the issuance of stock options exercisable for an
aggregate of 245,000 shares of SFX Entertainment Class A Common Stock. The
options will vest over five years and will have an exercise price of $5.50 per
share. SFX Entertainment will record non-cash compensation charges over the
five-year exercise period to the extent that the fair value of the underlying
SFX Entertainment Class A Common Stock exceeds the exercise price.
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Further, the consummation of the Pending Acquisitions will result in
substantial charges to earnings relating to interest expense and the
recognition and amortization of goodwill.
Year 2000 Issues
SFX Entertainment has addressed the risks associated with the Year
2000 issue 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 Pending Acquisitions and to be Year
2000 compliant. SFX Entertainment anticipates that the cost of implementing
these systems will be approximately $1.4 million. SFX Entertainment is in the
process of examining the Year 2000 issue with respect to its vendors and does
not anticipate that it will be subject to a material impact in this area.
Sources of Liquidity
As of September 30, 1997, SFX Entertainment's cash and cash
equivalents totaled $7.1 million. As a subsidiary of SFX, SFX Entertainment
has incurred and, as a stand-alone entity, will continue to incur substantial
amounts of indebtedness. As of September 30, 1997, SFX Entertainment's
consolidated indebtedness would have been approximately $497.3 million on a
pro forma basis giving effect to the Spin-Off and the Pending Acquisitions
(assuming that all of these transactions occur on the terms currently
contemplated). The total amount of SFX Entertainment's indebtedness could
increase substantially if those transactions do not occur on the terms
currently contemplated as described above. In addition, SFX Entertainment may
incur indebtedness from time to time to finance acquisitions, for capital
expenditures or for other purposes.
SFX Entertainment will incur substantial indebtedness in order to
consummate the Pending Acquisitions, which it anticipates obtaining through
the Financing, consisting of the private placement of approximately $275.0
million in debt securities and borrowings of $205.9 million under a credit
facility expected to consist of a $250.0 million seven year reducing revolving
facility (the "Proposed Revolver") and a $100.0 million eight year term loan
(the "Proposed Term Loan"). Pursuant to the expected terms of the proposed
credit facility, the maximum amount of funding available under the facility on
a pro forma basis for the 12 months ended September 30, 1997 would have been
approximately $250.4 million. This amount, together with the proceeds of the
debt private placement, would be sufficient to close the Pending Acquisitions
and for the other uses of funds described herein. However, there can be no
assurance that SFX Entertainment will be able to enter into the Financing or
that it will have sufficient borrowing availability under the proposed credit
facility for the uses of funds described herein. If SFX Entertainment does not
enter into the proposed credit facility, there can be no assurance that it
will otherwise be able to obtain the necessary financing on terms comparable
to the expected terms of the credit facility or on terms otherwise acceptable
to SFX Entertainment. The failure to obtain sufficient financing will result
in breaches under certain of SFX Entertainment's existing agreements,
including the agreements relating to the Pending Acquisitions. See "Risk
Factors--Risks Related to the Pending Acquisitions." In addition, SFX
Entertainment's ability to borrow under the proposed credit facility or to
obtain other financing may be restricted by the terms of the proposed
indenture governing its privately-placed debt securities.
As required by the Distribution Agreement, by the time of the
Spin-Off, SFX will contribute to SFX Entertainment all of its concert and
other live entertainment assets. At that time, SFX Entertainment will assume
all of SFX's liabilities pertaining to the live entertainment businesses,
along with certain other liabilities. Immediately after the Spin-Off, SFX
will pay to SFX Entertainment an allocation of working capital in an amount
estimated by SFX's management to be consistent with the proper operation of
SFX. At the time of the SFX Merger, SFX will contribute its positive Working
Capital (if any) to SFX Entertainment. If Working Capital is negative, then
SFX Entertainment must pay the amount of the shortfall to SFX. As of September
30, 1997, SFX Entertainment estimates that Working Capital to be received by
SFX Entertainment would have been approximately $2.1 million, and that
approximately $135.5 million of additional assets and $34.1 million of
liabilities related to the live entertainment businesses would have been
contributed to SFX Entertainment. The actual amount of Working Capital as of
the closing of the SFX Merger may differ substantially from the amount as of
September 30, 1997, and will be a function of, among other things, the
operating results of SFX through the date of the SFX Merger and the actual
cost of consummating the
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SFX Merger and the related transactions. In addition, at the time of the
Spin-Off, SFX Entertainment must repay sums advanced to it by SFX for certain
acquisitions or capital expenditures after August 24, 1997 and which have not
been repaid. As of January 15, 1998, SFX had advanced approximately $6.5
million to SFX Entertainment for use in connection with certain acquisitions
and capital expenditures. SFX Entertainment intends to repay these amounts
from the proceeds of the Financing. SFX may advance additional amounts to SFX
Entertainment for these purposes before the consummation of the Spin-Off. See
"Agreements Between SFX Entertainment and SFX--Distribution Agreement."
SFX Entertainment expects that the Proposed Revolver and Proposed
Term Loan will contain provisions providing that, at its option and subject to
certain conditions, SFX Entertainment may increase the amount of either the
Proposed Revolver or Proposed Term Loan by $50 million. The Proposed Revolver
and Proposed Term Loan are expected to 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) to pro forma interest
expense, debt service and fixed charges. SFX Entertainment's obligations under
the Proposed Revolver and Proposed Term Loan would be secured by substantially
all of its assets, including property, stock of subsidiaries and accounts
receivable and guaranteed by SFX Entertainment's subsidiaries.
The degree to which SFX Entertainment is leveraged following the
Financing will have material consequences to SFX Entertainment. SFX
Entertainment's ability to obtain additional financing in the future for
acquisitions, working capital, capital expenditures, general corporate or
other purposes will be subject to the covenants contained in the instruments
governing its indebtedness. A substantial portion of SFX Entertainment'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 agreements
governing SFX Entertainment's long-term debt will likely contain restrictive
financial and operating covenants, and the failure by SFX Entertainment 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). SFX
Entertainment 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; SFX Entertainment's
indebtedness could also have other adverse consequences. See "Risk
Factors--Substantial Leverage."
SFX Entertainment'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 SFX Entertainment's operations.
There can be no assurance that SFX Entertainment will be able to make planned
borrowings (including the Financing), that SFX Entertainment's business will
generate sufficient cash flow from operations, or that future borrowings will
be available in an amount to enable SFX Entertainment to service its debt and
to make necessary capital or other expenditures. SFX Entertainment 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 SFX
Entertainment will be able to raise additional capital through the sale of
securities, the disposition of assets or otherwise for any refinancing. See
"Risk Factors."
SFX Entertainment intends to pursue additional expansion
opportunities and expects to continue to identify and negotiate with respect
to substantial acquisitions in the concert promotion and venue operation
business, certain of which may be consummated prior to the Spin-Off. However,
it may be unable to identify and acquire additional suitable businesses or
obtain the financing necessary to acquire the businesses. SFX Entertainment,
in connection with future acquisitions, may seek additional debt and equity
financing, the terms of which could affect the results of operations of SFX
Entertainment. Any debt financing would require payments of principal and
interest and would adversely impact SFX Entertainment's cash flows, and any
equity financing could be dilutive to the ownership interests of SFX
Entertainment's then-existing stockholders. There can be no assurance that SFX
Entertainment will be able to obtain financing on terms acceptable to SFX
Entertainment, or at all. Furthermore, any additional acquisitions may result
in
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charges to operations relating to interest expense or the recognition and
amortization of goodwill, which would increase SFX Entertainment's losses or
reduce or eliminate its earnings, if any.
Based on the current earnings of SFX Entertainment and the
Acquisition Businesses and anticipated cost savings and revenue growth,
management believes that, after consummating the Pending Acquisitions, cash
flow from operations and available cash (together with available borrowings
under the proposed credit facility) will be adequate to meet SFX
Entertainment's future liquidity needs until at least December 31, 1999.
Seasonality
SFX Entertainment'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 Recent
Acquisitions, SFX Entertainment generated approximately 70% of its revenues in
the second and third quarters for the 12 months ending September 30, 1997. SFX
Entertainment'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 SFX Entertainment promotes largely occur
in the second and third quarters. To the extent that SFX Entertainment's
entertainment marketing and consulting relate to musical concerts, they also
predominantly generate revenues in the second and third quarters. Therefore,
the seasonality of SFX Entertainment's business causes (and will probably
continue to cause) a significant variation in SFX Entertainment's quarterly
operating results. These variations in demand could have a material adverse
effect on the timing of SFX Entertainment's cash flows and, therefore, on its
ability to service its obligations with respect to its indebtedness. However,
SFX Entertainment believes that this variation may be somewhat offset with the
acquisition of typically non-summer seasonal businesses in the Pending
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."
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to SFX Entertainment's Certificate of Incorporation and
By-Laws, the business of SFX Entertainment will be 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 SFX Entertainment authorize the Board to fix the
number of directors from time to time. The initial number of directors of SFX
Entertainment is nine. All directors hold office until the next annual meeting
of stockholders following their election or until their successors are elected
and qualified. Officers of SFX Entertainment are to be elected annually by the
Board and serve at the Board's discretion. In the election of directors, the
holders of SFX Entertainment 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 SFX Entertainment
Class A Common Stock entitled to one vote.
Initially, the Board will consist of the individuals who are
currently serving as directors of SFX. In addition, it is anticipated that,
after the consummation of the PACE Acquisition, Brian Becker, the Chief
Executive Officer and President of PACE, will be appointed as a Director, as
an Executive Vice President and, together with Messrs. Sillerman and Ferrel,
as a Member of the Office of the Chairman. All of the individuals who
currently serve as directors of SFX will cease to be directors of SFX 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 SFX Entertainment, and
the Board will appoint three new independent directors, to serve until the
next annual meeting of the stockholders of SFX Entertainment. The directors of
SFX Entertainment will hold office until the next annual meeting of
stockholders of SFX Entertainment or until their successors are duly elected
and qualified.
All of the executive officers of SFX Entertainment (the "Executive
Officers") consist initially of individuals currently responsible for the
management of SFX. It is anticipated that, prior to the Spin-Off, the
Executive Officers will enter into five year employment agreements with SFX
Entertainment that will be similar to their existing employment agreements
with SFX (except that Mr. Armstrong's employment agreement is expected to
provide that he will serve as an executive vice president of SFX Entertainment
but not as the chief operating officer). 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 will continue to devote as much time
as they deem necessary to conduct the operations of SFX Entertainment
consistent with their obligations to SFX. If the Merger Agreement is
terminated for any reason, the Executive Officers will continue to perform
services to both SFX and SFX Entertainment until SFX is able to hire suitable
replacements for the Executive Officers. If the Merger Agreement is
terminated, SFX intends to seek another buyer for the radio broadcasting
business.
SFX and Messrs. Sillerman and Ferrel have reached agreements in
principle that Messrs. Sillerman and Ferrel will serve as officers and
directors of SFX Entertainment; however, if Proposal 3 in the Proxy Statement
is not approved, there can be no assurance that they will serve in any such
capacity, in which event SFX intends to pursue alternative means of disposing
of SFX Entertainment. See "Risk Factors--Dependence on Key Personnel."
It is expected that, after the consummation of the Pending
Acquisitions, current senior management of the Acquisition Businesses will
remain largely intact in order to preserve essential local relationships,
reputations, names and expertise, with senior management overseeing and
coordinating operations of SFX Entertainment as a whole. See "Agreements
Related to the Pending Acquisitions." The following table sets forth
information as to the Directors and the Executive Officers of SFX
Entertainment:
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<PAGE>
<TABLE>
<CAPTION>
DIRECTOR AGE AS OF
POSITION(S) HELD WITH POSITION(S) HELD WITH OF SFX DECEMBER
NAME SFX ENTERTAINMENT SFX SINCE 31, 1997
- ------------------------------ -------------------------- -------------------------- -------- -----------
<S> <C> <C> <C> <C>
Robert F.X. Sillerman Director, Executive Director and Executive 1992 49
Chairman and Member Chairman
of the Office of the
Chairman
Michael G. Ferrel Director, President, Director, President and 1996 48
Chief Executive Officer Chief Executive Officer
and Member of the
Office of the Chairman
D. Geoffrey Armstrong Director and Executive Director, Chief Operating 1993 40
Vice President Officer and Executive
Vice President
Howard J. Tytel Director, General Director, General 1993 50
Counsel, Secretary and Counsel, Secretary and
Executive Vice Executive Vice President
President
Thomas P. Benson Director, Vice President Director and Chief 1996 35
and Chief Financial Financial Officer
Officer
Richard A. Liese Director, Vice President Director, Vice President 1995 45
and Assistant General and Assistant General
Counsel Counsel
James F. O'Grady, Jr. Director Director 1993 69
Paul Kramer Director Director 1993 65
Edward F. Dugan Director Director 1996 63
*Brian Becker Director, Executive Vice None -- 41
President and Member
of the Office of the
Chairman
</TABLE>
- -----------------
* Anticipated to be appointed after the consummation of the PACE
Acquisition.
ROBERT F.X. SILLERMAN has served as the Executive Chairman of SFX
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. Mr. Sillerman is
Chairman of the Board of Directors and Chief Executive Officer of SCMC, a
private investment company in which he and Mr. Tytel have economic interests
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
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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 midwestern 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 since November 22, 1996. Mr. Ferrel served as President and
Chief Operating Officer of MMR, a wholly-owned subsidiary of SFX, 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 SFX, Inc. the former owner of radio station
WPKX-FM, Springfield, Massachusetts, which was acquired by MMR in July 1993.
D. GEOFFREY ARMSTRONG has been the Chief Operating Officer and an
Executive Vice President of SFX since November 22, 1996 and has served as a
Director of SFX since 1993. Mr. Armstrong became the Chief Operating Officer
of SFX in June 1996 and the Chief Financial Officer, Executive Vice President
and Treasurer of SFX in April 1995. Mr. Armstrong was Vice President, Chief
Financial Officer and Treasurer of SFX from 1992 until March 1995. He had been
Executive Vice President and Chief Financial Officer of Capstar, a predecessor
of SFX, since 1989. From 1988 to 1989, Mr. Armstrong was the Chief Executive
Officer of Sterling Communications Corporation.
HOWARD J. TYTEL has been a Director, General Counsel, Executive Vice
President and Secretary of SFX 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, 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 since November 22, 1996. Mr. Benson became the Vice President of
Financial Affairs of SFX 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 Assistant
General Counsel of SFX 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.
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
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<PAGE>
University from 1984 to 1996, and has served as a Director of Orange and
Rockland Utilities, Inc. since 1980 and 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.
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.
Audit Committee
The Audit Committee will review (and report to the Board prior to the
Spin-Off) on various auditing and accounting matters, including the selection,
quality and performance of SFX Entertainment'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 SFX Entertainment. The members of the Audit Committee are Messrs. Kramer,
O'Grady and Dugan.
Compensation Committee
The Compensation Committee will review and make recommendations with
respect to certain of SFX Entertainment's compensation programs and
compensation arrangements with respect to certain officers, including Messrs.
Sillerman, Ferrel, Armstrong, 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 or SFX Entertainment.
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 SFX Entertainment
Class A Common Stock to holders as of the Spin-Off Record Date of stock
options or SARs of SFX, 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'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 SFX Entertainment 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 SFX
Entertainment may be granted options and determine the rights and limitations
of options
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<PAGE>
granted under SFX Entertainment's plans. The members of the Stock Option
Committee are Messrs. Kramer, O'Grady and Dugan.
Stock Option Plan
The Board and SFX, as sole stockholder of SFX Entertainment, have
approved and adopted a stock option plan providing for the issuance of options
to purchase up to 2,000,000 shares of SFX Entertainment Class A Common Stock.
The purpose of the plan is to provide additional incentive to officers and
employees of SFX Entertainment. 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.
Compensation of Directors
Directors employed by SFX Entertainment will receive no compensation
for meetings they attend. Each director not employed by SFX Entertainment 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, SFX
Entertainment 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 SFX
Entertainment Class A Common Stock.
EXECUTIVE COMPENSATION
SFX Entertainment did not pay any compensation to the current
Executive Officers in 1997. SFX Entertainment anticipates that during 1998 its
most highly compensated executive officers will be Messrs. Sillerman, Ferrel,
Armstrong, Tytel and, after the consummation of the PACE Acquisition, 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.
It is anticipated that the Board will, after the Spin-Off, grant
shares of SFX Entertainment Class A Common Stock to holders as of the Spin-Off
Record Date of stock options or SARs of SFX, whether or not vested. See
"Certain Relationships and Related Transactions--Issuance of Stock to Holders
of SFX's Options and SARs."
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS WITH CERTAIN OFFICERS AND DIRECTORS
SFX Entertainment anticipates that it will enter into employment
agreements with all of the Executive Officers prior t o the consummation of
the Spin-Off, and that the employment agreements (except for Mr. Becker's
employment agreement) 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, $325,000 for Mr. Armstrong, $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 SFX Entertainment or the
employee, the term will continue thereafter on a year-to-year basis on the
same terms existing at
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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 restricted stock awards: 500,000 shares of SFX Entertainment Class B
Common Stock to Mr. Sillerman, 150,000 shares of SFX Entertainment Class B
Common Stock to Mr. Ferrel, 100,000 shares of SFX Entertainment Class A Common
Stock to Mr. Armstrong, 80,000 shares of SFX Entertainment Class A Common
Stock to Mr. Tytel and 10,000 shares of SFX Entertainment Class A Common Stock
to Mr. Benson. For a period of three years from issuance, the restricted stock
may not be transferred and will be subject to forfeiture if an unwaived event
of default is called on certain indebtedness, including the debt to be
incurred in the Financing. In addition, in connection with entering into the
employment agreements, 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 SFX Entertainment 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 and options to purchase 10,000 shares to Mr. Benson. The
options will vest over five years and will have an exercise price of $5.50 per
share.
SFX Entertainment has entered into an employment agreement with Mr.
Becker (which will be effective at the time of consummation of the PACE
Acquisition), who will serve 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 "Agreements Related to the Pending Acquisitions--PACE
Acquisition--Becker Employment Agreement." In addition, SFX Entertainment
expects to enter into additional employment agreements with certain of the
existing officers of the Acquisition Businesses after the consummation of the
acquisitions. See "Agreements Related to the Pending Acquisitions."
Until the closing date of the SFX Merger, the Executive Officers
(other than Mr. Becker) will continue to be employed by SFX (at SFX's
expense), but will devote as much time as they deem reasonably necessary,
consistent with their obligations to SFX, in support of SFX Entertainment 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, SFX Entertainment will assume all
obligations arising under any employment agreement or arrangement (written or
oral) between SFX 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 (as defined in
their respective employment agreements) and all existing rights to
indemnification. SFX Entertainment will assume the obligation to make change
of control payments under Messrs. Sillerman's, Ferrel's and Benson's existing
employment agreements with SFX of approximately $3.3 million, $1.5 million and
$0.2 million, respectively. SFX Entertainment will also indemnify SFX 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).
SFX Entertainment and SFX have also entered into certain agreements
and arrangements with their officers and directors from time to time in the
past. See "Certain Relationships and Related Transactions."
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PRINCIPAL STOCKHOLDERS OF SFX ENTERTAINMENT
All of the outstanding SFX Entertainment Common Stock is currently
held by SFX. To the best of SFX Entertainment's knowledge, the following table
sets forth projected information regarding the beneficial ownership of shares
of SFX Entertainment Common Stock after the Spin-Off, and after the Spin-Off,
the Pending Acquisitions and stock grants, with respect to (a) each director
of SFX Entertainment, (b) certain executive officers of SFX Entertainment, (c)
the directors and executive officers of SFX Entertainment as a group and (d)
each person known by SFX Entertainment to own beneficially more than five
percent of the outstanding shares of any class of SFX's common stock. The
ownership information presented below with respect to all persons and
organizations is based on record ownership of SFX's common stock and certain
options and warrants to purchase SFX's common stock as of [January 13, 1998]
and assumes no change in record ownership of SFX's common stock and the
options and warrants.
<TABLE>
<CAPTION>
After the Spin-Off, Pending Acquisitions and
After the Spin-Off Stock Grants 1,2
---------------------------------------------------------------------------------
Class A Class B Class A
Common Stock Common Stock3 Common Stock
------------------------------------- ----------------------
Percent
of Total
Name and Address of Number of Percent Number Percent Voting Number of Percent
Beneficial Owner4 Shares of Class of Shares of Class Power Shares of Class
- --------------------------------- ------------ ---------- --------- -------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Directors and Executive Officers:
Robert F.X. Sillerman..... 1,287,4375 9.2 1,024,168 97.8% 47.1% 1,332,630 5,6 6.9%
Michael G. Ferrel......... 12,132 * 22,869 2.2% 1.0% 179,504 8 *
D. Geoffrey Armstrong..... 9,496 * -- -- * 294,496 10 1.6%
Howard J. Tytel11......... 24,284 * -- -- * 137,891 11,12 *
Thomas P. Benson.......... -- -- -- -- * 19,000 13 *
Richard A. Liese.......... -- -- -- -- * 9,500 14 *
James F. O'Grady, Jr...... 1,772 * -- -- * 14,772 15 *
Paul Kramer............... 2,922 * -- -- * 15,922 16 *
Edward F. Dugan........... 2,922 * -- -- * 5,922 17 *
Brian Becker.............. -- -- -- -- * -- *
All directors and executive
officers as a group (9
persons; 10 persons after
the PACE Acquisition).... 1,340,965 9.9% 1,047,037 100.0% 48.3% 2,009,637 10.7%
5% Stockholders:
Nomura Holdings America In 1,320,729 18 9.8% -- -- 5.5% 1,320,729 18 7.0%
2 World Financial Center,
Building B
New York, NY 10281
The Goldman Sachs Group, L.P 689,574 19 5.1% -- -- 2.8% 689,574 19 3.6%
85 Broad Street
New York, NY 10004
College Retirement Equities 460,500 20 3.4% -- -- 1.9% 460,500 20 2.5%
Fund
730 Third Avenue
New York, NY 10017
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
-------------------------------
Class B
Common Stock3
---------------------
Percent
of Total
Name and Address of Number of Percent Voting
Beneficial Owner4 Shares of Class Power
- --------------------------------- ----------- ---------- -------
<S> <C> <C> <C>
Directors and Executive Officers:
Robert F.X. Sillerman..... 1,524,168 7 89.9% 45.7%
Michael G. Ferrel......... 172,869 9 10.1% 5.3%
D. Geoffrey Armstrong..... -- -- *
Howard J. Tytel11......... -- -- *
Thomas P. Benson.......... -- -- *
Richard A. Liese.......... -- -- *
James F. O'Grady, Jr...... -- -- *
Paul Kramer............... -- -- *
Edward F. Dugan........... -- -- *
Brian Becker.............. -- -- *
All directors and executive
officers as a group (9
persons; 10 persons after
the PACE Acquisition).... 1,697,037 100.0% 52.3%
5% Stockholders:
Nomura Holdings America In -- -- 3.6%
2 World Financial Center,
Building B
New York, NY 10281
The Goldman Sachs Group, L.P -- -- 1.9%
85 Broad Street
New York, NY 10004
College Retirement Equities -- -- 1.3%
Fund
730 Third Avenue
New York, NY 10017
</TABLE>
- ------------------------
* Less than 1%
1 Assumes that (a) all of the outstanding Class B Warrants and Unit
Purchase Options of SFX are exercised prior to the Spin-Off Record
Date and (b) SFX exercises a contractual right to purchase 250,838
shares of SFX's
D-121
<PAGE>
Class A common stock prior to the Spin-Off Record Date. Does not
include 2,000,000 shares reserved for issuance pursuant to SFX
Entertainment's stock option plan.
2 Assumes that (a) an aggregate of 4,216,680 shares of SFX Entertainment
Class A Common Stock are issued pursuant to the Pending Acquisitions,
(b) an aggregate of 793,633 shares of SFX Entertainment Class A Common
Stock are issued to the holders of stock options and SARs issued by
SFX and (c) an aggregate of 290,000 shares of SFX Entertainment Class
A Common Stock and 650,000 shares of SFX Entertainment 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's Options
and SARs."
3 Assumes that the proposal to allow holders of SFX's Class B Common
Stock to receive SFX Entertainment Class B Common Stock in the
Spin-Off is approved at SFX's stockholders meeting.
4 Unless otherwise set forth above, the address of each stockholder is
the address of SFX Entertainment, 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 [January 13, 1998]. Unless noted otherwise, (a) information as to
beneficial ownership is based on statements furnished to SFX or SFX
Entertainment by the beneficial owners, and (b) stockholders possess
sole voting and dispositive power with respect to shares listed on
this table. As of [January 13, 1998], there were issued and
outstanding [9,492,033] shares of SFX's Class A common stock and
1,047,037 shares of SFX's Class B common stock.
5 Includes 600,000 shares of SFX Entertainment Class A Common Stock to
be issued to SCMC in the Spin-Off pursuant to certain warrants held
by SCMC and an option, exercisable upon consummation of the Spin-Off,
to acquire an aggregate of 537,185 shares of SFX Entertainment Class
A Common Stock from [Bear Stearns].
6 Assumes that SFX Entertainment issues 45,193 shares of SFX
Entertainment Class A Common Stock to Mr. Sillerman (or entities
controlled by Mr. Sillerman) as a result of his ownership of options
of SFX. See "Certain Relationships and Related Transactions--Issuance
of Stock to Holders of SFX's Options and SARs." Includes 8,949 shares
of SFX Entertainment Class A Common Stock expected to be issued to TSC
in the Spin-Off. If the 1,524,168 shares of SFX Entertainment Class B
Common Stock to be held by Mr. Sillerman were included in calculating
his ownership of SFX Entertainment Class A Common Stock, then Mr.
Sillerman would beneficially own 2,856,705 shares of SFX Entertainment
Class A Common Stock, representing approximately 14% of the class.
Does not include options to purchase an aggregate of 120,000 shares of
SFX Entertainment 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."
7 Includes 500,000 shares of SFX Entertainment 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."
8 Assumes that SFX Entertainment issues 167,372 shares of SFX
Entertainment Class A Common Stock to Mr. Ferrel as a result of his
ownership of options of SFX. See "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX's Options and SARs."
If the 22,869 shares of Class B Common Stock held by Mr. Ferrel were
included in calculating his ownership of SFX Entertainment Class A
Common Stock, then Mr. Ferrel would beneficially own 352,371 shares of
SFX Entertainment Class A Common Stock, representing approximately
1.9% of the class. Does not include options to purchase an aggregate
of 50,000 shares of SFX Entertainment 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."
9 Includes 150,000 shares of SFX Entertainment 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."
D-122
<PAGE>
10 Assumes that SFX Entertainment issues an aggregate of 285,000 shares
of SFX Entertainment Class A Common Stock to Mr. Armstrong pursuant
to his anticipated employment agreement and as a result of his
ownership of options of SFX. See "Management--Employment Agreements
and Arrangements with Certain Officers and Directors" and "Certain
Relationships and Related Transactions--Issuance of Stock to Holders
of SFX's Options and SARs."
11 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."
12 Assumes that SFX Entertainment issues an aggregate of 113,614 shares
of SFX Entertainment Class A Common Stock to Mr. Tytel pursuant to his
anticipated employment agreement and as a result of his ownership of
options of SFX. Mr. Tytel has an economic interest in SCMC and TSC,
which together will beneficially own an aggregate of 608,949 shares of
SFX Entertainment 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 SFX Entertainment 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's Options
and SARs."
13 Assumes that SFX Entertainment issues an aggregate of 19,000 shares
of SFX Entertainment Class A Common Stock to Mr. Benson pursuant to
his anticipated employment agreement and as a result of his ownership
of options of SFX. Does not include options to purchase an aggregate
of 10,000 shares of SFX Entertainment 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's Options
and SARs."
14 Assumes that SFX Entertainment issues 9,500 shares of SFX
Entertainment Class A Common Stock to Mr. Liese as a result of his
ownership of options of SFX. See "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX's Options and
SARs."
15 Assumes that SFX Entertainment issues 13,000 shares of SFX
Entertainment Class A Common Stock to Mr. O'Grady as a result of his
ownership of options and/or SARs of SFX. See "Certain Relationships
and Related Transactions--Issuance of Stock to Holders of SFX's
Options and SARs." Includes 922 shares issuable pursuant to SFX's
director deferred stock ownership plan.
16 Assumes that SFX Entertainment issues 13,000 shares of SFX
Entertainment Class A Common Stock to Mr. Kramer as a result of his
ownership of options and/or SARs of SFX. See "Certain Relationships
and Related Transactions--Issuance of Stock to Holders of SFX's
Options and SARs." Includes 922 shares issuable pursuant to SFX's
director deferred stock ownership plan.
17 Assumes that SFX Entertainment issues 3,000 shares of SFX
Entertainment Class A Common Stock to Mr. Dugan as a result of his
ownership of options and/or SARs of SFX. See "Certain Relationships
and Related Transactions--Issuance of Stock to Holders of SFX's
Options and SARs." Includes 922 shares issuable pursuant to SFX's
director deferred stock ownership plan.
18 Based on information contained in Amendment No. 2 to Schedule 13D
filed with the SEC on November 7, 1997. Of these shares, 1,071,429
shares are held of record by Bedrock Asset Trust I, a Delaware trust
established by Nomura Holdings America Inc. The remaining 249,300
shares are held directly by Nomura Holdings America Inc., which is
controlled by The Nomura Securities Co., Ltd., a corporation
organized under the laws of Japan.
19 Based on information contained in Amendment No. 1 to Schedule 13D
filed with the SEC on September 24, 1997. As of September 19, 1997,
The Goldman Sachs Group, L.P., a holding partnership, beneficially
owned 689,574 shares, of which 649,574 shares were beneficially owned
by Goldman, Sachs & Co., including 293,952 shares issuable upon
conversion of shares of Series D preferred stock. The Goldman Sachs
Group, L.P. is a general partner of (and owns a 99% interest in)
Goldman, Sachs & Co., a broker dealer and an investment adviser under
the Investment Advisers Act of 1940.
D-123
<PAGE>
20 Based on information contained in Schedule 13G filed with the SEC on
February 10, 1997. College Retirement Equities Fund is an investment
company registered under the Investment Company Act of 1940.
[POSSIBLE CHANGES IN CONTROL]
[Describe Sillerman's pledge, if any, of his shares of SFX
Entertainment Common Stock.]
D-124
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS WITH SFX
SFX Entertainment and SFX 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 Between SFX Entertainment and SFX."
SFX ENTERTAINMENT COMMON STOCK TO BE RECEIVED IN THE SPIN-OFF
In the Spin-Off, the holders of SFX's Class A common stock, Series D
preferred stock and Warrants (upon exercise) will receive shares of SFX
Entertainment Class A Common Stock, whereas Messrs. Sillerman and Ferrel, as
the holders of SFX's Class B common stock (which is entitled to ten votes per
share on most matters), will receive shares of SFX Entertainment Class B
Common Stock (assuming approval of Proposal 3 in the attached Proxy
Statement). The SFX Entertainment Class A Common Stock and Class B Common
Stock have similar rights and privileges, except that the SFX Entertainment
Class B Common Stock differs as to voting rights generally to the extent that
SFX's Class A common stock and Class B common stock presently differ. See
"Description of Capital Stock." The issuance of SFX Entertainment 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 45.7% of the
combined voting power of SFX Entertainment after the Pending Acquisitions,
Spin-Off and stock grants to management. Similarly, Messrs. Sillerman and
Ferrel are anticipated to be deemed to beneficially own approximately 51.0% of
the combined voting power of SFX Entertainment after the Pending Acquisitions,
Spin-Off and stock grants to management. Accordingly, Mr. Sillerman, alone and
together with SFX Entertainment's current directors and executive officers,
will generally be able to control the outcome of the votes of the stockholders
of SFX Entertainment on most matters. SFX Entertainment and Messrs. Sillerman
and Ferrel have agreed in principle that Messrs. Sillerman and Ferrel will
serve as officers and directors of SFX Entertainment; however, if Proposal 3
in the Proxy Statement is not approved, there can be no assurance that they
will serve in that capacity, in which event SFX intends to pursue alternative
means of disposing of SFX Entertainment. See "The Spin-Off."
In addition, in August 1997, the board of directors of SFX approved
amendments to the SCMC Warrants (which represent the right to purchase an
aggregate of 600,000 shares of SFX'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 that SCMC
receive the aggregate number of shares of SFX Entertainment 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'S OPTIONS AND SARS
The Board has approved the grant of shares of SFX Entertainment Class
A Common Stock to holders as of the Spin-Off Record Date of the stock options
or SARs of SFX, 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's Class A common stock. Additionally, many of
the option and SAR holders will become officers, directors or employees of SFX
Entertainment. These grants will result in the issuance of an aggregate of up
to 793,633 shares of SFX Entertainment Class A Common Stock. Among those
receiving shares will be all members of the Board other than Mr.
Becker.
D-125
<PAGE>
EMPLOYMENT AGREEMENTS
SFX Entertainment anticipates that it will enter into employment
agreements with each member of its senior management before consummating the
Spin-Off, and that the employment agreements (except for Mr. Becker's
employment agreement) will become effective immediately after the consummation
of the SFX Merger. SFX Entertainment anticipates that the employment
agreements will provide for annual base salaries of $500,000 for Mr.
Sillerman, $350,000 for Mr. Ferrel, $325,000 for Mr. Armstrong, $300,000 for
Mr. Tytel and $235,000 for Mr. Benson. In addition, the employment agreements
are expected to provide for certain stock and option grants. 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."
DELSENER/SLATER EMPLOYMENT AGREEMENTS
In connection with the Delsener/Slater Acquisition, SFX 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 Delsener/Slater Employment
Agreements will continue until December 31, 2001 unless terminated earlier by
SFX Entertainment for Cause (as defined in the Delsener/Slater Employment
Agreements) or voluntarily by Messrs. Delsener or Slater.
Rights to Repurchase (Or to Offer to Repurchase) Delsener/Slater
Pursuant to the Delsener/Slater Employment Agreements, if, before
January 2, 2000, SFX's Board of Directors approves a Change of Control (as
defined in the Delsener/Slater Employment Agreements to include a transaction
in which a third party becomes the beneficial owner of 50% or more of the
voting power of SFX), then Messrs. Delsener and Slater will have the right to
purchase the outstanding capital stock of Delsener/Slater for Fair Market
Value (as defined in the Delsener/Slater Employment Agreements).
Under the Delsener/Slater Employment Agreements, Messrs. Delsener and
Slater each also have a 60-day right to negotiate with SFX to purchase the
capital stock or assets of Delsener/Slater if, before January 2, 2000, SFX
proposes to (a) commence an initial public offering of Delsener/Slater, (b)
sell or transfer capital stock of Delsener/Slater, resulting in SFX no longer
controlling Delsener/Slater, or (c) sell or transfer substantially all of the
assets of Delsener/Slater.
Rights to Receive Additional Cash Payments
In the case of a Return Event (as defined in the Delsener/Slater
Employment Agreements), which may be deemed to include the Spin-Off, the SFX
Merger and related transactions, Messrs. Delsener and Slater will have the
right to receive a portion of the excess of the proceeds of the Return Event,
less a fixed amount determined in reference to the original purchase price for
Delsener/Slater. Management believes that no payment will accrue to Messrs.
Delsener or Slater pursuant to these rights with respect to the Spin-Off, the
SFX Merger and related transactions.
Additionally, the Delsener/Slater Employment Agreements require
Messrs. Delsener and Slater to receive annual bonuses determined with
reference to Delsener/Slater Profits (as defined in the Delsener/Slater
Employment Agreements) for the immediately preceding year. Delsener/Slater
Profits for each year are required to be allocated as follows:
D-126
<PAGE>
o the first $4.0 million of Delsener/Slater Profits will be retained by
SFX;
o the next $300,000 of Delsener/Slater Profits must be paid to Messrs.
Delsener and Slater; and
o all Delsener/Slater Profits above $4.3 million must be shared 80% by
SFX and 20% by Messrs. Delsener and Slater.
Management believes that no bonus was earned in 1997 pursuant to this
arrangement. However, any bonuses that may accrue to Messrs. Delsener and
Slater in the future will not be available for SFX Entertainment's use to
service its debt or for other purposes.
Possible Amendments to Delsener/Slater Employment Agreements
Messrs. Delsener and Slater and SFX Entertainment are in the process
of negotiating amendments to the Delsener/Slater Employment Agreements to
reflect, among other things, the changes to SFX Entertainment's business as a
result of the Pending Acquisitions and the Spin-Off. Messrs. Delsener and
Slater have agreed in principle to waive any rights to repurchase (or to offer
to repurchase) Delsener/Slater, and any rights to receive a portion of the
proceeds of a Return Event, 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 SFX
Entertainment 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. SFX Entertainment 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.
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, SFX Entertainment will assume all
obligations under any employment agreement or arrangement (whether written or
oral) between SFX or any of its subsidiaries and any employee of SFX
Entertainment (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, 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 following a change of control of SFX,
pursuant to their employment agreements with SFX. In addition, SFX
Entertainment'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 in connection with the SFX Merger.
INDEMNIFICATION OF MR. SILLERMAN
On August 24, 1997, Mr. Sillerman entered into an agreement with SFX,
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,
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, SFX Entertainment will agree to
indemnify Mr. Sillerman for these claims and damages to the fullest extent
permitted by applicable law.
D-127
<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 9.2% in Marquee; Mr. Sillerman is the chairman of its board of
directors, and Mr. Tytel is one of its directors. SFX Entertainment
anticipates that, from time to time, it will enter into transactions and
arrangements (particularly, booking arrangements) with Marquee and Marquee's
clients, and it may compete with Marquee for specific concert promotion
engagements. In addition, SFX Entertainment 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
the independent committees of SFX Entertainment 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 SFX, who are anticipated to become directors, officers and
employees of SFX Entertainment at the time of consummation of the SFX Merger,
and 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 SFX Entertainment, on the one hand, and
their duties as directors of Marquee and their interests in TSC, Marquee and
Triathlon, on the other hand.
[MEADOWS REPURCHASE TRANSACTION]
[To come.]
RELATIONSHIP BETWEEN HOWARD J. TYTEL AND BAKER & MCKENZIE
Howard J. Tytel, who is the Executive Vice President, General Counsel,
Secretary and a Director of SFX Entertainment, 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. Baker & McKenzie serves as counsel to SFX, SFX
Entertainment 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, 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
and SFX Entertainment. 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 (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. In 1997, these cash fees
aggregated approximately $5.0 million, a portion of which were paid from the
proceeds of payments made by SFX 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 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 SFX
Entertainment and cash fees from TSC, SCMC and Mr. Sillerman personally in an
amount to be determined in the future. See
D-128
<PAGE>
"--Assumption of Employment Agreements; Certain Change of Control Payments."
It is also anticipated that Mr. Tytel will enter into an employment agreement
directly with SFX Entertainment 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 year ended
December 31, 1996 and for the nine months ended September 30, 1997 were
$3,000,000 and $1,693,000, 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. Pursuant to the terms of the
Distribution Agreement, SFX will assign its rights to receive these fees to
SFX Entertainment. 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
SFX has guaranteed certain payments in connection with the PACE
Acquisition, the Contemporary Acquisition and the Network Acquisition. See
"Agreements Related to the Pending Acquisitions."
Certain members of management of SFX (who are also members of SFX
Entertainment's management) have entered into a number of additional related
party agreements and transactions in connection with the SFX Merger and
certain related transactions. The section entitled "Proposal 1: The
Merger--Interests of Certain Persons in the Merger" in the attached Proxy
Statement describes these agreements and transactions.
D-129
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Spin-Off, there has not been any public market for SFX
Entertainment Class A Common Stock, and there can be no assurance that a
significant public market for SFX Entertainment Class A Common Stock will
develop or continue after the Spin-Off. Sales of substantial amounts of SFX
Entertainment 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 SFX Entertainment Class A Common Stock or the future ability of SFX
Entertainment to raise capital through an offering of equity securities.
After the Spin-Off, Pending Acquisitions and other transactions
described in this Prospectus, approximately [19] million shares of SFX
Entertainment Class A Common Stock will be outstanding. 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 SFX
Entertainment (as that term is defined in Rule 144 under the Securities Act).
Of the shares of SFX Entertainment Class A Common Stock to be issued in
conjunction with the Spin-Off, approximately _______ shares will be issued to
affiliates of SFX Entertainment. These shares held by affiliates will be
eligible for sale subject to compliance with the provisions of Rule 144.
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 SFX
Entertainment Class A Common Stock then outstanding (approximately ____ shares
at the time of completion of the Spin-Off, Pending Acquisitions and other
issuances described in this Prospectus) or (b) generally, the average weekly
trading volume in the SFX Entertainment 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 SFX
Entertainment. Under Rule 144(k), a person who is not deemed to have been an
affiliate of SFX Entertainment 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 SFX Entertainment Class A Common Stock may be sold without
any volume limitations pursuant to an effective registration statement filed
with the SEC.
It is anticipated that the board of directors of SFX Entertainment
will, subsequent to the Spin-Off, grant an aggregate of up to [693,733] shares
of SFX Entertainment Class A Common Stock to holders as of the Spin-Off Record
Date of stock options or SARs of SFX, whether or not vested. See "Certain
Relationships and Related Transactions--Issuance of Stock to Holders of SFX's
Options and SARs." These shares will be "restricted securities" under Rule
144.
In addition, SFX Entertainment anticipates granting options to
purchase an aggregate of approximately 245,000 shares of SFX Entertainment
Class A Common Stock, in conjunction with entering into employment agreements
with SFX Entertainment's executive officers. These options will vest over five
years and will have an exercise price of $5.50 per share. See
"Management--Employment Agreements."
The shares of SFX Entertainment Class A Common Stock issuable in
connection with the Pending Acquisitions will be "restricted securities" under
Rule 144 of the Securities Act when issued, but SFX Entertainment has
obligations to register all or a portion of these shares with the SEC for
resale. See "Agreements Related to the Pending Acquisitions."
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SFX Entertainment has adopted a stock option plan providing for the
issuance of options to purchase up to 2,000,000 shares of SFX Entertainment
Class A Common Stock. No options have been granted to date under the plan. SFX
Entertainment 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.
Furthermore, approximately 1.7 million shares of SFX Entertainment
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 SFX
Entertainment Class A Common Stock. [Describe any lock-up by Sillerman and
Ferrel.]
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DESCRIPTION OF CAPITAL STOCK
At the time of the Spin-Off, the authorized capital stock of SFX
Entertainment will consist of 110,000,000 shares of common stock (comprised of
100,000,000 shares of SFX Entertainment Class A Common Stock and 10,000,000
shares of SFX Entertainment 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 SFX Entertainment Certificate (which is attached as Annex E
to the Proxy Statement) and the SFX Entertainment By-Laws (which was filed as
an exhibit to the SFX Entertainment Registration Statement). See "Additional
Information."
COMMON STOCK
Shares Outstanding
As of ________ __, 1998, there are issued and outstanding 1,000
shares of SFX Entertainment Class A Common Stock and 1,000 shares of SFX
Entertainment Class B Common Stock. All of these shares are validly issued,
fully paid and nonassessable.
After the consummation of the Spin-Off, Pending Acquisitions and
other issuances described in this Prospectus, it is anticipated that there
will be issued and outstanding approximately ____________ shares of SFX
Entertainment Class A Common Stock and 1,697,037 shares of SFX Entertainment
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 SFX
Entertainment 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 SFX
Entertainment 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
SFX Entertainment Class A Common Stock to holders of SFX Entertainment Class A
Common Stock and in shares of SFX Entertainment Class B Common Stock to
holders of SFX Entertainment 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 SFX Entertainment Class A Common Stock and the SFX
Entertainment Class B Common Stock.
Voting Rights
Holders of SFX Entertainment Class A Common Stock and SFX
Entertainment Class B Common Stock vote as a single class on all matters
submitted to a vote of the stockholders, with each share of SFX Entertainment
Class A Common Stock entitled to one vote and each share of SFX Entertainment
Class B Common Stock entitled to ten votes, except (a) for the election of
directors, (b) with respect to any "going private" transaction between SFX
Entertainment 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 SFX
Entertainment Class A Common Stock, voting as a separate class, are entitled
to elect two sevenths of SFX Entertainment's directors (each, a "Class A
Director"). Any person nominated by the Board for election by the holders of
SFX Entertainment Class A Common Stock as a director
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of SFX Entertainment must be qualified to be an "Independent Director" (as
defined in the SFX Entertainment 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 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 SFX Entertainment Class A Common Stock and SFX Entertainment Class B Common
Stock, voting as a single class, with each share of SFX Entertainment Class A
Common Stock entitled to one vote and each share of SFX Entertainment Class B
Common Stock entitled to ten votes, are entitled to elect the remaining
directors. The holders of SFX Entertainment 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 SFX
Entertainment, and the board of directors of SFX Entertainment will appoint
three different Class A Directors, to serve until the next annual meeting of
the stockholders of SFX Entertainment.
The holders of the SFX Entertainment Class A Common Stock and SFX
Entertainment 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 SFX Entertainment Class A Common Stock and SFX
Entertainment 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 SFX Entertainment,
after distribution in full of any preferential amounts required to be
distributed to holders of preferred stock, the holders of SFX Entertainment
Class A Common Stock will be entitled to share ratably with the holders of SFX
Entertainment Class B Common Stock all assets available for distribution after
payment in full of creditors.
Conversion
Each share of SFX Entertainment Class B Common Stock is convertible
at any time, at the holder's option, into one share of SFX Entertainment Class
A Common Stock. [Describe any lock-ups by Sillerman/Ferrel.] Each share of SFX
Entertainment Class B Common Stock converts automatically into one share of
SFX Entertainment Class A Common Stock (a) at the time of its sale or transfer
to a party not affiliated with SFX Entertainment 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 SFX Entertainment 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 SFX
Entertainment Class A Common Stock must be identical to that received by
holders of SFX Entertainment 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 SFX Entertainment Class A Common Stock and the SFX
Entertainment Class B Common Stock. SFX Entertainment may not subdivide (by
any stock split, reclassification, stock dividend, recapitalization, or
otherwise) or combine the outstanding shares
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of either class of SFX Entertainment 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 SFX Entertainment Class A
Common Stock and the SFX Entertainment Class B Common Stock is [Chase Mellon].
PREFERRED STOCK
As of ________ __, 1998, there are no shares of SFX Entertainment's
preferred stock, par value $.01 per share, outstanding and there are 1,000
shares of preferred stock authorized. After the consummation of the Spin-Off
and the Pending Acquisitions, it is anticipated that SFX Entertainment will
have 25,000,000 shares of preferred stock authorized, with no shares of
preferred stock issued and outstanding. However, SFX Entertainment may, under
certain circumstances, be required to issue shares of preferred stock in
conjunction with the Contemporary Acquisition. See "Agreements Related to the
Pending Acquisitions--Contemporary Acquisition."
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, 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 SFX Entertainment 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 SFX Entertainment and
may adversely affect the rights of holders of SFX Entertainment 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. There are no shares of preferred stock outstanding, and SFX
Entertainment currently has no plans to issue any preferred stock, except in
connection with the Contemporary Acquisition.
WARRANTS OF SFX
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 acquired MMR, the IPO Warrants converted into warrants to purchase
SFX'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 SFX Entertainment 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 ______ __, 1998, there are outstanding _______ IPO
Warrants, which have the right to purchase an aggregate of [36,289] shares of
SFX's Class A common stock at an aggregate price per share of $22.36, which
will require the transfer of [36,289] shares of SFX Entertainment 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 from time to time with respect to specific
transactions. In April 1996, SFX and SCMC agreed to terminate the arrangement
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pursuant to which SFX compensated SCMC for financial consulting services.
Pursuant to the termination agreement, among other things, SFX issued to SCMC
the SCMC Warrants to purchase up to 600,000 shares of SFX'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'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 to SCMC pursuant to the
agreement was fair, from a financial point of view, to SFX. The SCMC Warrants
were subsequently amended to provide for the receipt of an aggregate of
600,000 shares of SFX Entertainment Class A Common Stock upon exercise. See
"Certain Relationships and Related Transactions--SFX Entertainment Common
Stock to Be Received in the Spin-Off." As of _________ __, 1998, all of the
SCMC Warrants remain outstanding, and therefore 600,000 shares of SFX
Entertainment 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."
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DESCRIPTION OF INDEBTEDNESS
PROPOSED NOTES
The following is a summary of certain terms expected to be contained
in the proposed note offering anticipated to be included in the Financing.
This summary is not complete. It is subject to the final terms of the
indenture governing the notes to be issued. There can be no assurance that SFX
Entertainment will be able to consummate the proposed note offering on the
terms described herein, or at all.
SFX Entertainment is in the process of offering in a private
placement $275.0 million in aggregate principal amount of senior subordinated
notes due 2008 (the "Proposed Notes") pursuant to an indenture (the "Proposed
Indenture"). The Proposed Notes will bear interest at an undetermined interest
rate, and interest payments will be due semi-annually. The Proposed Notes will
mature in 2008. The Proposed Notes do not contain any sinking fund provision.
Ranking
The Proposed Notes will be general unsecured obligations of SFX
Entertainment, subordinate in right to all Senior Debt (as defined in the
Proposed Indenture), whether outstanding on the date of the Proposed Indenture
or thereafter incurred, of SFX Entertainment and senior in right of payment to
or pari passu with all other indebtedness of SFX Entertainment. On a pro forma
basis giving effect to the Financing, the Pending Acquisitions, the Spin-Off
and the SFX Merger, SFX Entertainment would have had approximately $497.3
million of indebtedness outstanding, of which $213.9 million would have been
Senior Debt (excluding letters of credit) at September 30, 1997. See
"Capitalization."
Subsidiary Guarantees
SFX Entertainment's payment obligations under the Proposed Notes will
be jointly and severally guaranteed on a senior subordinated basis by all of
its current and future subsidiaries, with certain specified exceptions.
Optional Redemption
Except as noted below, the Proposed Notes will not be redeemable at
SFX Entertainment's option before a date in 2003. Thereafter, the Proposed
Notes will be subject to redemption at any time at the option of SFX
Entertainment, in whole or in part, at specified redemption prices plus
accrued and unpaid interest and Liquidated Damages (as defined in the Proposed
Indenture), if any, thereon to the applicable redemption date. In addition, at
any time prior to a date in 2001, SFX Entertainment may on any one or more
occasions redeem up to 35.0% of the original aggregate principal amount of
Proposed Notes at a certain redemption price to be determined based on 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 SFX Entertainment. However, at least
65.0% of the original aggregate principal amount of Proposed 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
Proposed Indenture), SFX Entertainment will be required to make an offer to
repurchase the Proposed 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.
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Certain Covenants
The Proposed Indenture will contain certain covenants that, among
other things, limit the ability of SFX Entertainment and its subsidiaries to
(a) incur additional Indebtedness (as defined in the Proposed Indenture), (b)
issue preferred stock, (c) pay dividends, (d) make certain other restricted
payments, (e) create certain Liens (as defined in the Proposed Indenture), (f)
enter into certain transactions with affiliates, (g) sell assets of SFX
Entertainment or its Restricted Subsidiaries (as defined in the Proposed
Indenture), (h) issue or sell Equity Interests (as defined in the Proposed
Indenture) of SFX Entertainment's Restricted Subsidiaries or (i) enter into
certain mergers and consolidations. In addition, under certain circumstances,
SFX Entertainment will be required to offer to purchase Proposed 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 Proposed Indenture).
Exchange Offer; Registration Rights
Pursuant to a registration rights agreement among SFX Entertainment
and the initial purchasers of the Proposed Notes, SFX Entertainment will use
its best efforts to file a registration statement with the SEC with respect to
an offer to exchange the Proposed Notes for a new issue of debt securities
registered under the Securities Act, with terms identical in all material
respects to those of the Proposed Notes. If (a) this exchange offer is not
permitted by applicable law or (b) any holder of Transfer Restricted
Securities (as defined in the Proposed Indenture) notifies SFX Entertainment
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 Proposed Notes acquired directly from SFX Entertainment or an affiliate
of SFX Entertainment, then SFX Entertainment will be required to provide a
shelf registration statement to cover resales of the Proposed Notes by their
holders. If SFX Entertainment fails to satisfy these registration obligations,
it will be required to pay Liquidated Damages to the holders of Proposed Notes
under certain circumstances.
Transfer Restrictions
The Proposed 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.
PROPOSED SENIOR CREDIT FACILITY
The following is a summary of certain terms expected to be contained
in the proposed senior credit facility anticipated to be included in the
Financing. This summary is not complete. It is subject to, and qualified in
its entirety by reference to, the Commitment Letter (as defined below), which
has been filed as Exhibit 10.77 to the SFX Entertainment Registration
Statement. There can be no assurance that SFX Entertainment will be able to
enter into the proposed credit agreement on the terms described herein, or at
all.
SFX Entertainment has received a commitment letter (the "Commitment
Letter") from The Bank of New York ("BNY") to act as the Administrative Agent
for--and from BNY Capital Markets, Inc., Lehman Brothers Inc. and Goldman
Sachs Credit Partners L.P. to act as the Arrangers for--$350.0 million of
senior secured credit facilities. These facilities are to be comprised of (a)
the Proposed Term Loan, a $100.0 million eight-year term loan, and (b) the
Proposed Revolver, a $250.0 million seven-year reducing revolving credit
facility (together, the "Proposed Credit Facility"). Subsequent to, and
conditioned upon, the consummation of the offering of the Proposed Notes and
the PACE Acquisition, SFX Entertainment anticipates the execution and delivery
of the definitive documents governing the Proposed Credit Facility (the
"Credit Facility Closing Date"). SFX Entertainment currently anticipates that,
on the Credit Facility Closing Date, the Proposed Term Loan will be fully
funded and that a portion of the Proposed Revolver
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will be drawn. The following discussion summarizes the material terms and
conditions of the Commitment Letter; it is subject to the final provisions of
the definitive documents governing the Proposed Credit Facility.
General
The Proposed Credit Facility is expected to provide for borrowings in
a principal amount of up to $350.0 million, subject to certain covenants and
conditions. Under certain circumstances, (a) before the Credit Facility
Closing Date, the Proposed Revolver may be increased to an amount not to
exceed $300.0 million, (b) before the Credit Facility Closing Date, the
Proposed Term Loan may be increased from $100.0 million to an amount not to
exceed $150.0 million, with a subsequent decrease in the Proposed Revolver by
this increase in the Proposed Term Loan amount, and (c) the Proposed Revolver
may be increased after the Credit Facility Closing Date and before December
31, 1999 by an additional amount not to exceed $50.0 million. Borrowings under
the Proposed Credit Facility may be used by SFX Entertainment to finance
Permitted Acquisitions (as defined in the Commitment Letter), for working
capital and for general corporate purposes. Up to $20.0 million of the
Proposed 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 SFX Entertainment and, with
the exception of the Pending Acquisitions, must have the prior written consent
of the Required Lenders (as defined in the Commitment Letter) if the cost of
the Permitted Acquisition exceeds $50.0 million.
Interest Rates; Fees
Loans outstanding under the Proposed Credit Facility will bear
interest, at SFX Entertainment'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 Proposed Term Loan and the Proposed Revolver will be
adjusted based on SFX Entertainment's Total Leverage Ratio (as defined below).
SFX Entertainment will pay an annual commitment fee on unused availability
under the Proposed Revolver of 0.50% if SFX Entertainment'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. SFX Entertainment will also pay an annual letter of credit
fee equal to the Applicable LIBOR Margin (as defined in the Commitment Letter)
for the Proposed Revolver then in effect.
Mandatory Prepayments and Commitment Reductions
Commitments to lend under the Proposed Revolver will be reduced in
equal quarterly installments commencing March 31, 2000 in annual percentages
of the borrowings under the Proposed 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 Proposed 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 Proposed 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 Commitment Letter),
subject to standard reinvestment provisions; (b) 50.0% of Excess Cash Flow (as
defined in the Commitment Letter), 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 SFX Entertainment's present and future direct and indirect
domestic subsidiaries (the "Senior Guarantors") must provide guarantees under
the Proposed Credit Facility. In order to secure its obligations under the
Proposed Credit Facility, SFX Entertainment and each of the Senior Guarantors
must also pledge to the lenders a continuing security interest in all of their
tangible assets (subject to certain non-material exceptions), all of the
capital
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stock of each Senior Guarantor and not less than 662/3% of the capital stock
of SFX Entertainment's present and future direct and indirect foreign
subsidiaries.
Conditions Precedent; Covenants
The lenders' obligations to extend credit under the Proposed Credit
Facility will be subject to the satisfaction of certain conditions precedent,
including:
o the contribution by SFX to SFX Entertainment of all of its existing
concert promotion and live entertainment businesses;
o the issuance of the Proposed Notes on terms acceptable to the
Administrative Agent (BNY);
o the acquisition by SFX Entertainment or any Senior Guarantor of not
less than 85.0% of the capital stock of PACE on terms acceptable to
the Administrative Agent and the refinancing of all outstanding debt
of PACE; and
o the execution of definitive purchase agreements on terms acceptable
to the Administrative Agent for the purchase of BGP,
Concert/Southern, Network, Contemporary, 100.0% of the ownership
interests in Pavilion Partners and 100.0% of the ownership of
Riverport Amphitheater.
The Proposed Credit Facility may contain various covenants that, subject to
certain specified exceptions, will restrict SFX Entertainment'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 Commitment
Letter);
o declare or pay dividends, distributions and other prepayments or
repurchases of other indebtedness;
o amend certain agreements, including SFX Entertainment's organizational
documents, the Proposed Notes and the Proposed Indenture;
o enter into partnerships and joint ventures;
o engage in transactions with affiliates;
o form subsidiaries; and
o change lines of business.
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The Proposed Credit Facility will also include 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 Proposed Credit Facility will require
SFX Entertainment 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 Proposed Credit Facility and any other borrowed
money and similar type indebtedness (including capital lease
obligations) of SFX Entertainment 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 SFX Entertainment and the Required Lenders, plus (iv) the
lesser of (A) the equity income from Unconsolidated Investments (as
defined in the Commitment Letter) and (B) cash dividends and other
cash distributions from Unconsolidated Investments (however, the total
amount determined under this clause (iv) will not exceed 10.0% of
Operating Cash Flow before overhead) (the amount referred to in this
clause (b), "Operating Cash Flow"); Operating Cash Flow is to be
adjusted to reflect acquisitions and dispositions consummated during
the calculation period as if those transactions were consummated at
the beginning of the period;
o a maximum ratio (the "Senior Leverage Ratio") of (a) Total Debt less
the principal amount outstanding under the Proposed 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)
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) 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 Proposed 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 (before any adjustments to reflect acquisitions,
sales and exchanges) 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 Commitment Letter) plus the
scheduled maturities of Total Debt and current commitment reductions
with respect to the Proposed 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 Commitment Letter).
It is anticipated that 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) 3.75x from
the Credit Facility Closing Date to September 29, 1998, (b) 3.50x from
September 30, 1998 to December 30, 1998, (c), 3.25x from December 31, 1998
D-140
<PAGE>
to December 30, 1999, (d) 3.00x from December 31, 1999 to December 30, 2000
and (e) 2.50x on December 31, 2000 and thereafter.
The Pro Forma Interest 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
1.00x.
The Proposed Credit Facility will also prohibit prepayment or
defeasance of the Proposed Notes.
Events of Default
The Proposed Credit Facility will contain customary events of
default, including payment defaults, the occurrence of a Change of Control (as
defined in the Commitment Letter), the invalidity of guarantees or security
documents under the Proposed Credit Facility, any Material Adverse Change (as
defined in the Commitment Letter), breach of any representation or warranty
under the Proposed Credit Facility and any cross-default to other indebtedness
of SFX Entertainment and its subsidiaries. The occurrence of any event of
default could result in termination of the commitments to extend credit under
the Proposed Credit Facility and foreclosure on the collateral securing those
obligations, each of which, individually, could have a material adverse effect
on SFX Entertainment.
OTHER DEBT
SFX Entertainment also has approximately $16.5 million of long-term
debt outstanding, which was incurred primarily in connection with its recently
completed acquisitions. See Note 5 to the notes to the Consolidated Financial
Statements of SFX Entertainment.
D-141
<PAGE>
ADDITIONAL INFORMATION
By the time of the Spin-Off, SFX Entertainment will be a reporting
company under the Exchange Act. SFX Entertainment has filed the SFX
Entertainment Registration Statement on Form S-1 under the Securities Act with
the SEC with respect to the SFX Entertainment Common Stock described in this
Prospectus. This Prospectus, which is part of the SFX Entertainment
Registration Statement, does not contain all of the information set forth in
the SFX Entertainment Registration Statement and the exhibits thereto. For
further information with respect to SFX Entertainment and its common stock
offered hereby, reference is hereby made to the SFX Entertainment 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 SFX Entertainment Registration Statement, and each such statement is
qualified in all respects by this reference.
In addition, SFX is a reporting company under the Exchange Act and
therefore files reports, proxy statements and other materials with the SEC.
SFX's reports, proxy statements and other filed materials are available as
discussed above for SFX Entertainment.
LEGAL MATTERS
The validity of the shares of SFX Entertainment Common Stock to be
issued in connection with the Spin-Off will be passed upon for SFX
Entertainment 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 SFX Entertainment, and who has an equity interest
in SFX, TSC and SCMC and is an executive officer and director of those
entities, is Of Counsel to Baker & McKenzie. See "Management," "Principal
Stockholders" and "Certain Relationships and Related Transactions."
EXPERTS
The consolidated financial statements of SFX Entertainment, Inc. and
Subsidiaries as of September 30, 1997, and for the nine months ended September
30, 1997; the combined financial statements of Delsener/Slater Enterprises,
Ltd. and Affiliated Companies (Predecessor) as of December 31, 1995 and 1996,
and for the years ended December 31, 1994, 1995 and 1996; the consolidated
financial statements of PACE Entertainment Corporation and Subsidiaries as of
September 30, 1996, and for the years ended September 30, 1995 and 1996; the
combined financial statements of Contemporary Group as of September 30, 1996
and December 31, 1996, and for the nine months ended September 30, 1997 and
year ended December 31, 1996; the combined financial statements of SJS
Entertainment Corporation and Affiliated Company as of December 31, 1996, and
for the year ended December 31, 1996; 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,
1996 and 1997 and for the years ended January 31, 1996 and 1997; and the
combined financial statements of Concert/Southern Promotions and Affiliated
Companies as of September 30, 1997 and for the nine months ended September 30,
1997, included in the Prospectus and Registration Statement of SFX
Entertainment have been audited
D-142
<PAGE>
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 SFX Entertainment Registration
Statement), each appearing in this Prospectus and the SFX Entertainment
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, 1994, 1995 and 1996;
the combined financial statements of Deer Creek Partners, L.P. and Murat
Centre, L.P. as of December 31, 1995 and 1996, and for the years ended
December 31, 1994, 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, 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 SFX Entertainment
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 SFX Entertainment's
independent auditors to audit SFX Entertainment's financial statements.
D-143
<PAGE>
INDEX TO DEFINED TERMS
Page
Acquisition Businesses.................................................
AEP....................................................................
Album Network..........................................................
Album Shareholders.....................................................
Becker Employment Agreement............................................
Becker Right of First Refusal..........................................
Becker Second Year Option..............................................
BGP....................................................................
BGP Acquisition........................................................
BGP Acquisition Sub....................................................
BGP Agreement..........................................................
BGP Sellers............................................................
Blockbuster Acquisition................................................
Blockbuster Agreement..................................................
Blockbuster Group......................................................
Blockbuster Sub........................................................
BNY....................................................................
Board..................................................................
Broadway Show..........................................................
Class A Director.......................................................
Commitment Letter......................................................
Concert/Southern.......................................................
Concert/Southern Acquisition...........................................
Concert/Southern Agreement.............................................
Concert/Southern Asset Companies.......................................
Concert/Southern Joint Ventures........................................
Concert/Southern Sale Companies........................................
Contemporary...........................................................
Contemporary Acquisition...............................................
Contemporary Agreement.................................................
Contemporary Asset Acquisition.........................................
Contemporary International.............................................
Contemporary Merger....................................................
Credit Facility Closing Date...........................................
Debt Service Ratio.....................................................
Delsener/Slater........................................................
DGCL...................................................................
Distribution Agent.....................................................
Distribution Agreement.................................................
EBITDA.................................................................
Employee Benefits Agreement............................................
Entertainment Business.................................................
Escrow Agent...........................................................
Estimated Working Capital..............................................
Excess Debt............................................................
Exchange Act...........................................................
Executive Officers.....................................................
Final Working Capital..................................................
Financing..............................................................
Fixed Charges Ratio....................................................
GAAP...................................................................
HSR Act................................................................
IPO Warrants...........................................................
Marquee................................................................
MMR....................................................................
Nasdaq National Market.................................................
Network................................................................
Network 40.............................................................
Network Acquisition....................................................
Network Agreement......................................................
Network Cash Consideration.............................................
Network Earn-Out EBITDA................................................
Network Magazine.......................................................
Network Sellers........................................................
Network Stock Consideration............................................
Network Sub............................................................
Operating Cash Flow....................................................
PACE...................................................................
PACE Acquisition.......................................................
PACE Acquisition Facility..............................................
PACE Agreement.........................................................
PACE Bylaw Provisions..................................................
PACE Cash Payment......................................................
PACE Damages...........................................................
PACE Material Adverse Effect Condition.................................
PACE Reps and Warranties Condition.....................................
PACE Sellers...........................................................
PACE Sellers' Representative...........................................
PACE Stock Consideration...............................................
PACE Stock Options.....................................................
PACE Term Loan.........................................................
PACE Term Loan Assets..................................................
D-144
<PAGE>
Pavilion Acquisition...................................................
Pavilion Exclusivity Provision.........................................
Pavilion Partners Option...............................................
Pending Acquisitions...................................................
Pro Forma Interest Ratio...............................................
Proposed Credit Facility...............................................
Proposed Notes.........................................................
Proposed Revolver......................................................
Proposed Term Loan.....................................................
Proxy Statement........................................................
Recent Acquisitions....................................................
SAR....................................................................
SCMC...................................................................
SCMC Warrants..........................................................
SEC....................................................................
Securities Act.........................................................
Senior Guarantors......................................................
Senior Leverage Ratio..................................................
SFX....................................................................
SFX Buyer..............................................................
SFX Buyer Sub..........................................................
SFX Entertainment......................................................
SFX Entertainment By-laws..............................................
SFX Entertainment Certificate..........................................
SFX Entertainment Class A Common Stock.................................
SFX Entertainment Class B Common Stock.................................
SFX Entertainment Common Stock.........................................
SFX Entertainment Group................................................
SFX Entertainment Preferred Stock......................................
SFX Entertainment Registration Statement...............................
SFX Merger.............................................................
SFX Merger Agreement...................................................
SFX Merger Consideration Adjustment....................................
SJS....................................................................
SJS Shareholders.......................................................
Sony Agreement.........................................................
Sony Sub...............................................................
Spin-Off...............................................................
Spin-Off Distribution Date.............................................
Spin-Off Record Date...................................................
Sunshine Promotions....................................................
Tax Code...............................................................
Tax Sharing Agreement..................................................
Total Debt.............................................................
Total Leverage Ratio...................................................
Touring Broadway Shows.................................................
D-145
<PAGE>
Triathlon..............................................................
TSC....................................................................
Warrants...............................................................
Working Capital........................................................
Working Capital Adjustment Amount......................................
D-146
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
Report of Independent Auditors............................................................. D-F-4
Consolidated Balance Sheet as of September 30, 1997 ....................................... D-F-5
Consolidated Statement of Operations for the nine months ended September 30, 1996
(Predecessor-unaudited) and 1997 ......................................................... D-F-6
Consolidated Statement of Cash Flows for the nine months ended September 30, 1996
(Predecessor-unaudited) and 1997 ......................................................... D-F-7
Notes to Consolidated Financial Statements................................................. D-F-8
DELSENER/SLATER ENTERPRISES, LTD. AND AFFILIATED COMPANIES (PREDECESSOR)
Report of Independent Auditors............................................................. D-F-19
Combined Balance Sheets as of December 31, 1995 and 1996 .................................. D-F-20
Combined Statements of Operations for the years ended December 31, 1994, 1995
and 1996 ................................................................................. D-F-21
Combined Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996.................................................................................. D-F-22
Combined Statements of Stockholders' Equity for the years ended December 31, 1994, 1995
and 1996.................................................................................. D-F-23
Notes to Combined Financial Statements..................................................... D-F-24
CONNECTICUT PERFORMING ARTS, INC. AND CONNECTICUT PERFORMING ARTS PARTNERS
Report of Independent Public Accountants................................................... D-F-28
Combined Balance Sheets as of December 31, 1995 and 1996................................... D-F-29
Combined Statements of Operations for the years ended December 31, 1994, 1995
and 1996.................................................................................. D-F-30
Combined Statements of Shareholders' Equity and Partners' Equity for the years ended
December 31, 1994, 1995 and 1996.......................................................... D-F-31
Combined Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 ... D-F-32
Notes to Combined Financial Statements..................................................... D-F-33
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
Report of Independent Public Accountants .................................................. D-F-41
Combined Balance Sheet as of December 31, 1995 and 1996.................................... D-F-42
Combined Statements of Operations and Partners' Equity for the years ended
December 31, 1994, 1995 and 1996.......................................................... D-F-44
Combined Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996.................................................................................. D-F-45
Notes to Combined Financial Statements..................................................... D-F-46
D-F-1
<PAGE>
PAGE
-----------
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants .................................................. D-F-52
Report of Independent Auditors............................................................. D-F-53
Consolidated Balance Sheets as of September 30, 1996 and 1997.............................. D-F-54
Consolidated Statements of Operations for the years ended September 30, 1995, 1996 and
1997...................................................................................... D-F-55
Consolidated Statements of Shareholders' Equity for the years ended September 30, 1995,
1996 and 1997............................................................................. D-F-56
Consolidated Statements of Cash Flows for the years ended September 30, 1995, 1996 and
1997...................................................................................... D-F-57
Notes to Consolidated Financial Statements................................................. D-F-58
PAVILION PARTNERS
Report of Independent Public Accountants .................................................. D-F-72
Report of Independent Accountants ......................................................... D-F-73
Consolidated Balance Sheets as of September 30, 1996 and 1997 ............................. D-F-74
Consolidated Statements of Income for the year ended October 31, 1995, eleven months ended
September 30, 1996 and year ended September 30, 1997 ..................................... D-F-75
Consolidated Statements of Partners' Capital for the year ended October 31, 1995, eleven
months ended September 30, 1996 and year ended September 30, 1997 ........................ D-F-76
Consolidated Statements of Cash Flows for the year ended October 31, 1995, eleven months
ended September 30, 1996 and year ended September 30, 1997 ............................... D-F-77
Notes to Consolidated Financial Statements ................................................ D-F-78
CONTEMPORARY GROUP
Report of Independent Auditors ............................................................ D-F-87
Combined Balance Sheets as of December 31, 1996 and September 30, 1997 .................... D-F-88
Combined Statements of Operations for the year ended December 31, 1996 and nine months
ended September 30, 1997 ................................................................. D-F-89
Combined Statements of Cash Flows for the year ended December 31, 1996 and nine months
ended September 30, 1997 ................................................................. D-F-90
Combined Statements of Stockholders' Equity for the year ended December 31, 1996 and nine
months ended September 30, 1997 .......................................................... D-F-91
Notes to Combined Financial Statements .................................................... D-F-92
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
Report of Independent Auditors ............................................................ D-F-96
Combined Balance Sheets as of December 31, 1996 and September 30, 1997 (unaudited) ....... D-F-97
Combined Statement of Operations and Retained Earnings for the year ended December 31,
1996 ..................................................................................... D-F-98
Combined Statements of Operations and Retained Earnings for the nine months ended
September 30, 1996 and 1997 (unaudited) .................................................. D-F-99
Combined Statement of Cash Flows for the year ended December 31, 1996 ..................... D-F-100
Combined Statements of Cash Flows for the nine months ended September 30, 1996 and 1997
(unaudited) .............................................................................. D-F-101
Notes to Combined Financial Statements .................................................... D-F-102
D-F-2
<PAGE>
PAGE
-----------
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
Report of Independent Auditors ............................................................ D-F-107
Combined Balance Sheets as of September 30, 1996 and 1997 ................................. D-F-108
Combined Statements of Operations and Stockholders' Deficit for the years ended September
30, 1996 and 1997 ........................................................................ D-F-109
Combined Statements of Cash Flows for the years ended September 30, 1996 and 1997 ......... D-F-110
Notes to Combined Financial Statements .................................................... D-F-111
BG PRESENTS, INC. AND SUBSIDIARIES
Report of Independent Auditors ............................................................ D-F-115
Consolidated Balance Sheets as of January 31, 1996 and 1997 ............................... D-F-116
Consolidated Balance Sheet as of October 31, 1997 (unaudited).............................. D-F-117
Consolidated Statements of Operations for the years ended January 31, 1996 and 1997 ...... D-F-118
Consolidated Statement of Operations for the nine months ended October 31, 1997
(unaudited)............................................................................... D-F-119
Consolidated Statements of Cash Flows for the years ended January 31, 1996 and 1997 ...... D-F-120
Consolidated Statement of Cash Flows for the nine months ended October 31, 1997
(unaudited)............................................................................... D-F-121
Consolidated Statements of Stockholders' Equity for the years ended January 31, 1996 and
1997 and the nine months ended October 31, 1997 (unaudited) .............................. D-F-122
Notes to Consolidated Financial Statements ................................................ D-F-123
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
Report of Independent Auditors ............................................................ D-F-129
Combined Balance Sheet as of September 30, 1997 ........................................... D-F-130
Combined Statement of Operations for the nine months ended September 30, 1997 ............ D-F-131
Combined Statement of Cash Flows for the nine months ended September 30, 1997 ............ D-F-132
Combined Statements of Stockholders' Equity for the nine months ended
September 30, 1997 ....................................................................... D-F-133
Notes to Combined Financial Statements .................................................... D-F-134
</TABLE>
D-F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
SFX Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of SFX
Entertainment, Inc. and Subsidiaries as of September 30, 1997, and the
related consolidated statements of operations and cash flows for the nine
months 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 consolidated financial position of SFX
Entertainment, Inc. and Subsidiaries at September 30, 1997, and the
consolidated results of its operations and its cash flows for the nine months
then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
January 16, 1998
See accompanying notes.
D-F-4
<PAGE>
SFX ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 3)...................................... $ 7,094,000
Accounts receivable .................................................... 2,525,000
Prepaid expenses and other current assets .............................. 2,570,000
--------------
Total current assets .................................................... 12,189,000
Property and equipment, net ............................................. 55,882,000
Goodwill, net ........................................................... 59,721,000
Investment in unconsolidated subsidiaries ............................... 1,324,000
Note receivable from employee............................................ 900,000
Other assets (Note 3) ................................................... 5,454,000
--------------
Total assets ............................................................ $135,470,000
==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable ....................................................... $ 1,620,000
Accrued expenses ....................................................... 777,000
Deferred revenue ....................................................... 4,095,000
Income taxes payable ................................................... 4,107,000
Current portion of long-term debt ...................................... 922,000
Current portion of deferred purchase consideration ..................... 734,000
--------------
Total current liabilities ............................................... 12,255,000
Long-term debt, less current portion .................................... 15,531,000
Deferred purchase consideration, less current portion ................... 3,490,000
Deferred income taxes ................................................... 2,816,000
Commitment and contingencies (Notes 4 and 9)............................. --
Shareholder's equity:
Capital to be contributed by SFX Broadcasting (Note 1)................... 97,726,000
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 ........................................................ --
Retained earnings ....................................................... 3,652,000
--------------
Total shareholder's equity .............................................. 101,378,000
--------------
Total liabilities and shareholder's equity .............................. $135,470,000
==============
</TABLE>
See accompanying notes.
F-5
<PAGE>
SFX ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
PREDECESSOR
(UNAUDITED)
1996 1997
-------------- -------------
<S> <C> <C>
Concert revenue ................................................ $41,609,000 $74,396,000
OPERATING EXPENSES
Cost of concerts ............................................... 42,930,000 63,045,000
Depreciation and amortization .................................. 744,000 4,041,000
Corporate, general and administrative expenses, net of
Triathlon fees of $1,693,000 in 1997 .......................... -- 1,307,000
-------------- -------------
43,674,000 68,393,000
-------------- -------------
Income (loss) from operations .................................. (2,065,000) 6,003,000
OTHER INCOME (EXPENSE)
Interest income ................................................ 143,000 213,000
Interest expense ............................................... (60,000) (956,000)
Equity in pretax income of unconsolidated subsidiaries ........ 525,000 1,344,000
-------------- -------------
Income (loss) before provision for income taxes ................ (1,457,000) 6,604,000
Provision for income taxes ..................................... 80,000 2,952,000
-------------- -------------
Net income (loss) .............................................. $(1,537,000) $ 3,652,000
============== =============
</TABLE>
See accompanying notes.
F-6
<PAGE>
SFX ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
PREDECESSOR
(UNAUDITED)
1996 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................................ $(1,537,000) $ 3,652,000
Adjustment to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization .................................. 744,000 4,041,000
Equity in pretax income of unconsolidated subsidiaries, net
distributions received.......................................... (148,000) 458,000
Changes in operating assets and liabilities, net of amounts
acquired:
Accounts receivable ........................................... (317,000) (1,019,000)
Prepaid expenses and other current assets ..................... (513,000) (2,419,000)
Other asset.................................................... 13,000 (275,000)
Accounts payable and accrued expenses ......................... 4,448,000 (311,000)
Income taxes payable........................................... -- 3,379,000
Deferred income taxes.......................................... -- (427,000)
Deferred revenue .............................................. 71,000 (6,290,000)
-------------- --------------
Net cash provided by (used in) operating activities.............. 2,761,000 789,000
INVESTING ACTIVITIES:
Purchase of concert promotion businesses, net of cash acquired -- (69,645,000)
Purchase of fixed assets ....................................... -- (2,352,000)
-------------- --------------
Net cash used in investing activities............................ -- (71,997,000)
FINANCING ACTIVITIES:
Capital to be contributed by SFX Broadcasting .................. -- 78,855,000
Payment of debt ................................................ -- (553,000)
Proceeds from issuance of Common Stock and capital
contributions ................................................. 613,000 --
Due to stockholder ............................................. 71,000 --
--------------
Net cash provided by financing activities ....................... 684,000 78,302,000
-------------- --------------
Net increase in cash and cash equivalents ....................... 3,445,000 7,094,000
Cash and cash equivalents at beginning of period ................ 2,905,000 0
-------------- --------------
Cash and cash equivalents at end of period....................... $ 6,350,000 $ 7,094,000
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................... $ 60,000 $ 897,000
============== ==============
Cash paid for income taxes....................................... $ 80,000 $ --
============== ==============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
o Issuance of 250,838 shares of Boardcasting's Class A Common Stock and
assumption of $15.4 million of debt in connection with the Meadows
acquisition and issuance of 62,792 shares of Broadcasting's Class A Common
Stock and assumption of $1.6 million in connection with the Sunshine
Promotions acquisition.
o The balance sheet includes certain assets and liabilities which have been
or will be contributed to the Company prior to the Spin-Off.
See accompanying notes.
D-F-7
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
SFX Entertainment, Inc. ("SFX" or the "Company") was formed as a
wholly-owned subsidiary of SFX Broadcasting, Inc. ("Broadcasting") in
December 1997 and as the parent company of SFX Concerts, Inc ("Concerts").
During 1997, the following acquisitions were made:
Delsener/Slater
In January 1997, Broadcasting acquired Delsener/Slater Enterprises, Ltd.
and affiliated companies ("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,
shares of Broadcasting Class A Common Stock with a value of approximately
$7,500,000 and the assumption of approximately $15,400,000 in debt.
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, $2,000,000
payable over five years, shares of Broadcasting Class A Common Stock issued
and issuable over a two year period with a value of approximately $4,000,000
and the assumption of appoximately $1,600,000 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.
The cash portion of these acquisitions were financed through intercompany
loans from 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.
Pending Spin-Off and Financing
In August 1997, Broadcasting agreed to the merger among SBI Holdings, Inc.
(the "Buyer"), SBI Radio Acquisition Corporation, a wholly-owned subsidiary
of the Buyer, and Broadcasting (the "Broadcasting Merger") and to the
spin-off of the Company to the shareholders of Broadcasting (the "Spin-Off").
The Company intends to consummate a senior credit facility and an offering of
senior subordinated notes (collectively, the "Financing") prior to the
consummation of the Spin-Off to finance certain pending acquisitions (see
Note 2). The Spin-Off is subject to certain conditions, including, among
others: (i) the satisfaction of the Board of Directors of Broadcasting that
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
Broadcasting stockholder approvals.
D-F-8
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At or prior to the Spin-Off, pursuant to the Distribution Agreement,
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 Broadcasting to be consistent with the proper
operation of Broadcasting, and the Company will assume all of 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 Broadcasting of approximately $5,800,000 as
well as the obligation to indemnify one-half of certain of these employees'
excise tax. At the time of the Broadcasting Merger, Broadcasting will
contribute its positive Working Capital (as defined) to the Company. If
Working Capital is negative, the Company must pay the amount of the shortfall
to Broadcasting. Subsequent to September 30, 1997, Broadcasting advanced
approximately $6,500,000 to the Company for use in connection with certain
acquisitions and capital expenditures. Broadcasting may advance additional
amounts to the Company prior to the consummation of the Spin-Off.
The accompanying consolidated financial statements include the accounts of
Delsener/Slater, Sunshine Promotions, the Meadows and certain assets and
liabilities which have been or will be contributed by Broadcasting to the
Company prior to the Spin-Off under the terms of the Broadcasting Merger
agreement. Operating results associated with the assets and liabilities to be
contributed are included herein. Corporate expenses represent an allocation
from Broadcasting based on a method that management believes is reasonable.
Intercompany transactions and balances among these companies have been
eliminated in consolidation.
2. PENDING ACQUISITIONS
In December of 1997, the Company entered into agreements to acquire the
following live entertainment businesses:
PACE Entertainment Corporation ("PACE"), one of the largest diversified
producers and promoters of live entertainment in the United States, having
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 $155,000,000
(including issuance of 1,500,000 shares of the Company's common stock
valued by the parties at $20,000,000 and assumption of approximately
$25,500,000 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 has
agreed to acquire, for total consideration of $90,900,000 including cash,
assumed liabilities and the assumption of 100% of the partnership's third
party debt, 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. PACE will then own 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, he
would be entitled to purchase PACE's theatrical division for the fair
value. The Company has agreed to lend to PACE up to $25,000,000 for
potential PACE acquisitions whether or not the PACE Acquisition is
consummated.
D-F-9
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
$91,500,000 (including issuance of 1,402,851 shares of common stock of the
Company valued by the parties at $18,700,000) (the "Contemporary
Acquisition"). The cash consideration to be paid for Contemporary is
subject to a reduction of $10,500,000 should it not acquire the remaining
50% of Riverport Amphitheater Joint Venture. If any of the Contemporary
sellers owns any shares of Class A Common Stock of the Company 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.
The Network Magazine Group ("Network Magazine"), a leading publisher of
trade magazines for the radio broadcasting industry, and SJS Entertainment
("SJS"), a leading provider of air-time research to the radio broadcasting
industry and independent producer and distributor of music-related radio
programs and services 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
$62,000,000 (including issuance of approximately 750,000 shares of common
stock of the Company valued by the parties at $10,000,000). The Company is
also obligated to pay the sellers an additional payment based on EBITDA,
as defined, generated on a combined basis by Network Magazine and SJS in
1998, up to a maximum of $14,000,000.
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 $68,300,000 subject to adjustment based on
BGP's working capital and long-term debt (including issuance of
approximately 563,000 shares of common stock of the Company valued by the
parties at $7,500,000). The sellers of BGP have agreed to provide net
working capital (as defined) at the closing in an amount equal to or
greater than long-term debt.
Concert/Southern Promotions ("Concert/Southern"), the leading promoter of
live music events in the Atlanta, Georgia metropolitan area (the
"Concert/Southern Acquisition"), for total consideration of approximately
$16,600,000 (including payment of the present value of a $1,600,000
deferred liability).
The PACE Acquisition, the Contemporary Acquisition, the Network
Acquisition, the BGP Acquisition and the Concert/Southern Acquisition are
collectively referred to herein as the "Pending Acquisitions."
The Company expects to complete all of the Pending Acquisitions as soon as
practicable after the Financing and prior to the Broadcasting Merger. Each of
the Pending 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.
D-F-10
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma summary presents the consolidated
results of operations for the nine months ended September 30, 1997 and for
the year ended December 31, 1996 as if the acquisitions for any given period
and the subsequent period had occurred at the beginning of such period after
giving effect to certain adjustments, including amortization of goodwill and
interest expense on the acquisition debt. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had the acquisitions been made as of that date or of
results which may occur in the future.
<TABLE>
<CAPTION>
PRO FORMA
IN THOUSANDS EXCEPT PER SHARE DATA
(UNAUDITED)
-------------------------------------
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Revenues.......... $500,843,000 $552,365,000
================== ==================
Net income
(loss)........... $ 625,000 $(32,557,000)
================== ==================
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Cash and Cash Equivalents
The Companies consider all investments purchased with a maturity of three
months or less to be cash equivalents. Included in cash and cash equivalents
is $1,718,000 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 represents 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 as of September 30, 1997 was $59,721,000, which is net of
accumulated amortization of $1,789,000. Goodwill is being amortized using the
straight-line method over 15 years. Management reviews the carrying value of
goodwill against anticipated cash flows to determine whether the carrying
amount will be recoverable.
Other Assets
Other assets includes $5,093,000 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.
D-F-11
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 September 30, 1997.
The Company had agreements with various trade unions which have expired.
The trade unions are currently working under the old agreements and the
Company and the unions are in the process of negotiating new agreements.
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.
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.
Under a tax sharing agreement, the Company will agree to pay to
Broadcasting the amount of the tax liability of the combined Broadcasting/SFX
group to the extent properly attributable to the Company for the period up to
and including the Spin-Off, and will indemnify 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. 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 Broadcasting (excluding any taxes relating to the
Company) during the period prior to and including the Spin-Off. The Company
will be responsible for any taxes of Broadcasting resulting from the Spin-Off
to the extent such taxes result from a gain on the distribution that exceeds
the available net operating loss carryforwards of Broadcasting and the
Company.
The Company calculates its tax provision on a separate company basis.
D-F-12
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 and
is not expected to exist for the year ending December 31, 1997. The GFO Bonds
mature on October 15, 2024 and have an average coupon rate of 6.33%. Annual
debt service requirements, including interest, on the GFO Bonds for each of
the next five years and thereafter are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------- ------------
<S> <C>
1997 ......... $ 185,000
1998 ......... 739,000
1999 ......... 737,000
2000 ......... 739,000
2001 ......... 740,000
Thereafter .. 16,585,000
------------
$19,725,000
============
</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.
5. LONG-TERM DEBT
As of September 30, 1997, the Company's long-term debt consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
Meadows CDA Mortgage Loan ......... $ 7,440,000
Meadows Concession Agreement
Loans............................. 5,931,000
Meadows CDA Construction Loan .... 850,000
Murat notes payable................ 790,000
Meadows note payable .............. 694,000
Polaris note payable .............. 221,000
Capital Lease Obligations.......... 527,000
------------
16,453,000
Less Current Portion.............. (922,000)
------------
$15,531,000
============
</TABLE>
F-13
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Meadows CDA Mortgage Loan
On September 12, 1994, the 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 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 was
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 Company $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 September 30, 1997, the outstanding
balance was $4,355,000.
During 1995, the concessionaire loaned the Company 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 September 30, 1997, the outstanding balance was $715,000.
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 September 30, 1997, the outstanding balance was $861,000.
Meadows CDA Construction Loan
In March 1997, the Company 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 Company 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 March 1 of each calendar year commencing March 1,
1998.
Murat Notes Payable
The Company has two loans payable to the Massachusetts Avenue Community
Development Corporation (MAC), an $800,000 non-interest bearing note and a
$1,000,000 note. Principal payments on the non-interest bearing note are the
lesser of $0.15 per 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 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 ticket
sold during fiscal year or remaining net cash flow, as defined. The present
value of the two loans is $790,000 as of September 30, 1997.
D-F-14
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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. As of September
30, 1997, the outstanding balance was $694,000.
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. As of September 30, 1997, the net present value of the
advance was $221,000.
Capital Lease Obligations
The Company has entered into various equipment leases totaling $527,000.
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 September 30, 1997 are as
follows:
<TABLE>
<CAPTION>
LONG-TERM DEBT AND CAPITAL LEASE
SEPTEMBER 30, NOTES PAYABLE OBLIGATIONS
- --------------- ------------------ ---------------
<S> <C> <C>
1998............ $751,000 $171,000
1999 ........... 768,000 161,000
2000 ........... 747,000 121,000
2001 ........... 527,000 74,000
2002 ........... 558,000
</TABLE>
6. PROPERTY AND EQUIPMENT
The Company's property and equipment, net of accumulated amortization, as
of September 30, 1997 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Land....................... $ 8,750,000
Building and improvements 40,484,000
Furniture and equipment .. 5,518,000
Leasehold improvements ... 2,676,000
-------------
57,428,000
Accumulated depreciation .. (1,546,000)
-------------
$55,882,000
=============
</TABLE>
D-F-15
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The following is a summary of the unaudited financial position and results
of operations of the Company's equity investees as of and for the nine months
ended September 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Current assets.......................... $ 3,300,000
Property, plant and equipment .......... 1,217,000
Other assets ........................... 347,000
-------------
Total assets............................ $ 4,864,000
=============
Current liabilities..................... $ 1,150,000
Partners' capital ...................... 3,714,000
-------------
Total liabilities and partners'
capital................................ $ 4,864,000
=============
Revenue ................................ $18,622,000
Expenses ............................... 16,020,000
-------------
Net income.............................. $ 2,602,000
=============
</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.
8. INCOME TAXES
The provision for income taxes for the nine months ended September 30,
1997 is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
CURRENT:
Federal.... $3,041,000
State...... 338,000
DEFERRED:
Federal.... (384,000)
State...... (43,000)
------------
Total....... $2,952,000
============
</TABLE>
D-F-16
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED 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. The significant
components of the Company's deferred tax liabilities as of September 30, 1997
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax liabilities:
Depreciable assets......... $2,755,000
Deferred compensation ..... 61,000
------------
Net deferred tax
liability.................. $2,816,000
</TABLE>
The effective rate varies from the statutory Federal income tax rate as
follows:
<TABLE>
<CAPTION>
<S> <C>
Income taxes at the statutory rate .. $2,245,000
Nondeductible amortization........... 370,000
Travel and entertainment............. 13,000
State and local income taxes (net of
Federal benefit) ................... 324,000
------------
Total provision...................... $2,952,000
</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 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
an amphitheater, office space and land. Total rent expense was $1,773,000 for
the nine months ended September 30, 1997. The lease terms range from 3 to 37
years. The future minimum rental payments for the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
---------------
<S> <C>
1998................ $ 3,121,000
1999 ............... 3,812,000
2000 ............... 1,622,000
2001 ............... 1,630,000
2002 ............... 1,630,000
2003 and
thereafter......... 12,962,000
---------------
$24,777,000
===============
</TABLE>
The Company has committed to expansion projects at the Jones Beach Theater
and PNC Bank Arts Center which are expected to be completed in June 1998 and
to cost approximately $14,000,000 and $3,000,000, respectively.
As of September 30, 1997, outstanding letters of credit for $1,110,000
were issued by banks on behalf of the Company as security for loans and the
rental of theaters.
D-F-17
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the acquisition of Delsener/Slater, 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-Presidents and Co-Chief Executive Officers of Delsener/Slater. Each of the
employment agreements continue 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/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 nine months ended September 30, 1997.
However, the amount of any such bonuses which may accrue to Messrs. Delsener
and Slater in the future will not be available to the Company to apply to
debt service.
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 Pending
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.
11. CAPITAL STOCK
Subject to the approval of shareholders of Broadcasting, holders of Class
A Common Stock will be entitled to one vote and holders of Class B Common
Stock will be 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 fix 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.
D-F-18
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUBSEQUENT EVENTS (UNAUDITED)
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, agreed to grant the
executive officers an aggregate of 650,000 shares of the Company's Class B
Common Stock and 190,000 shares of the Company's Class A Common Stock. 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 the fair value of the shares issued.
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 five years and
will have an exercise price of $5.50 per share. The Company will record
non-cash compensation charges over the five-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 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 Broadcasting's Class A Common Stock. Additionally, many of the
option holders will become officers, directors and employees of the Company.
D-F-19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Delsener/Slater Enterprises, Ltd.
We have audited the accompanying combined balance sheets of
Delsener/Slater Enterprises, Ltd. and Affiliated Companies as of December 31,
1996 and 1995, and the related combined statements of operations, cash flows
and stockholders' equity for each of the three years in the period ended
December 31, 1996. 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 Delsener/Slater
Enterprises, Ltd. and Affiliated Companies at December 31, 1996 and 1995, and
the combined results of their operations and their cash flows for each of the
three 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
D-F-20
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 2,905,449 $ 5,253,193
Accounts receivable ................................................ -- 158,748
Prepaid expenses and other current assets .......................... 116,613 778,768
------------- -------------
Total current assets ................................................ 3,022,062 6,190,709
Investments in unconsolidated subsidiaries, principally GSAC
partners
in 1996 (Note 2) ................................................... 37,492 457,903
Property, plant and equipment:
Leasehold improvements ............................................. 6,726,317 6,726,317
Furniture and equipment ............................................ 132,445 130,846
------------- -------------
6,858,762 6,857,163
Accumulated depreciation and amortization .......................... (3,880,506) (4,626,531)
------------- -------------
2,978,256 2,230,632
------------- -------------
Total assets ........................................................ $ 6,037,810 $ 8,879,244
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued officers' salary expense ................................... $ 1,186,880 $ 5,950,123
Accounts payable and other accrued expenses ........................ 101,191 97,029
Advances and deferred income ....................................... 1,880 17,672
Prepaid memberships ................................................ 17,710 30,413
Due to stockholder (Note 3) ........................................ 1,830,000 1,877,465
------------- -------------
Total current liabilities ........................................... 3,137,661 7,972,702
Combined stockholders' equity (Note 4) .............................. 2,900,149 906,542
------------- -------------
Total liabilities and stockholders' equity .......................... $ 6,037,810 $ 8,879,244
============= =============
</TABLE>
See accompanying notes.
D-F-21
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996
-------------- -------------- -------------
<S> <C> <C> <C>
OPERATING REVENUES
Concert revenue ....................... $92,785,420 $47,566,304 $50,361,556
Cost of concerts ...................... 83,360,563 39,690,805 41,584,365
-------------- -------------- -------------
9,424,857 7,875,499 8,777,191
OPERATING EXPENSES
Officers' salary expense .............. 4,254,292 3,963,940 6,388,247
Depreciation and amortization ......... 755,238 750,083 746,505
General and administrative expenses .. 2,983,740 3,523,569 2,714,099
-------------- -------------- -------------
7,993,270 8,237,592 9,848,851
-------------- -------------- -------------
(Loss) income from operations ......... 1,431,587 (362,093) (1,071,660)
OTHER INCOME (EXPENSE)
Interest income ....................... 137,966 177,561 198,052
Interest expense ...................... (144,000) (144,000) (60,000)
Equity income (loss) from investments (8,422) 488,372 524,544
-------------- -------------- -------------
Income before income taxes............. 1,417,131 159,840 (409,064)
INCOME TAXES
State and local taxes.................. 4,882 12,610 106,297
-------------- -------------- -------------
Net income (loss) ..................... $ 1,412,249 $ 147,230 $ (515,361)
============== ============== =============
</TABLE>
See accompanying notes.
D-F-22
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .................................... $1,412,249 $ 147,230 $ (515,361)
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ....................... 755,238 750,083 746,505
Equity in pretax income of partnerships, net of
distributions received ............................. 73,229 2,447 15,885
Changes in operating assets and liabilities:
Accounts receivable ................................ 240,973 384,154 (158,748)
Prepaid expenses and other current assets ......... (389,203) 378,770 (662,155)
Accrued officers' salary expense, accounts payable
and accrued expenses .............................. 1,291,936 (1,326,542) 4,759,546
Advances and deferred income........................ (545) (433,998) 15,792
Prepaid memberships................................. (7,816) (5,000) 12,703
Sponsors advances payable........................... (416,915) (350,000) --
------------- ------------- -------------
Net cash provided by (used in) operating activities .. 2,959,146 (452,856) 4,214,167
INVESTING ACTIVITIES
Investment in GSAC Partnership........................ -- -- (436,296)
Proceeds from disposals of fixed assets............... -- -- 1,119
------------- ------------- -------------
Net cash used in investing activities................. -- -- (435,177)
FINANCING ACTIVITIES
Proceeds from the issuance of common stock and
capital contribution ................................ 30,000 -- 151,993
Due to stockholder.................................... 30,000 -- 47,000
Distributions paid.................................... (536,596) (215,787) (1,630,239)
------------- ------------- -------------
Net cash used in financing activities................. (476,596) (215,787) (1,431,246)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents . 2,482,550 (668,643) 2,347,744
Cash and cash equivalents at beginning of year ....... 1,091,542 3,574,092 2,905,449
------------- ------------- -------------
Cash and cash equivalents at end of year.............. $3,574,092 $ 2,905,449 $ 5,253,193
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................ $ 144,000 $ 144,000 $ 60,000
============= ============= =============
Cash paid for income taxes............................ $ 4,882 $ 12,610 $ 106,297
============= ============= =============
</TABLE>
See accompanying notes.
F-23
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
<S> <C>
January 1, 1994 ........................................... $ 2,063,053
Distributions to stockholder ............................. (536,596)
Issuance of common stock (Note 4) ........................ 30,000
Net income ............................................... 1,412,249
-------------
December 31, 1994 ......................................... 2,968,706
Distribution to stockholder .............................. (215,787)
Net income ............................................... 147,230
-------------
December 31, 1995 ......................................... 2,900,149
Distributions to stockholder ............................. (1,630,239)
Issuance of common stock and capital contribution (Note
4) ...................................................... 151,993
Net loss ................................................. (515,361)
-------------
December 31, 1996 ......................................... $ 906,542
=============
</TABLE>
See accompanying notes.
D-F-24
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Combination
The accompanying combined financial statements include the accounts of
Delsener/Slater Enterprises, Ltd. (the "Company," formerly known as Ron
Delsener Enterprises, Ltd.), Beach Concerts, Inc., Connecticut Concerts,
Inc., Ardee Productions, Ltd., Ardee Festivals NJ, Inc., Dumb Deal, Inc.,
In-House Tickets, Inc., Broadway Concerts, Inc. and Exit 116 Revisited, Inc.
(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 Ron Delsener.
The Companies principally promote musical events in the New York, New
Jersey and Connecticut area. Beach Concerts, Inc.'s principal income from
operations originates from the operation of the Jones Beach Theatre, located
in Wantagh, New York. The Companies 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.
Broadway Concerts, Inc. 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. Exit 116 Revisited, Inc. is 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 (formerly known as the Garden State Arts
Center) at varying percentages based on the partnership agreement. Exit 116
Revisited, Inc. invested $436,296 in 1996 for its share of GSAC Partners. The
Companies record these investments on the equity method.
Leasehold Improvements, Furniture and Equipment
Leasehold improvements represents 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. Furniture and equipment are valued at cost less
accumulated depreciation. Depreciation is provided on a straight-line basis
over the estimated useful lives of the assets.
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.
Concentration of Risk
As of December 1996 and 1995, the Companies have cash equivalents of
approximately $3,461,000 and $1,070,000, respectively, primarily at an
uninsured financial institution. The Companies maintain a policy whereby
funds are transferred daily into uninsured municipal accounts.
Income Taxes
All of the Companies, except Ardee Festivals NJ, Inc. and In-House
Tickets, Inc., have elected to be taxed as S Corporations as provided in
Section 1362(a) of the Internal Revenue Code. As such, the corporate income
or loss and credits are passed to the stockholders and combined with their
personal income and deductions to determine taxable income on their
individual federal tax returns.
Business income of an S Corporation is subject to a corporate level tax on
income derived in New York, New Jersey and Connecticut. The corporate tax
rates for S Corporations in New York State, New Jersey and Connecticut are
approximately one and one-half percent (1.5%), approximately two and
D-F-25
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
four-tenths percent (2.4%) and eleven and one-half percent (11.5%),
respectively. New York City does not recognize S Corporation status.
Provisions of $106,297, $12,610 and $4,882 have been recorded for 1996, 1995
and 1994 for state and local income taxes, respectively.
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.
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.
2. INVESTMENTS
The following is a summary of the unaudited financial position and results
of operations of the Companies' equity investees (GSAC Partners--1996 only)
as of and for the years ended December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Current assets .......................... $ 328,177 $ 214,947 $ 756,491
Property, plant and equipment ........... 138,467 121,620 239,290
Other assets ............................ -- -- 819,124
------------- ------------- -------------
Total assets ............................ $ 466,644 $ 336,567 $ 1,814,905
============= ============= =============
Current liabilities ..................... $ 398,620 $ 264,531 $ 1,534,380
Partners' capital ....................... 68,024 72,036 280,525
------------- ------------- -------------
Total liabilities and partners' capital $ 466,644 $ 336,567 $ 1,814,905
============= ============= =============
Revenue ................................. $2,505,595 $4,058,522 $16,037,410
Expenses ................................ 2,524,088 2,954,028 14,624,036
------------- ------------- -------------
Net income (loss) ....................... $ (18,493) $1,104,494 $ 1,413,374
============= ============= =============
</TABLE>
The equity income recognized by the Companies represents the appropriate
percentage of investment income less amounts reported in concert revenues for
shows promoted at theaters run by the Companies.
3. DUE TO STOCKHOLDER
Due to stockholder represents the balance due to Ronald Delsener on his
advances to renovate the Jones Beach Theatre (the "Jones Beach Loan") and the
PNC Bank Arts Center (the "PNC Loan"). The Companies 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
by SFX Broadcasting, Inc. ("Broadcasting") in 1997. (See Note 7).
D-F-26
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
4. COMMON STOCK
The corporations' stock and tax status are as follows:
<TABLE>
<CAPTION>
TAX SHARES SHARES PAR
STATUS AUTHORIZED ISSUED VALUE
--------- ------------ -------- -------
<S> <C> <C> <C> <C>
Delsener/Slater Enterprises, Ltd. . S-Corp. 100 10 None
Beach Concerts, Inc. ............... S-Corp. 2,500 10 None
Connecticut Concerts, Incorporated S-Corp. 5,000 10 None
Ardee Productions, Ltd. ............ S-Corp. 100 10 None
Ardee Festivals NJ, Inc. ........... C-Corp. 2,500 10 None
Dumb Deal, Inc. .................... S-Corp. 100 10 $.01
In-House Tickets, Inc. ............. C-Corp. 200 10 None
Broadway Concerts, Inc. ............ S-Corp. 2,500 10 None
Exit 116 Revisited, Inc. ........... S-Corp. 200 10 None
</TABLE>
In 1994, there was an issuance of common stock for Broadway Concerts, Inc.
for $20,000 and Connecticut Concerts, Inc. for $10,000. In 1996, there was an
initial issuance of the common stock of Dumb Deal, Inc. for $100,109 and a
capital contribution of $51,884 by Ron Delsener into Connecticut Concerts,
Inc.
5. COMMITMENTS AND CONTINGENCIES
Leases
The Companies lease office facilities and concert venues under
noncancellable leases which expire at various dates through 1999. Such leases
contain various operating escalations and renewal options.
Total rent expense for the years ended December 31, 1996, 1995 and 1994
under operating leases was $875,000, $835,000 and $823,333, respectively.
Future minimum lease payments under noncancellable operating leases as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 ... $ 837,500
1998 ... 775,000
1999 ... 820,000
-----------
$2,432,500
===========
</TABLE>
Unions
The Companies had agreements with various trade unions which have expired.
The trade unions are currently working under the old agreements and the
Companies and the unions are in the process of negotiating new agreements.
Other Matters
As of December 31, 1996, outstanding letters of credit for approximately
$400,000 were issued by banks on behalf of the Companies for the rental of
theaters.
6. SUBSEQUENT EVENTS
In January 1997, Broadcasting purchased 100% of the capital stock of the
Companies for aggregate consideration of approximately $26.6 million,
including $2.9 million for working capital and the present value of deferred
payments of $3 million to be paid, without interest, over five years, and $1
million to be paid, without interest, over ten years.
D-F-27
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
In March 1997, the Company consummated the acquisition of certain
companies which collectively own and operate the Meadows Music Theater in
Hartford, Connecticut for $0.9 million in cash, shares of Broadcasting's
Class A common stock with a value of approximately $7.5 million and the
assumption of approximately $15.4 million of debt.
D-F-28
<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, 1996 and 1995, and the related combined
statements of operations, shareholders' and partners' equity (deficit) and
cash flows for the years ended December 31, 1996, 1995 and 1994. 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, 1996 and 1995, and the results of its operations and its cash
flows for the years ended December 31, 1996, 1995 and 1994 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 21, 1997
D-F-29
<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 $503,766 and
$165,300 in 1996 and 1995, 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.
D-F-30
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
------- -------------- -------------
<S> <C> <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 ......................... 32 20,046 33,577
------- -------------- -------------
32 3,662,405 4,664,385
------- -------------- -------------
Loss from operations......... (32) (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 .................... $(32) $(1,015,342) $(1,942,718)
======= ============== =============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
D-F-31
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED STATEMENTS OF SHAREHOLDERS'
AND PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
-------------------------------------- PARTNERS'
COMMON PREFERRED ACCUMULATED EQUITY
STOCK STOCK DEFICIT (DEFICIT)
-------- ------------ -------------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1994................ $1,000 $ -- $ -- $ 500,000
Proceeds from sale of 125,000 shares of
Series A Preferred Stock............... -- 1,250,000 -- --
Proceeds from sale of 125,000 shares of
Series B Preferred Stock............... -- 1,250,000 -- --
Net loss................................ -- -- (32) --
-------- ------------ -------------- -----------
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.
D-F-32
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1994 1995 1996
------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................... $ (32) $ (1,015,342) $ (1,942,718)
Adjustments to reconcile net loss to net cash (used
in) provided by 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 ................. (2,232) (143,703) (59,329)
Accounts payable .................................. -- -- (6,294)
Accrued expenses .................................. -- 505,199 150,008
Deferred income ................................... -- 679,476 57,964
------------- --------------- ---------------
Net cash (used in) provided by operating
activities ...................................... (2,264) 407,445 (310,832)
------------- --------------- ---------------
Cash flows from investing activities:
Purchases of plant and equipment .................. (3,873,286) (23,242,858) (159,452)
Grant proceeds..................................... 3,232,839 7,680,161 --
Deferred start-up costs ........................... (756,570) (264,975) --
Accounts receivable--related party................. (527,878) 827,170 --
Accounts payable................................... 1,353,630 (438,350) --
Accounts payable--related party.................... (489,302) -- --
Long term deposit.................................. (110,000) -- --
------------- --------------- ---------------
Net cash (used in) investing activities ........ (1,170,567) (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 . 2,500,000 900 --
------------- --------------- ---------------
Net cash provided by financing activities ....... 2,500,000 13,767,299 414,001
------------- --------------- ---------------
Net increase (decrease) in cash .................... 1,327,169 (1,264,108) (56,283)
Cash, beginning of year ............................ -- 1,327,169 63,061
------------- --------------- ---------------
Cash, end of year................................... $ 1,327,169 $ 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.
D-F-33
<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.
D-F-34
<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, $689,160 and $0 for the years ended
December 31, 1996, 1995 and 1994, respectively.
D-F-35
<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:
D-F-36
<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.
D-F-37
<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
D-F-38
<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.
D-F-39
<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
D-F-40
<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.
D-F-41
<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, 1995 and 1994. 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, 1995 and 1994 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana
September 29, 1997.
D-F-42
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................. $ 1,894,533 $ 876,776
Accounts receivable........................ 138,548 155,929
Prepaid show expense....................... -- 42,114
Prepaid expenses........................... 91,919 118,152
------------- ------------
Total current assets..................... 2,125,000 1,192,971
------------- ------------
Property and equipment:
Land....................................... 2,428,770 2,428,770
Buildings.................................. 6,155,979 6,155,979
Site improvements.......................... 2,328,369 2,230,594
Leasehold improvements..................... 5,270,038 9,663,357
Furniture and equipment.................... 1,070,547 1,722,874
------------- ------------
17,253,703 22,201,574
Less: Accumulated depreciation............. 2,167,567 2,850,077
------------- ------------
Total property and equipment............. 15,086,136 19,351,497
------------- ------------
Other Assets:
Cash surrender value--life insurance
policy.................................... 62,819 71,815
Unamortized loan acquisition costs ....... 93,439 350,055
------------- ------------
Total other assets....................... 156,258 421,870
------------- ------------
TOTAL ASSETS ............................ $17,367,394 $20,966,338
============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
D-F-43
<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.
D-F-44
<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, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Operating revenues:
Concert revenue....................................... $ 9,258,015 $11,073,491 $14,194,502
Cost of concerts...................................... 8,018,336 8,939,022 10,724,059
-------------- -------------- --------------
1,239,679 2,134,469 3,470,443
Ancillary income:
Royalty commissions................................... 1,066,297 1,706,458 1,799,950
Corporate sponsorships................................ 987,362 959,518 1,056,161
Other ancillary income................................ 1,148,952 789,433 1,375,528
-------------- -------------- --------------
4,442,290 5,589,878 7,702,082
Operating expenses:
General & administrative.............................. 1,971,613 2,419,679 3,452,990
Depreciation & amortization........................... 340,753 343,567 783,167
Other operating expenses.............................. 211,428 249,812 471,126
-------------- -------------- --------------
2,523,794 3,013,058 4,707,283
Income from operations................................ 1,918,496 2,576,820 2,994,799
Other income (expense):
Interest income....................................... 56,919 86,034 84,123
Interest expense...................................... (1,648,956) (2,203,690) (1,549,579)
Professional fees related to attempted initial public
offering ............................................ (540,000) -- --
-------------- -------------- --------------
Net Income (Loss)................................... $ (213,541) $ 459,164 $ 1,529,343
Partners' Equity (Deficit) at beginning of year ..... $(1,161,815) $(1,857,603) $(1,572,719)
Contributions......................................... -- -- 2,200,000
Distributions......................................... (482,247) (174,280) (1,363,528)
-------------- -------------- --------------
Partners' Equity (Deficit) at end of year ............ $(1,857,603) $(1,572,719) $ 793,096
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
D-F-45
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss).............................................. $ (213,541) $ 459,164 $ 1,529,343
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization................................. 412,182 461,678 783,167
Decrease (increase) in certain assets:
Accounts receivable........................................... (93,231) (45,317) (17,381)
Prepaid show expenses......................................... -- -- (42,114)
Prepaid expenses and other ................................... (836,929) 746,307 (33,381)
Increase (decrease) in certain liabilities:
Accounts payable, construction payable and other accrued
liabilities.................................................. 213,228 3,424,461 (3,087,135)
Deferred ticket revenue....................................... 1,329,022 (1,266,654) 467,889
Accrued interest.............................................. -- 389,251 (363,791)
Other......................................................... -- (75,407) 44,852
------------- ------------- -------------
Net cash provided by (used in) operating activities ........ 810,731 4,093,483 (718,551)
------------- ------------- -------------
Investing Activities:
Capital expenditures.......................................... (53,621) (6,713,889) (5,197,260)
------------- ------------- -------------
Net cash used by investing activities......................... (53,621) (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....................................................... (40,741) (20,308) (1,334,653)
Distributions to partners..................................... (482,247) (174,280) (1,363,528)
------------- ------------- -------------
Net cash provided by (used by) financing activities ........ (522,988) 3,626,513 4,898,054
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents .......... 234,122 1,006,107 (1,017,757)
Cash and cash equivalents:
Beginning of period........................................... 654,304 888,426 1,894,533
------------- ------------- -------------
End of period................................................. $ 888,426 $ 1,894,533 $ 876,776
============= ============= =============
Supplemental disclosures:
Cash paid for interest........................................ $1,685,494 $ 1,148,049 $ 1,912,494
Equipment acquired under capital leases....................... -- -- 139,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
D-F-46
<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.
D-F-47
<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,
$595,000 in 1995 and $470,000 in 1994.
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
D-F-48
<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 and 1994, the Deer Creek
Partnership incurred contingent interest, which was based on cash flow, of
$885,000 and $374,000, respectively. 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.
D-F-49
<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.
D-F-50
<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, $1.7 million and $1.1
million in 1996, 1995 and 1994, 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 $501,000 in 1994, $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
D-F-51
<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 $204,000 in 1994, $249,000
in 1995 and $65,000 in 1996 from the Deer Creek Partnership and $46,000 in
1996 from the Murat Partnership.
9. ATTEMPTED INITIAL PUBLIC OFFERING
The Deer Creek Partnership was one of several commonly owned and managed
businesses which were involved in an attempted initial public offering during
1994. The offering was not completed. Approximately $900,000 of legal,
accounting, printing and other professional fees were incurred in
contemplation of the offering of which $540,000 was attributable to the
Deercreek Partnership. These costs are included in other expenses in the
combined statement of operations.
10. 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.
D-F-52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PACE Entertainment Corporation:
We have audited the accompanying consolidated balance sheet of PACE
Entertainment 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)
D-F-53
<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, except for
Note 10, as to which the
date is August 22, 1997
D-F-54
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................ $23,165 $23,784
Trade receivables, net ............................... 4,097 4,562
Accounts receivable, related parties ................. 1,010 1,007
Notes receivable ..................................... 3,040 386
Prepaid expenses ..................................... 6,106 9,967
Investments in theatrical productions ................ 2,489 4,402
Deferred tax asset ................................... 1,872 979
--------- ---------
Total current assets ................................ 41,779 45,087
INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS ............ 8,816 13,899
NOTES RECEIVABLE, related parties ..................... 6,958 8,024
INTANGIBLE ASSETS, net ................................ 17,244 17,894
OTHER ASSETS, net ..................................... 4,484 4,933
--------- ---------
Total assets ........................................ $79,281 $89,837
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ............. $10,285 $11,078
Deferred revenue ..................................... 26,909 32,093
Current maturities of long-term debt ................. 2,576 2,394
--------- ---------
Total current liabilities ........................... 39,770 45,565
LONG-TERM DEBT ........................................ 21,863 23,129
OTHER NONCURRENT LIABILITIES .......................... 2,496 1,607
REDEEMABLE COMMON STOCK ............................... 3,264 2,456
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
Additional paid-in capital ........................... 1,910 1,942
Retained earnings .................................... 10,115 15,275
Treasury stock, at cost, 544 shares .................. (140) (140)
--------- ---------
Total shareholders' equity .......................... 11,888 17,080
--------- ---------
Total liabilities and shareholders' equity ......... $79,281 $89,837
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-55
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
GROSS REVENUES ..................... $ 150,385 $ 156,325 $ 176,046
COST OF SALES ...................... (131,364) (135,925) (148,503)
EQUITY IN EARNINGS OF
UNCONSOLIDATED PARTNERSHIPS AND
THEATRICAL PRODUCTIONS ............ 2,183 3,048 6,838
----------- ----------- -----------
Gross profit ..................... 21,204 23,448 34,381
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES .......................... (13,351) (15,951) (21,260)
STOCK COMPENSATION ................. (25) (3,675) (456)
LITIGATION SETTLEMENT .............. -- (3,657) --
DEPRECIATION AND AMORTIZATION ..... (1,223) (1,737) (1,896)
----------- ----------- -----------
Operating profit (loss) .......... 6,605 (1,572) 10,769
INTEREST INCOME, related parties .. 305 329 403
INTEREST INCOME, other ............. 147 176 60
INTEREST EXPENSE ................... (655) (1,206) (1,997)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST ............. 6,402 (2,273) 9,235
INCOME TAX (PROVISION) BENEFIT .... (2,575) 714 (3,529)
MINORITY INTEREST .................. (485) (446) (546)
----------- ----------- -----------
NET INCOME (LOSS) .................. $ 3,342 $ (2,005) $ 5,160
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-56
<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
======== ============ ========== ========== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-57
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
---------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................... $ 3,342 $ (2,005) $ 5,160
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities-
Depreciation and amortization .................................. 1,223 1,737 1,896
Equity in earnings of unconsolidated partnerships ............. (1,624) (486) (4,912)
Distributions from unconsolidated partnerships ................. 1,297 1,090 2,354
Restricted stock compensation .................................. 25 3,675 456
Deferred income tax expense (benefit) .......................... 848 (4,541) 2,037
Changes in operating assets and liabilities-....................
Trade receivables ............................................. 447 (826) (465)
Notes receivable .............................................. (1,813) (1,227) 2,654
Prepaid expenses .............................................. (221) 1,466 (3,861)
Investments in theatrical productions ......................... 305 (335) (1,913)
Other assets .................................................. (37) (1,130) (421)
Accounts payable and accrued liabilities ...................... 947 (1,142) (920)
Deferred revenue .............................................. (1,082) (1,008) 5,184
Other liabilities ............................................. 171 1,601 (34)
--------- ---------- ----------
Net cash provided by (used in) operating activities ......... 3,828 (3,131) 7,215
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired .............................. -- (13,233) (2,215)
Capital expenditures ............................................ (728) (827) (1,008)
Loans and advances to related parties ........................... (2,301) (535) (2,295)
Contributions to unconsolidated partnerships .................... (1,212) (1,806) (2,162)
--------- ---------- ----------
Net cash used in investing activities ........................ (4,241) (16,401) (7,680)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt additions .................................... 8,927 24,043 24,287
Payments on debt ................................................ (8,928) (6,512) (23,203)
--------- ---------- ----------
Net cash provided by (used in) financing activities ......... (1) 17,531 1,084
--------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........... (414) (2,001) 619
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................... 25,580 25,166 23,165
--------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ......................... $25,166 $ 23,165 $ 23,784
========= ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ................................................... $ 620 $ 1,117 $ 1,900
Income taxes paid ............................................... 2,276 2,804 2,103
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-58
<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.
D-F-59
<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.
D-F-60
<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.
Reclassifications
Certain 1995 and 1996 amounts have been reclassified to conform with the
1997 presentation.
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.
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>
D-F-61
<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>
D-F-62
<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>
D-F-63
<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>
D-F-64
<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>
D-F-65
<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>
D-F-66
<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.
D-F-67
<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
D-F-68
<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.
D-F-69
<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.
D-F-70
<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. 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 approval of certain third
D-F-71
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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, 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 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 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)
D-F-72
<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)
D-F-73
<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
D-F-74
<PAGE>
PAVILION PARTNERS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------
1996 1997
--------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 8,554 $ 17,898
Accounts receivable ................................................. 7,842 6,167
Accounts receivable, related parties ................................ 1,878 3,878
Notes receivable, related parties ................................... 1,218 1,218
Prepaid expenses and other current assets ........................... 1,208 1,017
--------- ----------
Total current assets ............................................. 20,700 30,178
Prepaid rent ........................................................ 7,075 6,938
Property and equipment, net ......................................... 61,292 59,938
Other assets ........................................................ 4,426 5,722
--------- ----------
Total assets ..................................................... $93,493 $102,776
========= ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable .................................................... $ 1,404 $ 1,193
Accounts payable, related parties ................................... 1,866 3,948
Accrued liabilities ................................................. 8,112 7,032
Deferred revenue .................................................... 3,602 5,081
Current portion of notes payable and capital lease obligation ...... 1,573 1,614
Current portion of note payable, related party ...................... 637 880
--------- ----------
Total current liabilities ........................................ 17,194 19,748
Notes payable ....................................................... 43,680 42,192
Note payable, related party ......................................... 7,268 7,025
Capital lease obligation ............................................ 6,130 5,989
Other liabilities and minority interests in consolidated
subsidiaries ....................................................... 1,617 3,960
--------- ----------
Total liabilities ................................................ 75,889 78,914
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL .................................................... 17,604 23,862
--------- ----------
Total liabilities and partners' capital .......................... $93,493 $102,776
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-75
<PAGE>
PAVILION PARTNERS
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE ELEVEN MONTHS FOR THE
YEAR ENDED ENDED YEAR ENDED
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997
------------- --------------- ---------------
<S> <C> <C> <C>
TICKET REVENUES .................... $43,266 $50,151 $ 58,479
OTHER OPERATING REVENUES ........... 28,109 33,942 41,730
------------- --------------- ---------------
Total revenues ................... 71,375 84,093 100,209
COST OF SALES ...................... 49,226 57,723 64,052
------------- --------------- ---------------
Gross profit ..................... 22,149 26,370 36,157
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES .......................... 8,329 9,774 10,858
DEPRECIATION AND AMORTIZATION ..... 2,461 3,346 3,975
OTHER OPERATING COSTS .............. 5,345 7,390 8,531
LITIGATION EXPENSES AND SETTLEMENT -- 2,380 --
------------- --------------- ---------------
Operating profit ................. 6,014 3,480 12,793
INTEREST INCOME .................... 504 391 532
INTEREST EXPENSE ................... 2,793 3,855 4,413
------------- --------------- ---------------
INCOME BEFORE MINORITY INTEREST ... 3,725 16 8,912
MINORITY INTEREST .................. 276 308 1,926
------------- --------------- ---------------
NET INCOME (LOSS) .................. $ 3,449 $ (292) $ 6,986
============= =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-76
<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
=============== =============== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-77
<PAGE>
PAVILION PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE ELEVEN MONTHS FOR THE
YEAR ENDED ENDED YEAR ENDED
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997
------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................... $ 3,449 $ (292) $ 6,986
Adjustments to reconcile net income (loss) to
net cash provided by operating activities--
Depreciation and amortization .................. 2,461 3,346 3,975
Minority interest .............................. 276 308 1,926
Changes in assets and liabilities--
Accounts receivable ........................... (1,455) (3,647) 1,669
Accounts receivable and payable, related
parties ...................................... 32 (756) 82
Prepaid expenses and other current assets .... 191 (296) 266
Accounts payable and accrued liabilities ..... (512) 1,695 (2,184)
Deferred revenue and other liabilities ....... 1,304 2,110 2,284
Other, net .................................... (785) (1,259) (1,548)
------------- --------------- ---------------
Net cash provided by operating activities ... 4,961 1,209 13,456
------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments of preoperating costs .................. (1,318) (1,114) (59)
Capital expenditures ............................ (25,856) (7,483) (1,879)
------------- --------------- ---------------
Net cash used in investing activities ....... (27,174) (8,597) (1,938)
------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funding of capital commitments by partners ..... 4,046 -- --
Distributions to partner ........................ (699) (767) (728)
Proceeds from borrowings ........................ 24,322 8,323 -
Repayments of borrowings ........................ (639) (1,072) (1,446)
------------- --------------- ---------------
Net cash provided by (used in) financing
activities .................................. 27,030 6,484 (2,174)
------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ..................................... 4,817 (904) 9,344
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,641 9,458 8,554
------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...... $ 9,458 $ 8,554 $17,898
============= =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-78
<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.
D-F-79
<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, $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.
D-F-80
<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.
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 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.
D-F-81
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
D-F-82
<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.
D-F-83
<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
D-F-84
<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
D-F-85
<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
D-F-86
<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. 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 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 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).
D-F-87
<PAGE>
EPORT OF INDEPENDENT AUDITORS
The Boards of Directors
Contemporary Group
We have audited the accompanying combined balance sheets of Contemporary
Group as of September 30, 1997 and December 31, 1996 and the related combined
statements of operations, cash flows and stockholders' equity for each of the
nine months ended September 30, 1997 and year ended December 31, 1996. 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 Contemporary
Group at September 30, 1997 and December 31, 1996 and the combined results of
their operations and their cash flows for the nine months ended September 30,
1997 and the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
November 25, 1997
D-F-88
<PAGE>
CONTEMPORARY GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................................ $ 2,972,409 $ 4,630,459
Accounts receivable ............................................. 4,067,444 8,369,802
Prepaid expenses and other current assets ....................... 272,105 374,952
-------------- ---------------
Total current assets ............................................. 7,311,958 13,375,213
Property and equipment, at cost, less accumulated depreciation
and amortization of $2,723,986 in 1996 and $3,222,296 in 1997 .. 2,438,210 2,837,790
Reimbursable event costs ......................................... 474,469 890,502
Deferred event expenses .......................................... 250,973 175,551
Investment in Riverport .......................................... 4,934,513 6,232,889
Other assets ..................................................... 120,256 130,674
-------------- ---------------
Total assets ..................................................... $15,530,379 $23,642,619
============== ===============
LIABILITIES AND COMBINED STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 1,733,676 $ 1,212,506
Accrued expenses and other current liabilities .................. 4,975,189 6,572,522
Current portion of note payable ................................. 592,138 --
-------------- ---------------
Total current liabilities ........................................ 7,301,003 7,785,028
Deferred revenue ................................................. 2,424,020 4,012,136
Other liabilities ................................................ 244,412 790,127
Deferred compensation ............................................ -- 588,122
Note payable, less current portion ............................... 1,578,171 1,578,171
Combined stockholders' equity .................................... 3,982,773 8,889,035
-------------- ---------------
Total liabilities and combined stockholders' equity ............. $15,530,379 $23,642,619
============== ===============
</TABLE>
See accompanying notes.
D-F-89
<PAGE>
CONTEMPORARY GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ---------------
<S> <C> <C>
OPERATING REVENUES
Event promotion revenue ............. $38,023,454 $41,162,946
Marketing revenue ................... 12,969,621 21,132,035
Other event revenue ................. 8,859,218 8,846,167
-------------- ---------------
59,852,293 71,141,148
Cost of revenue ..................... 46,410,935 54,662,268
-------------- ---------------
13,441,358 16,478,880
OPERATING EXPENSES
Salary expense ...................... 8,010,991 7,936,131
Depreciation and amortization ...... 566,573 498,310
General and administrative expenses 3,767,111 4,165,336
-------------- ---------------
12,344,675 12,599,777
-------------- ---------------
Income from operations .............. 1,096,683 3,879,103
OTHER INCOME (EXPENSE)
Interest income ..................... 158,512 121,990
Interest expense .................... (213,658) (153,207)
Equity in income of Riverport ...... 822,716 1,298,376
-------------- ---------------
767,570 1,267,159
-------------- ---------------
Income before income taxes .......... 1,864,253 5,146,262
Federal and state taxes ............. 35,367 --
-------------- ---------------
Net income .......................... $ 1,828,886 $ 5,146,262
============== ===============
</TABLE>
See accompanying notes.
D-F-90
<PAGE>
CONTEMPORARY GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ................................................... $ 1,828,886 $ 5,146,262
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................... 566,573 498,310
Deferred revenue ............................................ 1,324,206 1,588,116
Non-cash compensation ....................................... -- 588,122
Equity in income of Riverport, net of distributions received (222,716) (1,298,376)
Changes in operating assets and liabilities:
Accounts receivable ........................................ (899,830) (4,302,358)
Prepaid expenses and other current assets .................. 225,754 (102,847)
Reimbursable event costs ................................... (207,355) (416,033)
Deferred event expenses .................................... (159,393) 75,422
Other assets ............................................... (29,923) (10,418)
Accounts payable ........................................... (186,876) (521,170)
Accrued expenses and other current liabilities ............ 2,605,182 1,597,333
Other liabilities .......................................... (1,061,570) 545,715
-------------- ---------------
Net cash provided by operating activities .................... 3,782,938 3,388,078
INVESTING ACTIVITIES
Purchase of property and equipment ........................... (1,159,382) (897,890)
-------------- ---------------
Net cash used in investing activities ........................ (1,159,382) (897,890)
FINANCING ACTIVITIES
Borrowings ................................................... 626,970 --
Payments of notes payable .................................... (34,832) (592,138)
Distributions paid ........................................... (2,993,000) (240,000)
-------------- ---------------
Net cash used in financing activities ........................ (2,400,862) (832,138)
-------------- ---------------
Net increase in cash ......................................... 222,694 1,658,050
Cash at beginning of period .................................. 2,749,715 2,972,409
-------------- ---------------
Cash at end of period ........................................ $ 2,972,409 $ 4,630,459
============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ....................................... $ 143,271 $ 112,429
============== ===============
Cash paid for income taxes ................................... $ 34,550 $ 23,618
============== ===============
</TABLE>
See accompanying notes.
D-F-91
<PAGE>
CONTEMPORARY GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1997
<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 .......................... (240,000)
Net income for the nine months ended September 30, 1997 5,146,262
-------------
Balance, September 30, 1997 ............................ $ 8,889,035
=============
</TABLE>
See accompanying notes.
D-F-92
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
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,
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 7.
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.
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.
CIC is a 50% partner in Riverport Performing Arts Centre Joint Venture
("Riverport"), a Missouri general partnership which leases and 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
The Companies have been organized as either partnerships or corporations
which have elected to be taxed as "S Corporations" or incorporated as "C
Corporations." The "S Corporation" elections are valid for both federal and
state tax purposes. With respect to the partnerships and "S Corporations,"
all items of income, loss, deduction or credit are reported by the partners
or shareholders on their respective personal income tax returns. Accordingly,
no current or deferred federal or state taxes have been provided for in the
accompanying financial statements with regard to such entities.
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 during the nine months ended
September 30, 1997. The remaining "C Corporation" generated a tax loss of
approximately $52,000 for the nine months ended September 30, 1997. As such,
no provision for income taxes has been provided for.
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 September 30, 1997 and December 31, 1996 to be
collectible; accordingly, no allowance for doubtful accounts is recorded.
D-F-93
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Significant Customer
CMI produces marketing and sales programs for national consumer product
companies. Its most significant customer is AT&T, which provided
approximately 20% and 12% of the Companies' combined revenues for the nine
months ended September 30, 1997 and the year ended December 31, 1996,
respectively.
Advertising Costs
Advertising costs are expensed as incurred. For the nine months ended
September 30, 1997 and the year ended December 31, 1996, advertising costs
were $66,413 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.
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 as
of and for the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ---------------
<S> <C> <C>
Current assets .......................... $ 473,275 $ 2,603,349
Property and equipment .................. 11,815,552 11,355,439
Other assets ............................ 16,553 8,186
-------------- ---------------
Total assets ............................ $12,305,380 $13,966,974
============== ===============
Current liabilities ..................... $ 1,993,981 $ 1,022,327
Other liabilities ....................... 442,374 478,870
Partners' capital ....................... 9,869,025 12,465,777
-------------- ---------------
Total liabilities and partners' capital $12,305,380 $13,966,974
============== ===============
Revenue ................................. $11,693,138 $14,429,029
Net operating income .................... 1,970,887 4,684,284
Net income .............................. $ 1,645,431 $ 2,596,752
</TABLE>
During the year ended December 31, 1996, CIC received a cash distribution
of $600,000 from Riverport.
D-F-94
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. NOTES PAYABLE
At September 30, 1997 and December 31, 1996, CIC held a $2,322,500 non
interest bearing note payable to its partner in Riverport. The note is
payable in installments through December 1, 2000 and is secured by CIC's
investment in Riverport. The carrying value of the note is $1,578,171 based
on an imputed interest rate of approximately 9%. Based on this rate, future
principal payments on the note as of September 30, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 ... $ 683,970
1999 ... 426,296
2000 ... 467,905
-----------
$1,578,171
===========
</TABLE>
At December 31, 1996, the Companies had a $592,138 bank note payable which
bore an interest rate based on the prime lending rate (8.25% in 1996, 8.5% in
1997) and was repaid in full prior to September 30, 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. 30,000 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 nine months ended September 30, 1997 and the
year ended December 31, 1996 was $754,395 and $818,123, respectively.
D-F-95
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under noncancellable operating leases as of
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 ......... $ 270,063
1998 ......... 858,757
1999 ......... 863,757
2000 ......... 440,050
2001 ......... 264,000
Thereafter .. 317,000
-----------
$3,013,627
===========
</TABLE>
Compensation
CMI has entered into an employment agreement with one of its employees
which provides her with rights to future cash payments based on the fair
value of CMI, as defined. These rights vest on January 1, 2002 or upon the
occurrence of certain transactions including a change of control. CMI
recorded related compensation expense for the nine months ended September 30,
1997 of $588,122 pursuant to this agreement.
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, based upon the advice of 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 nine months ended September 30, 1997 and the year
ended December 31, 1996, the Companies contributions totaled approximately
$23,700 and $25,600, respectively.
7. SUBSEQUENT EVENT
In December 1997, the owners of the Companies entered into an agreement to
transfer 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 $72,800,000 in cash and
the issuance of 1,402,851 shares of SFX Entertainment Class A Common Stock.
It is intended that prior to the sale, the Companies will acquire the
remaining 50% of Riverport. If it is unable to do so, the cash portion of the
purchase price would be reduced by $10,500,000.
D-F-96
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
SJS Entertainment Corporation
We have audited the accompanying combined balance sheet of SJS
Entertainment Corporation and Affiliated Company as of December 31, 1996, and
the related combined statements of operations and retained earnings and cash
flows 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, combined financial statements referred to above present
fairly, in all material respects, the financial position of SJS Entertainment
Corporation and Affiliated Company at December 31, 1996 and the 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
November 20, 1997
D-F-97
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................... $ 230,280 $ 633,001
Accounts receivable ................................ 2,257,110 3,644,176
Due from officers .................................. 616,177 --
Prepaid expenses ................................... 26,037 38,982
Employee loans ..................................... 1,925 9,108
-------------- ---------------
Total current assets ................................ 3,131,529 4,325,267
-------------- ---------------
Fixed assets, at cost:
Furniture, fixtures and office equipment .......... 309,756 375,390
Production equipment ............................... 95,317 172,641
Leasehold improvements ............................. 61,228 61,228
-------------- ---------------
466,301 609,259
Less, accumulated depreciation and amortization ... 187,546 275,142
-------------- ---------------
Net fixed assets .................................... 278,755 334,117
-------------- ---------------
Deferred tax asset .................................. -- 69,422
Other assets ........................................ 23,658 22,656
-------------- ---------------
Total assets ........................................ $3,433,942 $4,751,462
============== ===============
LIABILITIES AND COMBINED STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable--bank ................................ $1,900,000 $ --
Accounts payable ................................... 694,055 1,008,718
Accrued expenses ................................... 619,427 2,754,965
Due to affiliate ................................... 15,989 15,989
Loans and exchanges ................................ 2,799 --
Deferred revenue ................................... 104,208 41,575
Due to officers .................................... -- 988,423
-------------- ---------------
Total current liabilities ........................... 3,336,478 4,809,670
-------------- ---------------
Combined stockholders' equity:
Common stock ....................................... 27,200 27,200
Retained earnings (deficit) ........................ 145,264 (10,408)
Treasury stock ..................................... (75,000) (75,000)
-------------- ---------------
Total combined stockholders' equity ................. 97,464 (58,208)
-------------- ---------------
Total liabilities and combined stockholders' equity $3,433,942 $4,751,462
============== ===============
</TABLE>
See accompanying notes.
D-F-98
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Net sales, including management fees from related party
(Note 2)....................................................... $11,374,672
Cost of sales .................................................. 4,039,320
-------------
Gross profit ................................................... 7,335,352
-------------
Operating expenses:
Officers' base salaries ....................................... 490,353
Officers' salaries--bonus ..................................... 2,475,000
Employee payroll and taxes .................................... 2,211,372
Consulting fees ............................................... 272,233
Messengers and delivery expense ............................... 208,697
Telephone and utilities ....................................... 341,649
Transportation and automobile expenses ........................ 240,218
Advertising and promotion ..................................... 149,907
Rent expense, net ............................................. 182,012
Depreciation and amortization ................................. 84,001
Other, net .................................................... 648,128
-------------
7,303,570
-------------
Income from operations ......................................... 31,782
Interest expense--net .......................................... (3,229)
-------------
Income before provision for income taxes ....................... 28,553
Provision for income taxes ..................................... 91,197
-------------
Net loss ....................................................... (62,644)
Retained earnings at beginning of year ......................... 207,908
-------------
Retained earnings at end of year ............................... $ 145,264
=============
</TABLE>
See accompanying notes.
D-F-99
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Net sales, including management fees from related party
(Note 2)....................................................... $8,745,965 $10,736,887
Cost of sales .................................................. 3,076,955 3,439,414
------------ -------------
Gross profit ................................................... 5,669,010 7,297,473
------------ -------------
Operating expenses:
Officers' base salaries ....................................... 366,224 883,308
Officers' salaries--bonus ..................................... 2,085,000 2,116,692
Employee payroll and taxes .................................... 1,521,486 1,969,623
Consulting fees ............................................... 192,951 220,860
Messengers and delivery expense ............................... 157,075 192,097
Telephone and utilities ....................................... 248,866 316,473
Transportation and automobile expenses ........................ 165,811 242,895
Advertising and promotion ..................................... 128,005 279,758
Rent expense, net ............................................. 119,482 173,486
Start-up costs of SJS Research ................................ -- 216,944
Depreciation and amortization ................................. 59,500 87,596
Other, net .................................................... 439,024 665,881
------------ -------------
5,483,424 7,365,613
------------ -------------
Income (loss) from operations .................................. 185,586 (68,140)
Other income (expenses):
Other income .................................................. -- 77,510
Interest expense--net ......................................... (5,627) (30,540)
------------ -------------
Income (loss) before provision for income taxes ................ 179,959 (21,170)
Provision for income taxes ..................................... 88,859 134,502
------------ -------------
Net income (loss) .............................................. 91,100 (155,672)
Retained earnings at January 1 ................................. 207,908 145,264
------------ -------------
Retained earnings (deficit) at September 30 .................... $ 299,008 $ (10,408)
============ =============
</TABLE>
See accompanying notes.
D-F-100
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
COMBINED STATEMENT OF CASH FLOWS
Year ended December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss ...................................................................... $ (62,644)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization ............................................... 84,001
Changes in assets and liabilities:
Decrease in accounts receivable ............................................ 241,679
Decrease in due from affiliate ............................................. 6,134
Increase in prepaid expenses ............................................... (5,445)
Decrease in employee loans ................................................. 14
Decrease in security deposits .............................................. 4,737
Decrease in accounts payable ............................................... (130,667)
Increase in accrued expenses ............................................... 532,762
Increase in due to affiliate ............................................... 15,989
Decrease in loans and exchanges ............................................ (959)
Increase in deferred revenues .............................................. 104,208
-------------
Net cash provided by operating activities ..................................... 789,809
-------------
CASH FLOW FROM INVESTING ACTIVITIES
Cash used to acquire fixed assets ............................................. (184,132)
CASH FLOW FROM FINANCING ACTIVITIES
Officers' loans, net .......................................................... (2,204,564)
Repayments of bank loan ....................................................... (275,760)
Proceeds from new bank loans .................................................. 1,900,000
Payments towards treasury stock financing agreement ........................... (12,500)
-------------
Net cash used by financing activities ......................................... (592,824)
-------------
Net increase in cash .......................................................... 12,853
Cash at beginning of year ..................................................... 217,427
-------------
Cash at end of year ........................................................... $ 230,280
=============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during period ................................................... $ 9,003
=============
Income taxes paid during period ............................................... $ 180,636
=============
</TABLE>
See accompanying notes.
D-F-101
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income ................................................ $ 91,100 $ (155,672)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................... 59,500 87,596
Changes in assets and liabilities:
Increase in accounts receivable ........................ (347,582) (1,387,066)
Decrease in due from affiliate ......................... 6,134 --
(Increase) decrease in prepaid expenses ................ 4,316 (12,945)
(Increase) in employee loans ........................... (5,388) (7,183)
(Increase) in deferred tax asset ....................... -- (69,422)
(Increase) decrease in other assets .................... (1,354) 1,000
Increase in accounts payable ........................... 124,338 314,663
Increase in accrued expenses ........................... 1,491,531 2,135,538
Increase in due to affiliate ........................... 15,989 --
Decrease in loans and exchanges ........................ (3,758) (2,797)
Increase (decrease) in deferred revenues ............... 107,183 (62,633)
------------- -------------
Net cash provided by operating activities ................. 1,542,009 841,079
------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES
Cash used to acquire fixed assets ......................... (161,079) (142,958)
CASH FLOW FROM FINANCING ACTIVITIES
Officers' loans, net ...................................... (848,077) 1,604,600
Repayments of bank loan ................................... (275,760) (1,900,000)
Payments towards treasury stock financing agreement ...... (12,500) --
------------- -------------
Net cash used by financing activities ..................... (1,136,337) (295,400)
------------- -------------
Net increase in cash ...................................... 244,593 402,721
Cash at January 1 ......................................... 217,427 230,280
------------- -------------
Cash at September 30 ...................................... $ 462,020 $ 633,001
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during period ............................... $ 8,239 $ 33,218
============= =============
Income taxes paid during period ........................... $ 133,088 $ 57,052
============= =============
</TABLE>
See accompanying notes.
D-F-102
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Combined Statements
The financial statements present the financial position and results of
operations of SJS Entertainment Corporation and Urban Entertainment Corp.
(collectively, the "Company") which are affiliated through common management
and ownership.
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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management use 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.
Depreciation and amortization expense for the year ended December 31, 1996
totaled $84,001.
<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>
Intercompany Balances and Transactions
All intercompany balances and transactions have been eliminated in
combination.
Concentration of Credit Risk
The Company maintains bank balances with Sterling National Bank in excess
of the federally insured limit of $100,000.
Interim Financial Information
Financial information as of September 30, 1997 and for the nine months
ended September 30, 1997 and September 30, 1996 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
Due from 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.
D-F-103
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
At the beginning of the year, January 1, 1996, the Company owed its
officers $1,589,146. During the year, the officers loaned the Company an
additional $354,780, while the Company paid to its officers a total of
$2,560,103.
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 the year ended December 31, 1996.
Salaries and bonuses paid to officers is determined annually by the
Company's board of directors.
Management Services
The Company has arranged to manage the operations of a related company
which is 40% owned by the officers of the Company. In exchange for the
services provided, the Company receives managing fees of $40,000 per month.
In addition, the Company has subleased a portion of its premises to this
related company (see Note 4), 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 year ended December 31, 1996, the Company received the
following amounts from this related company:
<TABLE>
<CAPTION>
<S> <C>
Management fees ................. $480,000
Rental income ................... 69,780
Direct expense reimbursement ... 25,519
Indirect overhead reimbursement 108,000
-----------
$683,299
===========
</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.
Due to Affiliate
The amount reflected as due to affiliate on the current liabilities
section of the balance sheet in the amount of $15,989, is a carryforward of a
prior year liability due to a related company of which 50% is owned by the
officers of the Company. This matter is currently in litigation, and there is
no legal opinion as to its probable settlement. However, management does not
expect any eventual monetary settlement to exceed this amount.
3. LOANS PAYABLE--BANK
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 the same amount held by the officers of the Company. 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.
Interest charged to the Company was at the rate of prime plus 1%.
In addition to the term loan referred to above, the Company maintains a
$300,000 line-of-credit with Sterling National Bank, which is collateralized
by all corporate assets and guaranteed by the officers/ shareholders. At
December 31, 1996, there was an outstanding balance of $300,000. Interest is
charged at the rate of prime plus 1%. As of November 20, 1997, this loan has
been repaid.
In 1996, the Company repaid a $275,760 loan from Sterling National Bank,
which was outstanding at December 31, 1995.
D-F-104
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES
Automobile Lease
The Company leases automobiles with monthly payments of $1,834 due through
February, 1999.
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>
1997 ......... $ 305,300
1998 ......... 311,200
1999 ......... 300,000
2000 ......... 267,000
2001 ......... 240,100
Thereafter .. 1,098,800
-----------
$2,522,400
===========
</TABLE>
Rent expense for offices and production studios, net of the subtenant
lease income (see below), totaled $182,012 for the year ended December 31,
1996, while the automobile lease cost was approximately $22,000.
Subtenant Lease
The Company has subleased a portion of its New York City premises to a
related company who is partially owned by the stockholders of the Company,
for approximately $5,800 per month. The lease terminated at the end of April,
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. The future commitment is as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 ... $115,000
1998 ... 115,000
1999 ... 115,000
----------
$345,000
==========
</TABLE>
D-F-105
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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>
Treasury stock represents the acquisition cost of 550 shares of Urban
Entertainment Corp. (420 Class A, and 130 Class B) in 1995. The Company paid
$12,500 of the total consideration for the stock in 1996.
Retained earnings at January 1, 1996 was adjusted to reflect the
underaccrual of $51,831 of state and local taxes related to 1995.
6. INCOME TAXES
Urban Entertainment Corp. 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 seven state and local jurisidictions.
The provision for income taxes for the year ended December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Federal ......... $ 9,647
State and local 81,550
---------
$91,197
=========
</TABLE>
On October 30, 1997, SJS Entertainment Corporation filed an election to be
treated as an "S" Corporation beginning January 1, 1998. Approval from the
Internal Revenue Service and various state revenue departments are pending.
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 $1,000,
whichever is less.
During the year ended December 31, 1996, employer contributions totaled
$6,979.
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.
D-F-106
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS
In December 1997, the Company's shareholders entered into an agreement to
sell all of the issued and outstanding shares of the Company to SFX
Entertainment, Inc.
In December 1997, the Company borrowed $1,500,000 under a term loan with
Sterling National Bank (Unaudited).
D-F-107
<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
D-F-108
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 160,453 $ 272,423
Accounts receivable, less allowance for doubtful
accounts of $153,728 in 1997and $95,450 in 1996 ................... 2,148,159 2,229,237
Officers' loans receivable ......................................... 423,447 390,794
Prepaid expenses and other current assets .......................... 125,558 234,914
------------- -------------
Total current assets ................................................ 2,857,617 3,127,368
Property, plant and equipment, at cost, less accumulated
depreciation of $1,056,689 in 1997 and $914,512 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 ........................ 351,551 304,011
Current portion of long-term debt .................................. 624,723 426,228
------------- -------------
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.
D-F-109
<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.
D-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 (97,053)
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 (165,257)
Taxes payable and other current liabilities ..................... 143,423 (127,843)
------------ ------------
Net cash (used in) provided by operating activities ................ 940,949 930,500
------------ ------------
INVESTING ACTIVITIES
Purchase of property and equipment ................................. (65,731) (166,891)
Deferred software costs ............................................ (97,463) (150,630)
------------ ------------
Net cash used in investing activities .............................. (163,194) (317,521)
------------ ------------
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.
D-F-111
<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".
D-F-112
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
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%).
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.
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 ............................................................. $ 96,996 $ 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
------------ -----------
1,918,856 1,478,109
Less current portion .............................................. 624,723 426,228
------------ -----------
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.
D-F-113
<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 letters 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.
D-F-114
<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 EVENT
In December 1997, the shareholders of the Companies entered into an
agreement to sell all of the issued and outstanding shares of the Company and
all of the assets and liabilities of The Network 40, Inc. to SFX
Entertainment, Inc.
D-F-115
<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 1996, and the
related consolidated 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 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 1996, and the consolidated
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
December 18, 1997
D-F-116
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 7,431,899 $11,819,831
Accounts receivable--trade ............................................ 1,808,280 3,164,543
Accounts receivable--related parties .................................. 1,346,329 1,347,150
Investments ........................................................... 123,000 370,000
Inventories ........................................................... 228,294 236,078
Prepaid assets ........................................................ 929,274 450,883
Income tax receivable ................................................. 90,138 418,528
Deferred income taxes ................................................. 170,000 94,000
------------- -------------
Total current assets ................................................... 12,127,214 17,901,013
Property and equipment, net ............................................ 10,649,446 9,661,910
Goodwill, net........................................................... 1,668,800 1,549,600
Other assets ........................................................... 327 167
------------- -------------
Total assets............................................................ $24,445,787 $29,112,690
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--current portion......................................... $ 591,755 $ 722,966
Lease commitment--current portion ..................................... 405,275 35,676
Accounts payable ...................................................... 2,254,539 5,116,133
Accrued liabilities ................................................... 1,567,788 1,834,670
Deferred revenue ...................................................... 982,785 1,362,533
------------- -------------
Total current liabilities .............................................. 5,802,142 9,071,978
------------- -------------
Lease commitment, less current portion ................................. 6,740,395 6,704,719
Notes payable, less current portion .................................... 5,140,676 5,233,709
Deferred income taxes .................................................. 2,648,000 2,617,000
Stockholders' equity:
Common stock, no par value; 10,000,000 shares authorized; 1,000,000
and 957,894 shares issued and outstanding in 1996 and 1997,
respectively........................................................... 1,220,000 1,198,947
Retained earnings ..................................................... 2,894,574 4,286,337
------------- -------------
Total stockholders' equity ............................................. 4,114,574 5,485,284
------------- -------------
Total liabilities and stockholders' equity.............................. $24,445,787 $29,112,690
============= =============
</TABLE>
See accompanying notes.
D-F-117
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
October 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $10,709,619
Accounts receivable--trade................................................... 4,666,132
Accounts receivable--related parties......................................... 1,986,379
Inventories.................................................................. 224,922
Prepaid assets............................................................... 1,171,624
Total current assets.......................................................... 18,758,676
Property and equipment, net................................................... 9,233,108
Goodwill, net................................................................. 1,460,200
Other assets.................................................................. 222,284
-------------
Total assets.................................................................. $29,674,268
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--current portion............................................... $ 868,482
Accounts payable............................................................. 1,006,601
Accrued liabilities.......................................................... 2,833,129
Deferred revenue............................................................. 2,222,917
-------------
Total current liabilities..................................................... 6,931,129
Notes payable, less current portion........................................... 11,312,336
Deferred income taxes......................................................... 2,617,000
Stockholders' equity:
Common stock, no par value; 10,000,000 shares authorized; 957,894 shares
issued and outstanding...................................................... 1,208,947
Retained earnings............................................................ 7,604,856
-------------
Total stockholders' equity.................................................... 8,813,803
-------------
Total liabilities and stockholders' equity.................................... $29,674,268
=============
</TABLE>
See accompanying notes.
D-F-118
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1996 1997
------------- -------------
<S> <C> <C>
OPERATING REVENUES
Concert revenues............... $62,996,606 $74,981,534
Contract management ........... 7,844,248 10,255,060
Concessions/merchandise ...... 5,536,287 7,094,593
------------- -------------
76,377,141 92,331,187
Cost of concerts .............. 54,383,763 69,916,840
------------- -------------
Gross profit .................. 21,993,378 22,414,347
------------- -------------
OPERATING EXPENSES
General and administrative ... 17,614,296 17,602,501
Depreciation and amortization 1,441,439 1,474,414
------------- -------------
Income from operations ........ 2,937,643 3,337,432
OTHER INCOME (EXPENSE)
Interest expense .............. (1,324,219) (1,257,758)
Interest income ............... 307,756 295,057
Miscellaneous, net ............ 535,191 289,222
------------- -------------
Income before income taxes ... 2,456,371 2,663,953
Provision for income taxes ... 1,160,718 1,272,190
------------- -------------
Net income .................... $ 1,295,653 $ 1,391,763
============= =============
</TABLE>
See accompanying notes.
D-F-119
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
OPERATING REVENUES
Concert revenues.............. $51,188,539
Contract management........... 9,141,625
Concessions/merchandise....... 5,117,576
65,447,740
Cost of concerts.............. 47,557,539
-------------
Gross profit.................. 17,890,201
-------------
OPERATING EXPENSES
General and administrative ... 11,753,765
Depreciation and
amortization................. 611,111
-------------
Income from operations........ 5,525,325
OTHER INCOME (EXPENSE)
Interest expense.............. (836,850)
Interest income............... 229,285
Miscellanous, net............. 534,705
-------------
Income before income taxes ... 5,452,465
Provision for income taxes ... 2,133,946
-------------
Net income.................... $ 3,318,519
=============
</TABLE>
See accompanying notes.
D-F-120
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
1996 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................... $ 1,295,653 $ 1,391,763
Adjustment to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization...................... 1,441,439 1,474,414
Loss on sale of property and equipment............. 13,603 --
Changes in operating assets and liabilities:
Accounts receivable--trade........................ 524,566 (1,356,263)
Accounts receivable--related parties.............. (496,971) (821)
Inventories....................................... (228,294) (7,784)
Prepaid assets and other.......................... (322,524) 478,391
Income tax receivable............................. (50,888) (328,390)
Accounts payable and accrued expenses............. (491,982) 3,128,476
Deferred income taxes............................. 1,139,000 45,000
Deferred revenue.................................. (67,859) 379,748
Other............................................. 288,367 160
------------- -------------
Net cash provided by operating activities............ 3,044,110 5,204,694
INVESTING ACTIVITIES
Purchase of SAP limited partnership interest ........ (4,250,000) --
Proceeds from sale of equipment...................... 13,150 --
Purchase of property and equipment................... (469,447) (367,678)
Other................................................ (644,496) (247,000)
------------- -------------
Net cash used in investing activities................ (5,350,793) (614,678)
FINANCING ACTIVITIES
Payments of notes payable............................ (444,985) (775,756)
Payments of lease commitments........................ (395,330) (405,275)
Retirement of stock.................................. -- (21,053)
Proceeds from issuance of notes...................... -- 1,000,000
------------- -------------
Net cash used in financing activities................ (840,315) (202,084)
------------- -------------
Net increase (decrease) in cash and cash
equivalents......................................... (3,146,998) 4,387,932
Cash and cash equivalents at beginning of year ...... 10,578,897 7,431,899
------------- -------------
Cash and cash equivalents at end of year............. $ 7,431,899 $11,819,831
============= =============
Supplemental disclosure of cash flow information
Cash paid for interest............................... $ 1,324,219 $ 1,257,664
Cash paid for income taxes........................... 888,738 1,280,000
</TABLE>
See accompanying notes.
D-F-121
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
NINE MONTHS ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES
Net income...................................... $ 3,318,519
Adjustment to reconcile net income to net cash
used in operating activities:
Depreciation and amortization.................. 611,111
Changes in operating assets and liabilities:
Accounts receivable--trade.................... (1,501,589)
Accounts receivable--related parties ......... (639,229)
Inventories................................... 11,156
Prepaid assets and other...................... (720,741)
Income tax receivable......................... 418,528
Accounts payable and accrued expenses ........ (3,111,073)
Deferred income taxes......................... 94,000
Deferred revenue.............................. 860,384
Other......................................... 147,883
-------------
Net cash used in operating activities........... (511,051)
INVESTING ACTIVITIES
Proceeds from sale of equipment................. (92,909)
-------------
Net cash used in investing activities........... (92,909)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable ........ 6,224,143
Payments of lease commitments................... (6,740,395)
Proceeds from issuance of stock................. 10,000
-------------
Net cash used in financing activities........... (506,252)
Net decrease in cash and cash equivalents ...... (1,110,212)
Cash and cash equivalents at beginning of year . 11,819,831
-------------
Cash and cash equivalents at end of year ....... $10,709,619
Supplemental disclosure of cash flow
information
Cash paid for interest.......................... $ 3,836,850
Cash paid for income taxes...................... 500,000
</TABLE>
See accompanying notes.
D-F-122
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1997 AND 1996
AND NINE MONTHS ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Balance--February 1, 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 nine months ended December 31,
1997.............................................. 3,318,519
Issuance of stock.................................. 10,000
------------
Balance--October 31, 1997 (unaudited).............. $8,813,803
============
</TABLE>
See accompanying notes.
D-F-123
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Mountainview, 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 Bay Area. FF provides table service (food and beverage)
for two theatres owned by separate entities in Los Angeles.
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. Revenue from distributor sales of compact discs is
recognized when the right of return no longer exists. The Company received
revenue from various sources, including $14,562,424 during the fiscal year
ended January 31, 1997 (16% of total revenue) 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, 1997 and
1996, 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, 1997 and 1996 were fully collectible; therefore, no
allowance for doubtful accounts was recorded.
D-F-124
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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.
Investments
Investment stock consists of trading securities that are traded on stock
exchanges. These securities, which are stated at fair value, are traded with
the intent to sell when market prices are favorable. Unrealized holding gains
or losses are recognized in the financial statements.
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.
Interim Financial Information
Financial information as of October 31, 1997 and for the nine months ended
October 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. INCOME TAXES
The provisions for income taxes for the years ended January 31, 1996 and
1997 is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------------ -----------
<S> <C> <C>
Current:
Federal .. $ 848,600 $ 984,500
State ..... 246,400 285,800
------------ -----------
1,095,000 1,270,300
Deferred:
Federal .. 50,900 1,500
State ..... 14,800 400
------------ -----------
65,700 1,900
------------ -----------
$1,160,700 $1,272,200
============ ===========
</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 1996 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
permanent items.
D-F-125
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment as of January 31, 1996 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Buildings.................... $ 8,206,766 $ 8,234,231
Leasehold improvements ..... 10,167,067 10,326,553
Equipment ................... 2,133,343 2,166,037
Office furniture ............ 612,359 693,068
Computer equipment .......... 263,247 330,367
Vehicle ..................... 61,007 61,211
-------------- --------------
21,443,789 21,811,467
Accumulated depreciation and
amortization ............... (11,428,296) (12,751,012)
-------------- --------------
10,015,493 9,027,957
Land ........................ 633,953 633,953
-------------- --------------
$ 10,649,446 $ 9,661,910
============== ==============
</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
twenty-one 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 percent 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 $186,000 and $182,000 for the years ended January 31, 1997 and
1996, respectively.
5. NOTES PAYABLE
Notes payable as of January 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
------------ -------------
<S> <C> <C>
Note payable to Continental Savings; monthly payments of $16,574,
including interest at bank's index rate plus 3.5% (8.4% and 8%
at January 31, 1997 and 1996, respectively; matures May 1, 2004;
secured by deed:................................................. $2,232,431 $2,215,001
Note payable to Sanwa Bank; quarterly payments range from $75,000
to $200,000, interest accrued monthly at the banks prime rate
plus 0.5% (8.75% and 9.5% at January 31, 1997 and 1996,
respectively; matures January 31, 2001: ......................... 3,500,000 2,925,000
Note payable to Sanwa Bank; monthly payments of $16,666,
including interest at a rate of London Inter-Bank Offered Rates
(LIBOR) plus 2.5% (8% at January 31, 1997); matures January 31,
2002; secured by assets of the Company (excluding the office
building): ...................................................... -- 816,674
------------ -------------
5,732,431 5,956,675
Less current portion ............................................. (591,755) (722,966)
------------ -------------
$5,140,676 $5,233,709
============ =============
</TABLE>
D-F-126
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 1997,
there were no borrowings outstanding against this credit line.
The provisions of the second note payable to Sanwa Bank contain certain
restrictive financial covenants. The Company is in compliance with these
covenants at January 31, 1997.
At January 31, 1997, 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 (excluding the building) and a pledge of 100% of the outstanding
common stock.
Maturities of long-term debt are approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended January 31:
1998 ................. $ 722,966
1999 ................. 721,407
2000 ................. 725,124
2001 ................. 1,669,018
2002 ................. 29,698
Thereafter ........... 2,088,462
-----------
$5,956,675
===========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases storage space, nightclubs, and theaters 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 lease expire on various dates through June 2021.
As January 31, 1997 the future minimum operating lease payments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended January 31:
1998.................. $ 404,467
1999 ................. 500,346
2000 ................. 504,203
2001 ................. 453,705
2002 ................. 451,694
Thereafter ........... 2,792,986
-----------
$5,107,401
===========
</TABLE>
Total minimum rental expense included in operating expenses for the years
ended January 31, 1997 and 1996 was $438,500 and $810,956, respectively, and
the contingent rental expense was $627,222 and $541, 334, respectively.
Included in cost of concerts is $6,349,115 and $6,078,042 of contingent
rentals paid based on gross sales for the years ended January 31, 1997 and
1996, respectively.
D-F-127
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Shoreline Amphitheater Lease and Agreement
The Shoreline Amphitheater Lease and Agreement, as amended, provides for,
among other things, the following:
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
thirty-five 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.
Rent expense charged to operations for the years ended January 31, 1997
and 1996 amounted to $396,789 and $594,002, respectively.
The Company is obligated to pay the City monthly, commencing August 1,
1986 and ending July 1, 2006, $93,200, which relates to the $9,500,000 of
funds provided the Company by the City and Community pursuant to the lease.
The Company has 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 are being
amortized monthly. At January 31, 1997 and 1996, the outstanding balances
amounted to $6,740,395 and $7,145,670, of which $35,676 and $405,275 is
current, respectively.
On March 7, 1997, the Company acquired a term loan, the proceeds of which
were used to retire the obligation described in the preceding paragraph (see
Note 10).
Employment Contracts
The Company has entered into employment contracts with certain key
employees which amount to $2,302,250 per year. These contracts are in effect
until the note payable to Sanwa Bank (See Note 7) of $4,000,000 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.
D-F-128
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. SUBSEQUENT EVENTS
Issuance of Long-Term Debt
On March 7, 1997, Shoreline Amphitheater Partners executed a term loan
agreement that provides for a $6,900,000 term loan. The proceeds of the new
loan were used to retire the City of Mountain View obligation described in
Note 8.
The term loan is payable monthly in principal installments plus interest
at a rate if LIBOR plus 2.1% through February 1, 2007, with the entire unpaid
principal balance due March 1, 2007. The loan is secured by a leasehold deed
of trust on the Amphitheater and is guaranteed by the Company. Maturities of
the loan are approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended January 31:
1998 ................. $ 121,540
1999 ................. 155,928
2000 ................. 168,874
2001 ................. 182,890
2002 ................. 198,066
Thereafter ........... 6,072,702
-----------
$6,900,000
===========
</TABLE>
The term loan agreement also provides for, among other things,
restrictions on the payment of distributions, repurchase of partnership
interests, maintenance of certain financial ratios, and limitation on capital
expenditures.
Major Service Agreement
On September 7, 1997 the Company entered into a ticket service agreement
with a local ticket service company (the "Service"). The contract is in
effect through June 30, 2004. The Service sells approximately 70% of the
tickets sold to the events promoted by the Company.
Acquisition of Companies by SFX Entertainment, Inc.
In December 1997, the stockholders of the Company executed an agreement
with SFX Entertainment, Inc. to sell the Companies for a total purchase price
of approximately $68.3 million, including the issuance of common stock valued
at $7.5 million. The Company has agreed to have net working capital, as
defined, at the closing at least equal to the Company's debt.
D-F-129
<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 September 30,
1997, and the related combined statements of operations, cash flows and
stockholders' equity for the nine months 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 September 30, 1997, and the combined
results of their operations and their cash flows for the nine months then
ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
November 14, 1997
D-F-130
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 645,630
Accounts receivable ................................ 564,128
Due from owner (Note 3) ............................ 566,986
Prepaid expenses and other current assets ......... 143,932
------------
Total current assets ................................ 1,920,676
Investment in unconsolidated subsidiaries (Note 2) . 919,419
Property and equipment:
Land ............................................... 15,888
Leasehold improvements ............................. 286,998
Furniture and equipment ............................ 498,553
------------
801,439
Accumulated depreciation and amortization ......... 441,223
------------
360,216
------------
Total assets ........................................ $3,200,311
============
LIABILITIES AND COMBINED STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses ....... $ 880,814
Due to owner (Note 3) .............................. 373,481
------------
Total current liabilities ........................... 1,254,295
Combined stockholders' equity (Note 4) .............. 1,946,016
------------
Total liabilities and combined stockholders' equity $3,200,311
============
</TABLE>
See accompanying notes.
D-F-131
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
OPERATING REVENUES
Concert revenue .............................. $13,092,956
Cost of concerts ............................. 8,558,759
-------------
4,534,197
-------------
OPERATING EXPENSES
Salaries--officers ........................... 276,500
Bonus--officers .............................. 564,767
Salaries--other .............................. 294,321
Rent expense ................................. 202,645
Legal and accounting fees .................... 115,109
Depreciation and amortization ................ 57,410
General and administrative expenses ......... 984,818
Legal settlement ............................. 100,000
-------------
2,595,570
-------------
Income from operations ....................... 1,938,627
OTHER INCOME
Interest income .............................. 57,189
Equity loss from unconsolidated subsidiaries (11,378)
-------------
Net income ................................... $ 1,984,438
=============
</TABLE>
See accompanying notes.
D-F-132
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES
Net income ......................................................................... $ 1,984,438
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................... 57,410
Equity in loss from unconsolidated subsidiaries, including distributions received 21,000
Changes in operating assets and liabilities:
Accounts receivable ............................................................. 622,090
Prepaid expenses and other current assets ....................................... 76,808
Accounts payable and accrued expenses ........................................... 296,143
-------------
Net cash provided by operating activities .......................................... 3,057,889
FINANCING ACTIVITIES
Due to owner ....................................................................... (352,605)
Distributions paid ................................................................. (2,900,129)
-------------
Net cash used in financing activities .............................................. (3,252,734)
-------------
Net decrease in cash and cash equivalents .......................................... (194,845)
Cash and cash equivalents at beginning of period ................................... 840,475
-------------
Cash and cash equivalents at end of period ......................................... $ 645,630
=============
</TABLE>
See accompanying notes.
D-F-133
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
Balance, January 1, 1997 .... $ 2,861,707
Distributions to stockholder (2,900,129)
Net income ................... 1,984,438
-------------
Balance, September 30, 1997 . $ 1,946,016
=============
</TABLE>
See accompanying notes.
D-F-134
<PAGE>
CONCERT/SOUTHERN PROMOTIONS 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
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 15% 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.
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 $12,820 at September 30, 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.
D-F-135
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
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
September 30, 1997:
<TABLE>
<CAPTION>
HC
CHASTAIN PROPERTIES
------------- -------------
<S> <C> <C>
Current assets .......................... $ 561,405 $ 31,675
Property and equipment .................. 581,853 798,984
Other assets ............................ -- 409,626
------------- -------------
Total assets ............................ $1,143,258 $1,240,285
============= =============
Current liabilities ..................... $ 319,709 $ 1,532
Partners' capital ....................... 823,549 1,238,753
------------- -------------
Total liabilities and partners' capital $1,143,258 $1,240,285
============= =============
Revenue ................................. $ 569,133 $ 7,509
Expenses ................................ 500,112 117,196
------------- -------------
Net income (loss) ....................... $ 69,021 $ (109,687)
============= =============
</TABLE>
The equity income recognized by the Companies represents the appropriate
percentage of investment income less amount reported less intercompany income
eliminations.
3. RELATED PARTY TRANSACTIONS
Due from/to Owner
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
is recorded as due from owner.
Due to owner represents amounts advanced to High Cotton and Northern
Exposure by each respective owner and an amount which represents an
overfunding of cash from the Master Account. The advances are repaid out of
company assets when available. The balances at September 30, 1997 were
$62,189, $217,518, and $93,774, respectively. No interest is charged by the
owners on their advances.
Due from/to Unconsolidated Subsidiary
The Companies have a net receivable balance with Chastain Ventures
totaling $55,154 at September 30, 1997, which has been recorded with accounts
receivable and accounts payable.
D-F-136
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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>
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 September 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Year ended September 30:
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. Rental
expense was $202,645 for 1997.
Legal Matters
The Companies have 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
In December 1997, the Companies' shareholders entered into an agreement to
sell all of the issued and outstanding shares of the Companies to SFX
Entertainment, Inc. ("SFX"). SFX will pay the sellers $15,000,000 in cash at
closing and an additional $2,000,000, payable, at the sellers option,
quarterly over the next five years or as a lump sum present value at closing.
In addition, SFX agreed with CCMI to finance a new 20,000 seat amphitheatre
(the "Amphitheatre") located in the city of Alpharetta, Georgia. SFX will
deposit $250,000 at the close for the purchase of the real estate in
Alpharetta, Georgia and will pay the sum of approximately $84,000 for costs
related to the Amphitheatre.
Prior to the sale of the Companies to SFX, the sole shareholder of High
Cotton will receive a distribution of High Cotton's interest in HC
Properties, LP.
D-F-137
<PAGE>
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND SPIN-OFF
The following table sets forth the various expenses in connection
with the distribution of the securities being registered. All amounts shown
are estimates except for the SEC registration fee and the Nasdaq listing fee.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee................................... $ 30,777.94
Nasdaq National Market Listing Fees.................... 50,000.00
Transfer Agent and Registrar Fees...................... *
Accounting Fees and Expenses........................... *
Legal Fees and Expenses................................ *
Printing, Engraving and Mailing Expenses............... *
Miscellaneous.......................................... *
----------
Total......................................... $ *
==========
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL empowers a Delaware corporation to indemnify
any person who is, or is threatened to be made, a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that the person is or was an officer or
director of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise. The indemnity may include expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with the action, suit or proceeding,
provided that he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interest of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. Where an officer or director is successful
on the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which he actually and
reasonably incurred in connection therewith.
The SFX Entertainment Certificate provides that no director of SFX
Entertainment will be personally liable to SFX Entertainment or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
o for any breach of the director's duty of loyalty to SFX Entertainment
or its stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
II-1
<PAGE>
o under Section 174 of the DGCL; or
o for any transaction from which the director derived an improper
personal benefit.
In addition to the circumstances in which a director of SFX Entertainment is
not personally liable as set forth above, no director will be liable to SFX
Entertainment or its stockholders to such further extent as permitted by any
law enacted after the date of the SFX Entertainment Certificate, including any
amendment to the DGCL.
The SFX Entertainment Certificate requires SFX Entertainment to
indemnify any person who was, is, or is threatened to be made a party to any
action, suit or proceeding, by reason of the fact that he (a) is or was a
director or officer of SFX Entertainment or (b) is or was serving at the
request of SFX Entertainment as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan, or other enterprise. This indemnification is to be to the
fullest extent permitted by the DGCL. The right to indemnification will be a
contract right and, as such, will run to the benefit of any director or
officer who is elected and accepts the position of director or officer of SFX
Entertainment or elects to continue to serve as a director or officer of SFX
Entertainment while this provision of the SFX Entertainment Certificate is in
effect. The right to indemnification includes the right to be paid by SFX
Entertainment for expenses incurred in defending any such action, suit or
proceeding in advance of its final disposition to the maximum extent permitted
under the DGCL. If a claim for indemnification or advancement of expenses is
not paid in full by SFX Entertainment within 60 days after a written claim has
been received by SFX Entertainment, the claimant may, at any time thereafter,
bring suit against SFX Entertainment to recover the unpaid amount of the claim
and, if successful in whole or in part, expenses of prosecuting his claim. It
will be a defense to any such action that the requested indemnification or
advancement of costs of defense are not permitted under the DGCL, but the
burden of proving this defense will be on SFX Entertainment. The rights
described above do not exclude any other right that any person may have or
acquire under any statute, by-law, resolution of stockholders or directors,
agreement or otherwise.
The by-laws of SFX Entertainment require SFX Entertainment to
indemnify its officers, directors, employees and agents to the full extent
permitted by the DGCL. The by-laws also require SFX Entertainment to pay
expenses incurred by a director in defending a civil or criminal action, suit
or proceeding by reason of the fact that he is/was a director (or was serving
at SFX Entertainment's request as a director or officer of another
corporation) in advance of the final disposition of the action, suit or
proceeding, upon receipt of an undertaking by or on behalf of the director to
repay the advance if it ultimately is determined that the director is not
entitled to be indemnified by SFX Entertainment as authorized by relevant
sections of the DGCL. The indemnification and advancement of expenses provided
in the by-laws are not to be deemed exclusive of any other rights provided by
any agreement, vote of stockholders or disinterested directors or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
EXHIBIT
NO. DESCRIPTION
- ------------ ------------------------------------------------------------------
2.1 Form of Distribution Agreement between SFX Entertainment and SFX.
2.2 Form of Tax Sharing Agreement between SFX Entertainment and SFX.
2.3+ Form of Employee Benefits Agreement between SFX Entertainment
and SFX.
3.1* Certificate of Incorporation of SFX Entertainment.
3.2 Bylaws of SFX Entertainment.
3.3+ Form of Amended and Restated Certificate of Incorporation of SFX
Entertainment (incorporated by reference to Annex E to Schedule
14A of SFX, filed with the SEC on ________ ___, 1998).
3.4 Stock Option Plan of SFX Entertainment.
5.1 Opinion of Baker & McKenzie.
10.1* Stock Purchase Agreement, dated as of October 11, 1996, by and
among Delsener/Slater Enterprises, Ltd., Beach Concerts, Inc.,
Connecticut Concerts Incorporated, Broadway Concerts, Inc.,
Ardee Productions, Ltd., In-House Tickets, Inc., Exit 116
Revisited, Inc., Ron Delsener, Mitch Slater and
SFX Broadcasting, Inc.
10.2* License Agreement, dated January 29, 1990, by and between the
State of New York and Beach Concerts, Inc.
10.3* Amendment to License Agreement of January 29, 1990, dated as of
April 11, 1997, by and between the State of New York and Beach
Concerts, Inc.
10.4* Lease Agreement, Easement Agreement and Declaration of
Restrictive Covenants dated as of May 1, 1996, by and between
New Jersey Highway Authority and GSAC Partners.
10.5* Partnership Agreement, dated as of November 18, 1996, by and
between Pavilion Partners and Exit 116 Revisited, Inc.
10.6* Asset Purchase and Sale Agreement, dated June 23, 1997, by and
among Sunshine Concerts, L.L.C., SFX Broadcasting, Inc., Sunshine
Promotions, Inc., P. David Lucas and Steven P. Sybesma.
10.7* Asset Purchase and Sale Agreement, dated as of June 23, 1997, by
and among Suntex Acquisition, L.P., SFX Broadcasting, Inc.,
Suntex, Inc., P. David Lucas, Steven P. Sybesma, Greg Buttrey and
John Valant.
II-3
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------------ ------------------------------------------------------------------
10.8* Asset Purchase and Sale Agreement, dated as of June 23, 1997, by
and among Deer Creek Amphitheater Concerts, L.P., SFX
Broadcasting, Inc., Deer Creek Partners, L.P., Sand Creek
Partners, L.P., Sand Creek, Inc., P. David Lucas and Steven P.
Sybesma.
10.9* Asset Purchase and Sale Agreement, dated as of June 23, 1997, by
and among Murat Centre Concerts, L.P., SFX Broadcasting, Inc.,
Murat Centre L.P., P. David Lucas and Steven P. Sybesma.
10.10* Asset Purchase and Sale Agreement, dated June 23, 1997, by and
among Polaris Amphitheater Concerts, Inc., SFX Broadcasting,
Inc., Polaris Amphitheater Limited Partnership and certain of the
partners of Polaris Amphitheater Limited Partnership.
10.11* Asset Purchase and Sale Agreement, dated as of June 23, 1997, by
and among Sunshine Design, L.P., SFX Broadcasting, Inc.,
Tourdesign, Inc., P. David Lucas and Steven P. Sybesma.
10.12* Indenture of Lease, dated as of September 1, 1995, by and between
Murat Temple Association, Inc. and Murat Centre, L.P.
10.13* Agreement of Merger, dated as of February 12, 1997, by and among
SFX Broadcasting, Inc., NOC Acquisition Corp., Cadco Acquisition
Corp., QN-Acquisition Corp., Nederlander of Connecticut, Inc.,
Connecticut Amphitheater Development Corporation, QN Corp.,
Connecticut Performing Arts, Inc., Connecticut Performing Arts
Partners and the Stockholders of Nederlander of Connecticut,
Inc., Connecticut Amphitheater Development Corporation and QN
Corp.
10.14* Agreement of Merger, dated as of February 14, 1997, by and among
SFX Broadcasting, Inc., NOC Acquisition Corp., Cadco Acquisition
Corp., QN-Acquisition Corp., Nederlander of Connecticut, Inc.,
Connecticut Amphitheater Development Corporation, QN Corp.,
Connecticut Performing Arts, Inc., Connecticut Performing Arts
Partners and the Stockholders of Nederlander of Connecticut,
Inc., Connecticut Amphitheater Development Corporation and QN
Corp.
10.15* Second Amendment of Agreement of Merger, dated as of March 19,
1997, by and among SFX Broadcasting, Inc., NOC Acquisition
Corp., Cadco Acquisition Corp., QN-Acquisition Corp.,
Nederlander of Connecticut, Inc., Connecticut Amphitheater
Development Corporation, QN Corp., Connecticut Performing Arts,
Inc., Connecticut Performing Arts Partners and the Stockholders
of Nederlander of Connecticut, Inc., Connecticut Amphitheater
Development Corporation and QN Corp.
10.16* Lease Agreement, dated as of September 14, 1994, by and between
The City of Hartford and Connecticut Performing Arts Partners.
10.17* Agreement and Plan of Merger and Asset Purchase Agreement, dated
as of December 10, 1997, by and among SFX Entertainment, Inc.,
Contemporary Investments Corporation, Contemporary Investments
of Kansas, Inc., Continental Entertainment Associates, Inc.,
Capital Tickets, LP, Dialtix, Inc., Contemporary International
Productions Corporation, Steven F. Schankman Living Trust, dated
10/22/82, Irving P. Zuckerman Living Trust, dated 11/24/81,
Steven F. Schankman and Irving P.
Zuckerman.
II-4
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------------ ------------------------------------------------------------------
10.18* Lease Agreement, dated December 13, 1992, by and between
Wyandotte County, Kansas and Wyandotte County Parks Board and
Sandstone Amphitheater Joint Venture.
10.19* Stock Purchase Agreement, dated as of December 11, 1997, among
each of the shareholders of BGP Presents, Inc. and BGP
Acquisitions, LLC.
10.20* Amphitheater Lease and Agreement, dated June 20, 1986, between
the City of Mountain View, the Mountain View Shoreline Regional
Park Community and Shoreline Amphitheater Partners.
10.21* Stock and Asset Purchase Agreement, dated December 2, 1997,
between and among SFX Network Group, L.L.C. and SFX
Entertainment, Inc., and Elias N. Bird, individually and as
Trustee under the Bird Family Trust u/d/o 11/18/92, Gary F. Bird,
individually and as Trustee under the Gary F. Bird Corporation
Trust u/d/o 2/4/94, Stephen R. Smith, individually and as Trustee
under the Smith Family Trust u/d/o 7/17/89, June E. Brody, Steven
A. Saslow and The Network 40, Inc.
10.22* Purchase and Sale Agreement, dated as of December 15, 1997, by
and among Alex Cooley, S. Stephen Selig, III, Peter Conlon,
Southern Promotions, Inc., High Cotton, Inc., Cooley and Conlon
Management, Inc., Buckhead Promotions, Inc., Northern Exposure,
Inc., Pure Cotton, Inc., Interfest, Inc., Concert/Southern
Chastain Promotions Joint Venture, Roxy Ventures Joint Venture
and SFX Concerts, Inc.
10.23* Stock Purchase Agreement, dated as of December 12, 1997 by and
between Pace Entertainment Corporation and SFX Entertainment,
Inc.
10.24+ Agreement and Plan of Merger, dated as of August 24, 1997, as
amended on January ___, 1998, among SFX Buyer, SFX Buyer Sub and
SFX (composite version) (incorporated by reference to Annex A to
Schedule 14A of SFX, filed with the SEC on ________ ___, 1998).
10.25+ Amendment to SCMC Warrant, dated __________ __, 1998.
10.26* Non-Negotiable Promissory Note, dated as of June 23, 1997,
between SFX (as maker) and Sunshine Promotions, Inc. (as payee).
10.27* Partnership Agreement, dated as of April 1, 1994, by and among
SM/PACE, Inc., YM Corp., The Westside Amphitheater Corporation,
Charlotte Amphitheater Corporation and Amphitheater Entertainment
Partnership.
10.28* Purchase Agreement, dated as of December 19, 1997, by and among
SM/PACE, Inc., PACE Entertainment Corporation, Charlotte
Amphitheater Corporation, The Westside Amphitheater Corporation
and Viacom Inc.
10.29* Letter Purchase Agreement, dated as of December 22, 1997, by and
among SM/PACE, Inc., YM Corp. and PACE Entertainment Corporation.
10.30* Extended Events Management Agreement, dated as of November 21,
1994, by and between The Woodlands Center for the Performing Arts
and Pavilion Partners.
II-5
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------------ ------------------------------------------------------------------
10.31* Operator Lease Agreement, dated as of September 26, 1989, by and
between the City of Phoenix and The Westside Amphitheatre Corp.
10.32* Addendum to Operator Lease Agreement, dated as of September 26,
1989, by and between the City of Phoenix and Pavilion Partners.
10.33* Memorandum of Lease, dated as of April 1, 1994, by and between
the City of Phoenix and Pavilion Partners.
10.34* Lease Agreement, dated as of February 9, 1994, by and between
New Jersey Development Authority and Sony Music/Pace
Partnership.
10.35* First Amendment to Lease Agreement, dated as of March 11, 1994,
by and between New Jersey Economic Development and Sony
Music/Pace Partnership.
10.36* Second Amendment to Lease Agreement, dated as of June 7, 1994, by
and between New Jersey Economic Development Authority and
Pavilion Partners.
10.37* Third Amendment to Lease Agreement, dated as of March 15, 1995,
by and between New Jersey Economic Development Authority and
Pavilion Partners.
10.38* Fourth Amendment to Lease Agreement, dated as of March 11, 1997,
by and between the New Jersey Economic Development Authority and
Pavilion Partners.
10.39* Three Way Agreement, dated as of April 28, 1995, by and between
New Jersey Economic Development Authority, South Jersey
Performing Arts Center, Inc. and Pavilion Partners.
10.40* Lease Agreement, dated as of December 1, 1989, between Crossroads
Properties, Incorporated and Pace Entertainment Group, Inc.
10.41* Assignment of Ground Lease, dated as of April 6, 1990, by and
between Pace Entertainment Group, Inc. and YM/Pace Partnership.
10.42* Partnership Agreement, dated as of July 1, 1991, by and between
SM/PACE Partnership and CDC Amphitheaters/I, Inc.
10.43* First Amendment to Partnership Agreement, dated as of January
31, 1992, by and between SM/PACE Partnership and CDC
Amphitheaters/I, Inc.
10.44* Lease Agreement, dated as of December 1, 1990, by and between
the City of Raleigh, North Carolina and Sony Music/Pace
Partnership.
10.45* Amendment to Lease Agreement, dated as of November 15, 1995, by
and between Walnut Creek Amphitheater Partnership and City of
Raleigh, North Carolina.
II-6
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------------ ------------------------------------------------------------------
10.46* Mutual Recognition Agreement, dated as of December 1, 1990, by
and among Walnut Creek Amphitheater Financing Assistance
Corporation, First Union National Bank of North Carolina, City of
Raleigh, North Carolina and Sony Music/Pace Partnership.
10.47* Mutual Recognition Agreement, dated as of December 1, 1990, by
and among Walnut Creek Amphitheater Financing Assistance
Corporation, First Union National Bank of North Carolina, City of
Raleigh, North Carolina and Sony Music/Pace Partnership.
10.48* Partnership Agreement, dated as of February 28, 1986, by and
between Belz Investment Company, Inc., Martin S. Belz and Pace
Productions, Inc.
10.49* First Amendment to Partnership Agreement, dated as of June 15,
1986, by and among Belz Investment Company, Martin S. Belz,
Belz-Starwood, Inc. and Pace Productions, Inc.
10.50* Partnership Agreement, dated as of May 15, 1996, by and between
Pavilion Partners and CDC/SMT, Inc.
10.51* Lease Agreement, Easement Agreement and Declaration of
Restrictive Covenants, dated as of January 4, 1995, by and
between South Florida Fair and Pam Beach County Expositions, Inc.
and Pavilion Partners.
10.52* First Amendment to Lease Agreement, dated as of June 5, 1995, by
and between South Florida Fair and Pam Beach County Expositions,
Inc. and Pavilion Partners.
10.53* Partnership Agreement, dated as of April 4, 1997, by and between
Pavilion Partners and Irvine Meadows Amphitheater.
10.54* Amended and Restated Agreement, dated as of October 1, 1991, by
and between The Irvine Company and Irvine Meadows.
10.55* Concession Lease, dated as of October 19, 1992, by and between
the County of San Bernardino and Amphitheater Entertainment
Corporation.
10.56* Partnership Formation Agreement, dated as of January 22, 1988, by
and among MCA Concerts II, Inc. and Pace Entertainment Group,
Inc.
10.57* Lease and Use Agreement, dated as of December 9, 1987, by and
between City of Dallas and Pace Entertainment Group, Inc.
10.58* Agreement, dated as of October 10, 1988, by and between the City
of Atlanta and MCA Concerts, Inc.
10.59* Amended Indenture of Lease, February 2, 1984, by and between the
City of Atlanta and Filmworks U.S.A., Inc.
10.60* Amendment to Lease Agreement, dated as of October 10, 1988,
between the City of Atlanta, Georgia and Filmworks U.S.A., Inc.
II-7
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------------ ------------------------------------------------------------------
10.61* Agreement Regarding Sublease, dated as of January 20, 1988, by
and between Filmworks U.S.A., Inc. and MCA Concerts, Inc.
10.62* First Amendment to Sublease, dated as of January 21, 1988,
between Filmworks U.S.A., Inc. and MCA Concerts, Inc.
10.63* Second Amendment to Sublease, dated as of April 19, 1988, between
Filmworks U.S.A., Inc. and MCA Concerts, Inc.
10.64* Third Amendment to Sublease, dated as of September 15, 1988,
between Filmworks U.S.A., Inc. and MCA Concerts, Inc.
10.65* Memorandum of Agreement, dated as of October 10, 1988, by and
between the City of Atlanta and MCA Concerts, Inc.
10.66* Assignment of Sublease, dated as of June 15, 1989, by Filmworks
U.S.A., Inc. and MCA Concerts, Inc.
10.67* Assignment of Sublease, dated as of June 23, 1989, by Filmworks
U.S.A., Inc. and MCA Concerts, Inc.
10.68* Assignment of Agreement, dated as of June 15, 1989, by the City
of Atlanta and MCA Concerts, Inc.
10.69* Assignment of Agreement, dated as of June 23, 1989, by the City
of Atlanta and MCA Concerts, Inc.
10.70* Lease, dated as of June, 1997, by and between 500 Texas Avenue
Limited Partnership and Bayou Place Performance Hall General
Partnership.
10.71* Master Licensed User Agreement, dated as of February 1, 1996, by
and between Ticketmaster Ticketing Co., Inc. and Pace
Entertainment Corporation.
10.72* Joint Venture Agreement, dated as of July, 1995 by and between
American Broadway, Inc. and Gentry & Associates, Inc.
10.73* Amended and Restated Employment Agreement, dated as of December
12, 1997, by and between SFX Entertainment, Inc. and Brian E.
Becker.
10.74* Second Amended and Restated Partnership Agreement, dated as of
April 1, 1994 by and between The Westside Amphitheatre
Corporation, San Bernardino Amphitheater Corporation and YM
Corp.
10.75* Employment Agreement, dated as of January 2, 1997, between
Delsener/Slater Enterprises, Inc., SFX Broadcasting, Inc. and Ron
Delsener.
10.76* Employment Agreement, dated as of January 2, 1997, between
Delsener/Slater Enterprises, Inc., SFX Broadcasting, Inc. and
Mitch Slater.
II-8
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------------ ------------------------------------------------------------------
10.77* Bank Commitment Letter, dated January 15, 1998, among the Bank of
New York, BNY Capital Markets, Inc., Lehman Commercial Paper,
Inc., Goldman Sachs Credit Partners L.P. and SFX Entertainment,
Inc.
10.78* Summary of Principal Terms and Conditions of Credit Facility,
dated January 15, 1998.
21.1 Subsidiaries of SFX Entertainment.
23.1 Consent of Baker & McKenzie (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
23.3 Consents of Arthur Andersen LLP.
23.4 Consent of Price Waterhouse LLP.
23.5* Consent of Brian Becker.
24.1* Power of Attorney.
27.1* Financial Data Schedule.
99.1+ Opinion of Lehman Brothers (incorporated by reference to Annex B
to Schedule 14A of SFX, filed with the SEC on ______ __, 1998).
- ------------
* Previously filed.
+ To be filed by amendment.
(b) Financial Schedules.
None.
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant hereby undertakes:
(a) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
II-9
<PAGE>
in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price
represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed
in the registration statement or any material
change to such information in the registration
statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(2) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 2 to the registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized in
the City of New York, State of New York, on January 30, 1998.
SFX Entertainment, Inc.
By: /s/ Howard J. Tytel
-----------------------
Howard J. Tytel
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the registration statement has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
- ------------------------------------ ---------------------------------------------------- ----------------------
* Executive Chairman, Member of the Office of January 30, 1998
---------------------
Robert F.X. Sillerman the Chairman and Director
(principal executive officer)
* President, Chief Executive Officer, Member of January 30, 1998
---------------------
Michael G. Ferrel the Office of the Chairman and Director
* January 30, 1998
---------------------
D. Geoffrey Armstrong Executive Vice President and Director
* Chief Financial Officer, Vice President and January 30, 1998
---------------------
Thomas P. Benson Director
(principal financial and accounting officer)
/s/ Howard J. Tytel Executive Vice President, General Counsel, January 30, 1998
---------------------
Howard J. Tytel Secretary and Director
* Vice President, Assistant General Counsel and January 30, 1998
---------------------
Richard A. Liese Director
* Director January 30, 1998
---------------------
James F. O'Grady, Jr.
* Director January 30, 1998
---------------------
Paul Kramer
* Director January 30, 1998
---------------------
Edward F. Dugan
*By: /s/ Howard J. Tytel
---------------------
Howard J. Tytel
Attorney-in-fact
</TABLE>
II-11
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------------ ------------------------------------------------------------------
2.1 Form of Distribution Agreement between SFX Entertainment and SFX.
2.2 Form of Tax Sharing Agreement between SFX Entertainment and SFX.
2.3+ Form of Employee Benefits Agreement between SFX Entertainment
and SFX.
3.1* Certificate of Incorporation of SFX Entertainment.
3.2 Bylaws of SFX Entertainment.
3.3+ Form of Amended and Restated Certificate of Incorporation of SFX
Entertainment (incorporated by reference to Annex E to Schedule
14A of SFX, filed with the SEC on ________ ___, 1998).
3.4 Stock Option Plan of SFX Entertainment.
5.1 Opinion of Baker & McKenzie.
10.1* Stock Purchase Agreement, dated as of October 11, 1996, by and
among Delsener/Slater Enterprises, Ltd., Beach Concerts, Inc.,
Connecticut Concerts Incorporated, Broadway Concerts, Inc.,
Ardee Productions, Ltd., In-House Tickets, Inc., Exit 116
Revisited, Inc., Ron Delsener, Mitch Slater and
SFX Broadcasting, Inc.
10.2* License Agreement, dated January 29, 1990, by and between the
State of New York and Beach Concerts, Inc.
10.3* Amendment to License Agreement of January 29, 1990, dated as of
April 11, 1997, by and between the State of New York and Beach
Concerts, Inc.
10.4* Lease Agreement, Easement Agreement and Declaration of
Restrictive Covenants dated as of May 1, 1996, by and between
New Jersey Highway Authority and GSAC Partners.
10.5* Partnership Agreement, dated as of November 18, 1996, by and
between Pavilion Partners and Exit 116 Revisited, Inc.
10.6* Asset Purchase and Sale Agreement, dated June 23, 1997, by and
among Sunshine Concerts, L.L.C., SFX Broadcasting, Inc., Sunshine
Promotions, Inc., P. David Lucas and Steven P. Sybesma.
10.7* Asset Purchase and Sale Agreement, dated as of June 23, 1997, by
and among Suntex Acquisition, L.P., SFX Broadcasting, Inc.,
Suntex, Inc., P. David Lucas, Steven P. Sybesma, Greg Buttrey and
John Valant.
10.8* Asset Purchase and Sale Agreement, dated as of June 23, 1997, by
and among Deer Creek Amphitheater Concerts, L.P., SFX
Broadcasting, Inc., Deer Creek Partners, L.P., Sand Creek
Partners, L.P., Sand Creek, Inc., P. David Lucas and Steven P.
Sybesma.
10.9* Asset Purchase and Sale Agreement, dated as of June 23, 1997, by
and among Murat Centre Concerts, L.P., SFX Broadcasting, Inc.,
Murat Centre L.P., P. David Lucas and Steven P. Sybesma.
10.10* Asset Purchase and Sale Agreement, dated June 23, 1997, by and
among Polaris Amphitheater Concerts, Inc., SFX Broadcasting,
Inc., Polaris Amphitheater Limited Partnership and certain of the
partners of Polaris Amphitheater Limited Partnership.
10.11* Asset Purchase and Sale Agreement, dated as of June 23, 1997, by
and among Sunshine Design, L.P., SFX Broadcasting, Inc.,
Tourdesign, Inc., P. David Lucas and Steven P. Sybesma.
10.12* Indenture of Lease, dated as of September 1, 1995, by and between
Murat Temple Association, Inc. and Murat Centre, L.P.
10.13* Agreement of Merger, dated as of February 12, 1997, by and among
SFX Broadcasting, Inc., NOC Acquisition Corp., Cadco Acquisition
Corp., QN-Acquisition Corp., Nederlander of Connecticut, Inc.,
Connecticut Amphitheater Development Corporation, QN Corp.,
Connecticut Performing Arts, Inc., Connecticut Performing Arts
Partners and the Stockholders of Nederlander of Connecticut,
Inc., Connecticut Amphitheater Development Corporation and QN
Corp.
10.14* Agreement of Merger, dated as of February 14, 1997, by and among
SFX Broadcasting, Inc., NOC Acquisition Corp., Cadco Acquisition
Corp., QN-Acquisition Corp., Nederlander of Connecticut, Inc.,
Connecticut Amphitheater Development Corporation, QN Corp.,
Connecticut Performing Arts, Inc., Connecticut Performing Arts
Partners and the Stockholders of Nederlander of Connecticut,
Inc., Connecticut Amphitheater Development Corporation and QN
Corp.
10.15* Second Amendment of Agreement of Merger, dated as of March 19,
1997, by and among SFX Broadcasting, Inc., NOC Acquisition
Corp., Cadco Acquisition Corp., QN-Acquisition Corp.,
Nederlander of Connecticut, Inc., Connecticut Amphitheater
Development Corporation, QN Corp., Connecticut Performing Arts,
Inc., Connecticut Performing Arts Partners and the Stockholders
of Nederlander of Connecticut, Inc., Connecticut Amphitheater
Development Corporation and QN Corp.
10.16* Lease Agreement, dated as of September 14, 1994, by and between
The City of Hartford and Connecticut Performing Arts Partners.
10.17* Agreement and Plan of Merger and Asset Purchase Agreement, dated
as of December 10, 1997, by and among SFX Entertainment, Inc.,
Contemporary Investments Corporation, Contemporary Investments
of Kansas, Inc., Continental Entertainment Associates, Inc.,
Capital Tickets, LP, Dialtix, Inc., Contemporary International
Productions Corporation, Steven F. Schankman Living Trust, dated
10/22/82, Irving P. Zuckerman Living Trust, dated 11/24/81,
Steven F. Schankman and Irving P.
Zuckerman.
10.18* Lease Agreement, dated December 13, 1992, by and between
Wyandotte County, Kansas and Wyandotte County Parks Board and
Sandstone Amphitheater Joint Venture.
10.19* Stock Purchase Agreement, dated as of December 11, 1997, among
each of the shareholders of BGP Presents, Inc. and BGP
Acquisitions, LLC.
10.20* Amphitheater Lease and Agreement, dated June 20, 1986, between
the City of Mountain View, the Mountain View Shoreline Regional
Park Community and Shoreline Amphitheater Partners.
10.21* Stock and Asset Purchase Agreement, dated December 2, 1997,
between and among SFX Network Group, L.L.C. and SFX
Entertainment, Inc., and Elias N. Bird, individually and as
Trustee under the Bird Family Trust u/d/o 11/18/92, Gary F. Bird,
individually and as Trustee under the Gary F. Bird Corporation
Trust u/d/o 2/4/94, Stephen R. Smith, individually and as Trustee
under the Smith Family Trust u/d/o 7/17/89, June E. Brody, Steven
A. Saslow and The Network 40, Inc.
10.22* Purchase and Sale Agreement, dated as of December 15, 1997, by
and among Alex Cooley, S. Stephen Selig, III, Peter Conlon,
Southern Promotions, Inc., High Cotton, Inc., Cooley and Conlon
Management, Inc., Buckhead Promotions, Inc., Northern Exposure,
Inc., Pure Cotton, Inc., Interfest, Inc., Concert/Southern
Chastain Promotions Joint Venture, Roxy Ventures Joint Venture
and SFX Concerts, Inc.
10.23* Stock Purchase Agreement, dated as of December 12, 1997 by and
between Pace Entertainment Corporation and SFX Entertainment,
Inc.
10.24+ Agreement and Plan of Merger, dated as of August 24, 1997, as
amended on January ___, 1998, among SFX Buyer, SFX Buyer Sub and
SFX (composite version) (incorporated by reference to Annex A to
Schedule 14A of SFX, filed with the SEC on ________ ___, 1998).
10.25+ Amendment to SCMC Warrant, dated __________ __, 1998.
10.26* Non-Negotiable Promissory Note, dated as of June 23, 1997,
between SFX (as maker) and Sunshine Promotions, Inc. (as payee).
10.27* Partnership Agreement, dated as of April 1, 1994, by and among
SM/PACE, Inc., YM Corp., The Westside Amphitheater Corporation,
Charlotte Amphitheater Corporation and Amphitheater Entertainment
Partnership.
10.28* Purchase Agreement, dated as of December 19, 1997, by and among
SM/PACE, Inc., PACE Entertainment Corporation, Charlotte
Amphitheater Corporation, The Westside Amphitheater Corporation
and Viacom Inc.
10.29* Letter Purchase Agreement, dated as of December 22, 1997, by and
among SM/PACE, Inc., YM Corp. and PACE Entertainment Corporation.
10.30* Extended Events Management Agreement, dated as of November 21,
1994, by and between The Woodlands Center for the Performing Arts
and Pavilion Partners.
10.31* Operator Lease Agreement, dated as of September 26, 1989, by and
between the City of Phoenix and The Westside Amphitheatre Corp.
10.32* Addendum to Operator Lease Agreement, dated as of September 26,
1989, by and between the City of Phoenix and Pavilion Partners.
10.33* Memorandum of Lease, dated as of April 1, 1994, by and between
the City of Phoenix and Pavilion Partners.
10.34* Lease Agreement, dated as of February 9, 1994, by and between
New Jersey Development Authority and Sony Music/Pace
Partnership.
10.35* First Amendment to Lease Agreement, dated as of March 11, 1994,
by and between New Jersey Economic Development and Sony
Music/Pace Partnership.
10.36* Second Amendment to Lease Agreement, dated as of June 7, 1994, by
and between New Jersey Economic Development Authority and
Pavilion Partners.
10.37* Third Amendment to Lease Agreement, dated as of March 15, 1995,
by and between New Jersey Economic Development Authority and
Pavilion Partners.
10.38* Fourth Amendment to Lease Agreement, dated as of March 11, 1997,
by and between the New Jersey Economic Development Authority and
Pavilion Partners.
10.39* Three Way Agreement, dated as of April 28, 1995, by and between
New Jersey Economic Development Authority, South Jersey
Performing Arts Center, Inc. and Pavilion Partners.
10.40* Lease Agreement, dated as of December 1, 1989, between Crossroads
Properties, Incorporated and Pace Entertainment Group, Inc.
10.41* Assignment of Ground Lease, dated as of April 6, 1990, by and
between Pace Entertainment Group, Inc. and YM/Pace Partnership.
10.42* Partnership Agreement, dated as of July 1, 1991, by and between
SM/PACE Partnership and CDC Amphitheaters/I, Inc.
10.43* First Amendment to Partnership Agreement, dated as of January
31, 1992, by and between SM/PACE Partnership and CDC
Amphitheaters/I, Inc.
10.44* Lease Agreement, dated as of December 1, 1990, by and between
the City of Raleigh, North Carolina and Sony Music/Pace
Partnership.
10.45* Amendment to Lease Agreement, dated as of November 15, 1995, by
and between Walnut Creek Amphitheater Partnership and City of
Raleigh, North Carolina.
10.46* Mutual Recognition Agreement, dated as of December 1, 1990, by
and among Walnut Creek Amphitheater Financing Assistance
Corporation, First Union National Bank of North Carolina, City of
Raleigh, North Carolina and Sony Music/Pace Partnership.
10.47* Mutual Recognition Agreement, dated as of December 1, 1990, by
and among Walnut Creek Amphitheater Financing Assistance
Corporation, First Union National Bank of North Carolina, City of
Raleigh, North Carolina and Sony Music/Pace Partnership.
10.48* Partnership Agreement, dated as of February 28, 1986, by and
between Belz Investment Company, Inc., Martin S. Belz and Pace
Productions, Inc.
10.49* First Amendment to Partnership Agreement, dated as of June 15,
1986, by and among Belz Investment Company, Martin S. Belz,
Belz-Starwood, Inc. and Pace Productions, Inc.
10.50* Partnership Agreement, dated as of May 15, 1996, by and between
Pavilion Partners and CDC/SMT, Inc.
10.51* Lease Agreement, Easement Agreement and Declaration of
Restrictive Covenants, dated as of January 4, 1995, by and
between South Florida Fair and Pam Beach County Expositions, Inc.
and Pavilion Partners.
10.52* First Amendment to Lease Agreement, dated as of June 5, 1995, by
and between South Florida Fair and Pam Beach County Expositions,
Inc. and Pavilion Partners.
10.53* Partnership Agreement, dated as of April 4, 1997, by and between
Pavilion Partners and Irvine Meadows Amphitheater.
10.54* Amended and Restated Agreement, dated as of October 1, 1991, by
and between The Irvine Company and Irvine Meadows.
10.55* Concession Lease, dated as of October 19, 1992, by and between
the County of San Bernardino and Amphitheater Entertainment
Corporation.
10.56* Partnership Formation Agreement, dated as of January 22, 1988, by
and among MCA Concerts II, Inc. and Pace Entertainment Group,
Inc.
10.57* Lease and Use Agreement, dated as of December 9, 1987, by and
between City of Dallas and Pace Entertainment Group, Inc.
10.58* Agreement, dated as of October 10, 1988, by and between the City
of Atlanta and MCA Concerts, Inc.
10.59* Amended Indenture of Lease, February 2, 1984, by and between the
City of Atlanta and Filmworks U.S.A., Inc.
10.60* Amendment to Lease Agreement, dated as of October 10, 1988,
between the City of Atlanta, Georgia and Filmworks U.S.A., Inc.
10.61* Agreement Regarding Sublease, dated as of January 20, 1988, by
and between Filmworks U.S.A., Inc. and MCA Concerts, Inc.
10.62* First Amendment to Sublease, dated as of January 21, 1988,
between Filmworks U.S.A., Inc. and MCA Concerts, Inc.
10.63* Second Amendment to Sublease, dated as of April 19, 1988, between
Filmworks U.S.A., Inc. and MCA Concerts, Inc.
10.64* Third Amendment to Sublease, dated as of September 15, 1988,
between Filmworks U.S.A., Inc. and MCA Concerts, Inc.
10.65* Memorandum of Agreement, dated as of October 10, 1988, by and
between the City of Atlanta and MCA Concerts, Inc.
10.66* Assignment of Sublease, dated as of June 15, 1989, by Filmworks
U.S.A., Inc. and MCA Concerts, Inc.
10.67* Assignment of Sublease, dated as of June 23, 1989, by Filmworks
U.S.A., Inc. and MCA Concerts, Inc.
10.68* Assignment of Agreement, dated as of June 15, 1989, by the City
of Atlanta and MCA Concerts, Inc.
10.69* Assignment of Agreement, dated as of June 23, 1989, by the City
of Atlanta and MCA Concerts, Inc.
10.70* Lease, dated as of June, 1997, by and between 500 Texas Avenue
Limited Partnership and Bayou Place Performance Hall General
Partnership.
10.71* Master Licensed User Agreement, dated as of February 1, 1996, by
and between Ticketmaster Ticketing Co., Inc. and Pace
Entertainment Corporation.
10.72* Joint Venture Agreement, dated as of July, 1995 by and between
American Broadway, Inc. and Gentry & Associates, Inc.
10.73* Amended and Restated Employment Agreement, dated as of December
12, 1997, by and between SFX Entertainment, Inc. and Brian E.
Becker.
10.74* Second Amended and Restated Partnership Agreement, dated as of
April 1, 1994 by and between The Westside Amphitheatre
Corporation, San Bernardino Amphitheater Corporation and YM
Corp.
10.75* Employment Agreement, dated as of January 2, 1997, between
Delsener/Slater Enterprises, Inc., SFX Broadcasting, Inc. and Ron
Delsener.
10.76* Employment Agreement, dated as of January 2, 1997, between
Delsener/Slater Enterprises, Inc., SFX Broadcasting, Inc. and
Mitch Slater.
10.77* Bank Commitment Letter, dated January 15, 1998, among the Bank of
New York, BNY Capital Markets, Inc., Lehman Commercial Paper,
Inc., Goldman Sachs Credit Partners L.P. and SFX Entertainment,
Inc.
10.78* Summary of Principal Terms and Conditions of Credit Facility,
dated January 15, 1998.
21.1 Subsidiaries of SFX Entertainment.
23.1 Consent of Baker & McKenzie (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
23.3 Consents of Arthur Andersen LLP.
23.4 Consent of Price Waterhouse LLP.
23.5* Consent of Brian Becker.
24.1* Power of Attorney.
27.1* Financial Data Schedule.
99.1+ Opinion of Lehman Brothers (incorporated by reference to Annex B
to Schedule 14A of SFX, filed with the SEC on ______ __, 1998).
- ------------
* Previously filed.
+ To be filed by amendment.
<PAGE>
EXHIBIT 2.1
DISTRIBUTION AGREEMENT
DATED AS OF ____________, 1998
AMONG
SFX BROADCASTING, INC.,
SFX ENTERTAINMENT, INC.
AND
SBI HOLDING CORPORATION
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
DEFINITIONS
Section 1.1 General......................................................2
ARTICLE II
REORGANIZATION AND RELATED TRANSACTIONS
Section 2.1 The Reorganization...........................................4
Section 2.2 Working Capital Adjustment...................................5
Section 2.3 SFX Approval.................................................8
ARTICLE III
ASSUMPTION AND RETENTION OF LIABILITIES
Section 3.1 Assumed Liabilities..........................................9
Section 3.2 Retained Liabilities.........................................9
Section 3.3 Construction of Agreements...................................9
ARTICLE IV
THE DISTRIBUTION
Section 4.1 The Distribution.............................................9
Section 4.2 Fractional Shares...........................................10
Section 4.3 SFX Employees...............................................11
Section 4.4 SFX Board Action............................................11
Section 4.5 Registration and Listing; SEC Filings.......................11
Section 4.6 Third Party Consents........................................12
Section 4.7 Waivers.....................................................12
Section 4.8 Termination of Merger Agreement.............................12
i
<PAGE>
ARTICLE V
SURVIVAL; MUTUAL RELEASE AND INDEMNIFICATION
Section 5.1 Survival and Indemnification................................12
Section 5.2 Mutual Release, Etc.........................................13
Section 5.3 Indemnification.............................................14
Section 5.4 Procedure for Indemnification...............................16
ARTICLE VI
TAX MATTERS
Section 6.1 Prior Tax Sharing Agreements................................18
Section 6.2 Tax Sharing Agreement.......................................18
ARTICLE VII
CERTAIN ADDITIONAL MATTERS
Section 7.1 Conveyancing and Assumption Instruments.....................18
Section 7.2 No Representations or Warranties............................19
Section 7.3 Further Assurances; Subsequent Transfers....................19
Section 7.4 Entertainment Board.........................................20
Section 7.5 Resignations................................................20
Section 7.6 Sales and Transfer Taxes....................................20
Section 7.7 Change of Name..............................................20
ARTICLE VIII
ACCESS TO INFORMATION AND SERVICES
Section 8.1 Provision of Corporate Records..............................21
Section 8.2 Access to Information.......................................21
Section 8.3 Retention of Records........................................21
Section 8.4 Confidentiality.............................................21
Section 8.5 Privileged Matters..........................................22
ii
<PAGE>
ARTICLE IX
INSURANCE
Section 9.1 General.....................................................22
Section 9.2 Certain Insured Claims......................................23
ARTICLE X
CONDITIONS
Section 10.1 Conditions..................................................23
ARTICLE XI
MEDIATION
Section 11.1 Mediation and Binding Arbitration...........................24
Section 11.2 Initiation..................................................24
Section 11.3 Submission to Mediation.....................................24
Section 11.4 Selection of Mediator.......................................24
Section 11.5 Mediation...................................................24
Section 11.6 Selection of Arbitrator.....................................25
Section 11.7 Cost of Arbitration.........................................25
ARTICLE XII
MISCELLANEOUS
Section 12.1 Complete Agreement..........................................25
Section 12.2 Governing Law...............................................25
Section 12.3 Notices.....................................................25
Section 12.4 Amendment and Modification..................................26
Section 12.5 Termination.................................................26
Section 12.6 Successor and Assigns.......................................27
Section 12.7 No Third Party Beneficiaries................................27
Section 12.8 Counterparts................................................27
Section 12.9 Interpretation..............................................27
Section 12.10 Annexes, Etc................................................27
Section 12.11 Legal Enforceability........................................27
Annex I ASSUMED LIABILITIES.............................................I-1
Annex II TRANSFERRED ASSETS..............................................II-1
iii
<PAGE>
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT, dated as of ______________, 1997, by and
between SFX Broadcasting, Inc., a Delaware corporation ("SFX"), and SFX
Entertainment, Inc., a Delaware corporation and a wholly-owned subsidiary of
SFX ("Entertainment"). Capitalized terms used and not defined herein have the
respective meanings ascribed them in the Merger Agreement. Unless the context
requires otherwise, "SFX" refers to SFX and its subsidiaries (other than
Entertainment and its subsidiaries) and "Entertainment" refers to Entertainment
and its subsidiaries.
WHEREAS, SFX has entered into that Agreement and Plan of Merger dated
as of August 24, 1997, among SBI Holding Corporation, a Delaware corporation
("Parent"), SBI Radio Acquisition Corporation, a Delaware corporation and a
wholly owned subsidiary of Parent ("Sub"), and SFX pursuant to which SFX will
become a wholly-owned subsidiary of Parent (the "Merger Agreement");
WHEREAS, Entertainment has, among other endeavors, been engaged in the
business of venue ownership, operation and management and the booking,
promotion and/or production of entertainment events, including, without
limitation, related merchandising, concession management and Internet-based
marketing through its wholly owned subsidiary SFX Concerts, Inc., formerly
known as Delsener/Slater Enterprises, Inc., and its Subsidiaries and Affiliates
(the "Transferred Businesses"), which Transferred Businesses are principally
outside the scope of SFX's core radio broadcasting business;
WHEREAS, the Board of Directors of SFX has determined that the
interests of SFX's stockholders would be best served by restructuring the
ownership of the Transferred Businesses and ownership of the core radio
broadcasting business prior to the Merger as contemplated by Section 5.07 of
the Merger Agreement;
WHEREAS, SFX wishes to transfer and assign to Entertainment all of the
Transferred Assets as specified in this Agreement in exchange for the
assumption by Entertainment of the Assumed Liabilities as specified in this
Agreement;
WHEREAS, Entertainment is willing to assume such Assumed Liabilities;
WHEREAS, SFX intends to distribute all of the outstanding shares of
the Class A Common Stock, par value $.01 per share, of Entertainment (the
"Entertainment Class A Common Stock") and the Class B Common Stock of
Entertainment, par value $.01 per share (the "Entertainment Class B Common
Stock" and, together with the Entertainment Class A Common Stock, the
"Entertainment Common Stock"), owned by SFX to the holders of (i) the common
stock of SFX (the "SFX Common Stock"), (ii) the 6 1/2% Series D Cumulative
Convertible Exchangeable Preferred Stock due May 31, 2007 of SFX (the "Series D
Preferred Stock"), (iii)
1
<PAGE>
interests in the SFX Director Deferred Stock Ownership Plan dated as of January
1, 1997 (the "SFX Director Deferred Stock Ownership Plan") and (iv) certain
warrants of SFX, with the holders of the Class A Common Stock, par value $.01
per share, of SFX (the "SFX Class A Common Stock"), the Series D Preferred
Stock, interests in the SFX Director Deferred Stock Ownership Plan and certain
warrants of SFX receiving Entertainment Class A Common Stock and the holders of
the Class B Common Stock, par value $.01 per share, of SFX (the "SFX Class B
Common Stock") receiving Entertainment Class B Common Stock (such distribution
hereinafter referred to as the "Distribution") on the Distribution Date (as
hereinafter defined);
WHEREAS, SFX and Entertainment have determined that it is necessary
and desirable to set forth the principal corporate transactions required to
effect the Distribution and to set forth other agreements that will govern
certain other matters in connection with the Distribution; and
WHEREAS, Parent has joined as a signatory to this Agreement in order
to preserve and protect its rights under the Merger Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein and intending to be legally bound
hereby, SFX and Entertainment hereby agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1 General. As used in this Agreement, capitalized terms
defined immediately after their use shall have the respective meanings thereby
provided and the following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
Action: any action, claim, suit, arbitration, inquiry, proceeding or
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.
Affiliate: with respect to any specified person, a person that,
directly or indirectly, through one or more intermediaries, controls, or is
controlled by, or is under common control with, such specified person;
provided, however, that SFX and Entertainment shall not be deemed to be
Affiliates of each other for purposes of this Agreement.
Agent: ChaseMellon Shareholder Services, LLC, the distribution agent
appointed by SFX to distribute shares of Entertainment Common Stock pursuant to
the Distribution.
Assumed Liabilities: collectively, all of the Liabilities and other
obligations of SFX listed on Annex I hereto.
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Books and Records: the books and records of SFX (or true and complete
copies thereof), including all computerized books and records owned by SFX,
which relate principally to the Transferred Businesses and are necessary for
Entertainment to operate the Transferred Businesses, including, without
limitation, all such books and records relating to Employees, the purchase of
materials, supplies and services, the sale of products by the Transferred
Businesses or dealings with customers of the Transferred Businesses and all
litigation files relating to any Action being assumed by Entertainment as part
of the Assumed Liabilities.
Code: the Internal Revenue Code of 1986, as amended.
Conveyancing and Assumption Instruments: collectively, the various
agreements, instruments and other documents to be entered into in order to
effect the transfer to Entertainment of Transferred Assets, and the assumption
by Entertainment of the Assumed Liabilities in the manner contemplated by this
Agreement, each of which shall be in a form reasonably satisfactory to Parent.
Distribution Date: the date as of which the Distribution shall be
effected as determined by the SFX Board of Directors which, in any event, shall
be a date on or prior to the Closing Date.
Distribution Employees: the employees of SFX listed on Section 5.07(h)
of the Company Disclosure Schedule to the Merger Agreement.
Employee: the Distribution Employees and any employee shown on the
records of SFX as being employed by SFX and assigned to the Transferred
Businesses as of the Distribution Date, including any laid-off Employee or any
Employee on leave of absence.
Exchange Act: the Securities Exchange Act of 1934, as amended.
Form 8-A: the registration statement on Form 8-A to be filed by
Entertainment with the SEC to effect the registration of the Entertainment
Class A Common Stock pursuant to the Exchange Act.
Guarantees: the guarantees provided by SFX in connection with the
following agreements: (i) Agreement and Plan of Merger and Asset Purchase
Agreement, dated as of December 10, 1997 by and among SFX Entertainment, Inc.,
Contemporary Investments Corporation, Contemporary Investments of Kansas, Inc.,
Contemporary International Productions Corporation, Steven F. Schanman Living
Trust, Irving P. Zuckerman Living Trust, Steven F. Schankman and Irving P.
Zuckerman, (ii) Stock and Asset Purchase Agreement, dated December 2, 1997, by
and among SFX Network Group, L.L.C. and SFX Entertainment, Inc., and Elias N.
Bird, individually and as Trustee under the Bird Family Trust, Gary F. Bird,
individually and as Trustee under the Gary F. Bird Corporation Trust, Stephen
R. Smith, individually and as Trustee under the Smith Family Trust, June E.
Brody, Steven A. Saslow, and The Network 40,
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Inc. and (iii) Stock Purchase Agreement, dated as of December 12, 1997 by and
among Pace Entertainment Corporation and SFX Entertainment, Inc.
Indemnifiable Losses: with respect to any claim by an Indemnitee for
indemnification authorized pursuant to Article V hereof, all losses,
Liabilities, claims, damages, obligations, payments, costs and expenses
(including, without limitation, the costs and expenses of any and all Actions,
demands, assessments, judgments, settlements and compromises relating thereto
and reasonable attorneys' fees and expenses in connection therewith) suffered
by such Indemnitee with respect to such claim.
Indemnifying Party: any party who is required to indemnify any other
person pursuant to Article V hereof.
Indemnitee: any party who is entitled to receive indemnification from
an Indemnifying Party pursuant to Article V hereof.
Indemnity Payment: the amount an Indemnifying Party is required to pay
an Indemnitee pursuant to Article V hereof.
Insurance Program: collectively, the series of property and casualty
policies pursuant to which various insurance carriers provide insurance
coverage to SFX (including Entertainment and its subsidiaries) in respect of
claims or occurrences relating to, without limitation, property damage,
business interruption, transit, fire, extended coverage, fiduciary, fidelity,
environmental impairment, employee crime, general liability, products'
liability, automobile liability and employer's liability.
Liabilities: any and all debts, liabilities and obligations, whether
or not accrued, contingent, known or unknown, or reflected on a balance sheet,
including, without limitation, those arising under any law, rule, regulation,
Action, order or consent decree of any governmental entity or any judgment of
any court of any kind or any award of any arbitrator of any kind, and those
arising under any contract, commitment or undertaking.
Record Date: the date determined by the Board of Directors of SFX as
the record date for the Distribution.
Registration Statement: the registration statement on Form S-1 (Reg.
No. 333-43287) filed by Entertainment with the SEC on December 24, 1997, as
amended, to effect the registration of the Entertainment Class A Common Stock
and Class B Common Stock pursuant to the Securities Act of 1933, as amended.
Related Agreements: the Tax Sharing Agreement and the Employee
Benefits Agreement.
Retained Liabilities: all Liabilities and obligations of SFX other
than the Assumed
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Liabilities.
SEC: the Securities and Exchange Commission.
Transferred Assets: collectively, all of the assets and properties of
SFX identified on Annex II hereto.
ARTICLE 2
REORGANIZATION AND RELATED TRANSACTIONS
Section 2.1 The Reorganization. Subject to the terms and conditions of
this Agreement, SFX and Entertainment shall use their respective best efforts
to cause, prior to the Distribution Date, all of SFX's right, title and
interest in and to the Transferred Assets to be conveyed, assigned, transferred
and delivered to Entertainment, free and clear of all liens or encumbrances in
favor of SFX or its subsidiaries, and all of SFX's duties, obligations and
responsibilities under the Assumed Liabilities to be assumed by Entertainment
(the "Asset and Liability Transfer"). Such transfer and assumption shall be
effected by means of the Conveyancing and Assumption Instruments which shall be
executed and delivered by each of SFX and Entertainment prior to the
Distribution Date. Subject to Section 7.3 hereof, to the extent that any such
conveyances, assignments, transfers and deliveries shall not have been so
consummated on the Distribution Date, SFX and Entertainment shall cooperate to
effect such consummation as promptly thereafter as shall be practicable, it
nonetheless being understood and agreed by SFX and Entertainment that neither
shall be liable in any manner to any person who is not a party to this
Agreement for any failure of any of the transfers contemplated by this Article
II to be consummated on or subsequent to the Distribution Date. Whether or not
all of the Transferred Assets or the Assumed Liabilities shall have been
legally transferred to, or assumed by, Entertainment as of the Distribution
Date, SFX and Entertainment agree that, as of the Distribution Date,
Entertainment shall have, and shall be deemed to have acquired, complete and
sole beneficial ownership over all of the Transferred Assets, together with all
of SFX's and its subsidiaries' rights, powers and privileges incident thereto,
and shall be deemed to have assumed all of the Assumed Liabilities and all of
SFX's and its subsidiaries' duties, obligations and responsibilities incident
thereto in accordance with the terms of this Agreement.
Section 2.2 Working Capital Adjustment.
(a) In the event that the Distribution occurs prior to the Closing
Date, then on the Distribution Date, the management of SFX shall make an
allocation of working capital between Entertainment and SFX, consistent with
the proper operation of SFX in its usual, regular and ordinary course and,
immediately after the effective time of the Distribution, SFX shall deliver to
Entertainment, in immediately available funds by wire transfer to such bank
account as Entertainment shall specify, any positive amount allocated to
Entertainment.
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(b) Not less than five business days prior to the Closing Date, SFX
shall deliver to Entertainment a good faith estimate of Working Capital (as
defined in Section 2.3(d)) as of the Closing Date (the "Estimated Working
Capital") accompanied by a certificate by the Chief Executive Officer and Chief
Financial Officer of SFX certifying that the Estimated Working Capital has been
calculated in accordance with the Merger Agreement and this Agreement. If the
Estimated Working Capital is a positive number, then at the Closing SFX shall
deliver to Entertainment, in immediately available funds by wire transfer to
such bank account as Entertainment shall specify, an amount of cash equal to
the Estimated Working Capital. If the Estimated Working Capital is a negative
number, then at the Closing SFX shall cause Entertainment to deliver, and
Entertainment shall deliver to SFX, in immediately available funds by wire
transfer to such bank account as SFX shall specify, an amount of cash equal to
the Estimated Working Capital.
(c) (i) As soon as practicable after the Closing Date, SFX will
prepare a statement of Working Capital as of the Closing Date, which will be
audited by Ernst & Young LLP (the "Company's Working Capital Statement") at the
expense of SFX. SFX will deliver SFX's Working Capital Statement to
Entertainment as soon as practicable and in any event within ninety days after
the Closing Date. If within fifteen days following delivery of SFX's Working
Capital Statement to Entertainment, Entertainment has not given SFX notice of
its objection to SFX's Working Capital Statement (such notice must contain a
statement of the basis of such objection), then the Working Capital reflected
on SFX's Working Capital Statement shall be deemed final and conclusive and
shall be the "Final Working Capital." If Entertainment gives such notice of
objection within the fifteen day period, then the issues in dispute will be
submitted to a "big six" accounting firm (other than Ernst & Young LLP) to be
selected jointly by Entertainment and Parent within the following fifteen days
or, if they fail to agree, such accounting firm shall be Arthur Andersen
(Chicago office) (it being understood that the Chicago office of Arthur
Andersen was chosen because of representations made that neither Parent and its
Affiliates, SFX and its Affiliates nor Entertainment and its Affiliates have a
material relationship with such office and if any of such parties prior to the
calculation of the Final Working Capital develops a material relationship with
such office, the party having such a relationship shall promptly notify the
other party of such relationship and the parties will select another office of
Arthur Andersen or another "big six" accounting firm with which none of such
parties has a material relationship to serve as the accountants) (the
"Accountants"), for resolution and the Accountants shall determine the "Final
Working Capital" within thirty days after the dispute is submitted to them. If
issues in dispute are submitted to the Accountants for resolution, (A) each
party will furnish to the Accountants such work papers and other documents and
information relating to the disputed issues as the Accountants may request and
are available to that party or its Subsidiaries (or its independent public
accountants), and will be afforded the opportunity to present to the
Accountants any material relating to the determination and to discuss the
determination with the Accountants; (B) the determination by the Accountants of
Final Working Capital, as set forth in a notice delivered to both parties by
the Accountants, will be binding and conclusive on the parties; and (C)
Entertainment and SFX will each bear one-half of the fees and expenses of the
Accountants for such determination. SFX shall make its employees and books
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and records available to Entertainment for purposes of verifying Final Working
Capital and shall cause Ernst & Young LLP to make its work papers used in
determining Final Working Capital available to Entertainment.
(ii) On the third business day following the determination of the
Final Working Capital (the "Payment Date"), (A) if the Working Capital
Adjustment Amount (as defined below) is a positive number, then SFX will pay
such amount to Entertainment in immediately available funds by wire transfer to
such bank account as Entertainment shall specify and (B) if the Working Capital
Adjustment Amount is a negative number, then Entertainment will pay such amount
to SFX in immediately available funds by wire transfer to a bank account
specified by SFX. Notwithstanding the foregoing, if Entertainment has notified
SFX in writing prior to the Payment Date that it wishes to have all or any
portion of the Final Working Capital (such amount, the "Consideration
Adjustment") treated as an adjustment to the Class A Common Stock Merger
Consideration and the Class B Common Stock Merger Consideration, the Class A
Common Stock Merger Consideration and the Class B Common Stock Merger
Consideration shall be increased by an amount equal to the quotient of the
Consideration Adjustment divided by the fully diluted number of shares of SFX
Common Stock outstanding immediately prior to the Effective Time, and SFX shall
(X) promptly distribute the appropriate amount to the appropriate holders,
immediately prior to the Effective Time, of SFX Common Stock and Series D
Preferred Stock, (Y) promptly distribute upon exercise the appropriate amount
to holders of Options, Warrants and Unit Purchase Options unexercised
immediately prior to the Effective Time, and (Z) promptly distribute the
appropriate amount to holders of Options, Warrants, and Unit Purchase Options
who exercised such securities on and after the Effective Time and prior to the
Payment Date; provided that as a condition precedent to SFX's obligations under
this sentence, Entertainment shall have paid to SFX in immediately available
funds by wire transfer to an account specified by SFX the difference, if any,
between the Consideration Adjustment and the Working Capital Adjustment Amount
so that the aggregate net amount to be paid or received by SFX, as the case may
be, pursuant to this sentence is equal to the amount that would have been paid
or received, as the case may be, pursuant to the first sentence of this
paragraph had the Consideration Adjustment not been made.
(d) The term "Working Capital" shall mean, as of the point in time
immediately prior to the Effective Time, the sum of all current assets of SFX
and its consolidated Subsidiaries minus the sum of all current liabilities of
SFX and its consolidated Subsidiaries, each as determined in accordance with
GAAP applied on a basis consistent with the balance sheet of SFX as of June 30,
1997 included in Company SEC Documents (provided that no liabilities or
reserves reflected on such balance sheet shall be reduced or eliminated except
by reason of a payment or credit occurring in the ordinary course of business
and consistent with past practices).
Notwithstanding the foregoing, Working Capital shall, without
duplication either in this computation or as between this computation and the
computation of Excess Debt, (i) be increased by the lesser of (A) 50% of all
fees and expenses incurred by SFX in connection with
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acquiring consents from holders of the Series E Preferred Stock and the 2006
Notes in connection with the transactions contemplated by the Merger Agreement
and (B) $1,000,000, (ii) be increased by, if a positive number, or decreased
by, if a negative number, the product of (A) the Class A Common Stock Merger
Consideration and (B) the difference between 15,589,083 less the sum of the
fully diluted number of shares of SFX Common Stock outstanding immediately
prior to the Effective Time (excluding the Meadows Shares (as defined below))
(calculated in a manner consistent with Section 3.01(c)(i) of the Company
Disclosure Schedule (as defined in the Merger Agreement), such calculation to
include, without limitation, derivative securities that will become issuable
upon consummation of the transactions contemplated by the Merger Agreement),
(iii) be reduced by the difference between $84,554,649 less the sum of (A) the
aggregate exercise price of all Options, Warrants and Unit Purchase Options
outstanding immediately prior to the Effective Time plus (B) the aggregate
exercise price of all Unit Purchase Option Warrants underlying Unit Purchase
Options outstanding immediately prior to the Effective Time plus (C) the
aggregate base price of all SARs outstanding immediately prior to the Effective
Time, (iv) be reduced by the product of (A) $42 and (B) the aggregate number of
shares of SFX Common Stock subject to a right of repurchase in favor of SFX
(the "Meadows Shares") granted pursuant to that certain Agreement of Merger
dated February 12, 1997 among SFX, Nederlander of Connecticut, Inc. and the
other parties thereto outstanding immediately prior to the Effective Time, (v)
be increased by all capital expenditures paid by SFX and its Subsidiaries after
June 30, 1997 and immediately prior to the Effective Time permitted by Section
4.01(a)(viii) of the Merger Agreement, (vi) be decreased by all accrued capital
expenditures of SFX as of immediately prior to the Effective Time (to the
extent not reflected in current liabilities), (vii) be increased by dividends
that have been accrued immediately prior to the Effective Date whose regularly
scheduled payment date has not then yet occurred, (viii) except as required by
clause (xi) below, exclude any liabilities attributable to Indebtedness, (ix)
exclude any liabilities included in clauses (i) through (v) of the following
sentence, (x) be decreased by unpaid costs, fees and expenses of SFX arising
out of, based upon or that will arise from the transactions contemplated by the
Merger Agreement (other than as a result of actions taken by Sub) (including,
without limitation, amounts related to the termination of any employees, broker
fees, legal, accounting and advisory fees and fees incurred in connection with
third party consents, waivers and amendments of creditors or holders of
Preferred Stock), and (xi) be reduced by the amount of the Excess Debt, if a
positive number, or be increased by the amount of the Excess Debt, if a
negative number.
(e) The term "Excess Debt" shall mean, as of immediately prior to the
Effective Time, the difference between the sum of the following and
$899,700,000: (i) the difference between (A) Indebtedness of SFX and its
consolidated Subsidiaries less (B) the difference between $70,000,000 and any
amounts (other than the reimbursement of expenses) actually received by SFX and
its consolidated subsidiaries after August 24, 1997 under agreements relating
to the sale or LMA (such LMA payments not to exceed $30,000 per month) of its
WVGO-FM and the sale or LMA of its Jackson/Biloxi radio stations, less (C) any
Indebtedness incurred to finance acquisitions approved by Parent of stock of or
substantially all of the assets of radio stations, less (D) interest accrued as
of immediately prior to the Effective
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Time that is not then due and payable, (ii) the Series B Merger Consideration,
(iii) the Series C Merger Consideration, (iv) the liquidation preference amount
of the Series E Preferred Stock, and (v) Environmental Costs or Liabilities
accrued and not paid after June 30, 1997 to the extent they exceed $100,000 in
the aggregate. "Working Capital Adjustment Amount" shall mean an amount equal
to the Final Working Capital, less the Estimated Working Capital, together with
interest on the absolute value of the difference at 10% per annum beginning on
the Closing Date and ending on the date of payment of the Working Capital
Adjustment Amount as provided in Section 2.02(c)(ii) hereof.
Notwithstanding the foregoing, Working Capital shall not include any
asset transferred to Entertainment or any of its Subsidiaries, any Liability
assumed by Entertainment, or any Liability to which none of SFX or any of its
Subsidiaries is a party immediately after the Effective Time and any such
computation shall assume that the Distribution has been consummated.
(f) All amounts loaned to Entertainment by SFX to (i) acquire (whether
by merger, stock or asset acquisition or otherwise) additional businesses
engaged in the business in which Entertainment is engaged or (ii) make capital
improvements on assets owned or leased by Entertainment, shall be paid by
Entertainment to SFX by wire transfer of immediately available funds to a bank
account specified by SFX on the Distribution Date and shall not be considered
for purposes of computing Working Capital under clause (b) of this Section 2.3.
(g) If the Merger Agreement is terminated for any reason in accordance
with its terms, than the working capital shall be allocated in accordance with
Section 2.3(a) above, and no further adjustments to working capital shall be
made.
Section 2.3 SFX Approval. Prior to the Distribution Date, SFX shall
cooperate with Entertainment in effecting, and if so requested by
Entertainment, SFX shall, as the sole stockholder of Entertainment, ratify any
actions which are reasonably necessary or desirable to be taken by
Entertainment to effectuate the transactions contemplated by this Agreement in
a manner consistent with the terms of this Agreement, including, without
limitation, the following: (a) the election or appointment of directors and
officers of Entertainment to serve in such capacities following the
Distribution Date, and (b) the preparation and implementation of appropriate
plans, agreements and arrangements for Employees (including, without
limitation, plans, agreements or arrangements pursuant to which Entertainment
Common Stock would be acquired by Employees).
ARTICLE 3
ASSUMPTION AND RETENTION OF LIABILITIES
Section 3.1 Assumed Liabilities. Upon the terms and subject to the
conditions set forth in this Agreement and in addition to any other Liabilities
otherwise expressly assumed
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by Entertainment pursuant to this Agreement, the Related Agreements or any
other agreement contemplated by this Agreement, Entertainment hereby agrees
with SFX to assume, pay, perform and discharge in due course any and all
Assumed Liabilities.
Section 3.2 Retained Liabilities. Upon the terms and subject to the
conditions set forth in this Agreement and in addition to any other Liabilities
otherwise expressly retained by SFX pursuant to this Agreement, the Related
Agreements or any other agreement contemplated by this Agreement, SFX hereby
agrees with Entertainment that SFX shall pay, perform and discharge in due
course any and all Retained Liabilities.
Section 3.3 Construction of Agreements. Notwithstanding any other
provisions in this Agreement to the contrary, in the event and to the extent
there shall be a conflict between the provisions of this Agreement and the
Related Agreements (or any Conveyancing and Assumption Instrument or other
instrument of assumption entered into pursuant to this Agreement) and (a) the
provisions of the Merger Agreement then (i) prior to the Effective Time, the
provisions of the Merger Agreement shall control and (ii) subsequent to the
Effective Time, the provisions of this Agreement and the Related Agreements (or
any Conveyancing and Assumption Instrument or other instrument of assumption
entered into pursuant to this Agreement) shall control and (b) the provisions
of any other agreement entered into by SFX or Entertainment, the provisions of
this Agreement and the Related Agreements (and any Conveyancing and Assumption
Instrument or other instrument of assumption entered into pursuant to this
Agreement) shall control.
ARTICLE 4
THE DISTRIBUTION
Section 4.1 The Distribution.
(a) On or prior to the Distribution Date, SFX shall deliver to the
Agent for the benefit of holders of record of SFX Common Stock and Series D
Preferred Stock on the Record Date, (i) certificates representing, in the
aggregate, the number of Entertainment Class A Common Stock equal to the sum of
(A) the number of SFX Class A Common Stock outstanding on the Record Date (B)
the aggregate number of shares of SFX Class A Common Stock credited pursuant to
the SFX Director Deferred Stock Ownership Plan and (C) the product of the
number of Series D Preferred Stock outstanding on the Record date multiplied by
the Conversion Rate (as defined in the certificate of designations governing
the Series D Preferred Stock) and (ii) certificates representing, in the
aggregate, the number of Entertainment Class B Common Stock equal to the number
of SFX Class B Common Stock outstanding on the Record Date. SFX shall instruct
the Agent to distribute as promptly as practicable following the Distribution
Date to holders of the SFX Common Stock, Series D Preferred Stock and interests
in the SFX Director Deferred Stock Ownership Plan on the Record Date (i) one
share of Entertainment Class A Common Stock for every one share of SFX Class A
Common Stock, (ii) one share of
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Entertainment Class A Common Stock for every one share of SFX Class A Common
Stock credited pursuant to the SFX Director Deferred Stock Ownership Plan,
(iii) the number of shares of Entertainment Class A Common Stock equal to the
Conversion Rate (as defined in the Certificate of Designations governing the
Series D Preferred Stock) for every one share of Series D Preferred Stock and
(iv) one share of Entertainment Class B Common Stock for every one share of SFX
Class B Common Stock. Simultaneously with the Distribution, SFX shall place
that number of shares of the Entertainment Class A Common in an escrow account
with an escrow agent selected by SFX and governed by an escrow agreement
reasonably acceptable to SFX and Parent for delivery to the holders of the IPO
Warrants, Huff Warrants and SCMC Warrants upon exercise of such warrants that
equals the number of shares of Entertainment Class A Common Stock that the
holders of such warrants would have been entitled to receive if they had
exercised all of their IPO Warrants, Huff Warrants and SCMC Warrants
immediately prior to the Record Date. SFX and Entertainment agree to provide to
the Agent sufficient certificates in such denominations as the Agent may
request in order to effect the Distribution. All of the shares of Entertainment
Common Stock issued in the Distribution shall be fully paid, nonassessable and
free of preemptive rights.
(b) The Distribution shall be deemed to be effective on the
Distribution Date.
Section 4.2 Fractional Shares. No certificate or scrip representing
fractional shares of Entertainment Common Stock shall be issued as part of the
Distribution and in lieu of receiving fractional shares, each holder of a
warrant who would otherwise be entitled to receive a fractional share of
Entertainment Common Stock upon exercise of such warrant, after aggregating all
shares of Entertainment Common Stock which such holder would be entitled to
receive under Section 4.1, will receive cash for such fractional share. SFX and
Entertainment agree that Entertainment shall instruct the Agent to determine
the number of whole shares and fractional shares of Entertainment Common Stock
allocable to each holder of record of such warrant as of the date of exercise,
to aggregate all such fractional shares into whole shares and sell the whole
shares obtained thereby in the open market at the then prevailing prices on
behalf of holders who otherwise would be entitled to receive fractional shares
interests and to distribute to each such holder such holder's ratable share of
the total proceeds of such sale. SFX shall bear the costs of commissions
incurred in connection with such sale.
Section 4.3 SFX Employees. If the Distribution occurs prior to the
Closing Date, the Distribution Employees shall continue to be employed by SFX
(at SFX's expense), but shall devote such time as deemed reasonably necessary
to, consistent with their obligations to SFX, in support of the conduct of the
Entertainment Business by Entertainment on a basis consistent with the time and
scope of services that such employees devoted and provided to the Entertainment
Business prior to the Distribution. Effective immediately prior to the
Effective Time, Entertainment shall assume all obligations arising under any
employment agreement or arrangement (written or oral) between SFX or any of its
Subsidiaries and the Distribution Employees other than the rights, if any, of
the Distribution Employees to receive the options upon termination following a
change of control as defined in their respective employment
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agreements (the "Termination Options") immediately prior to the Effective Time
(with such Termination Options being deemed granted as of such time) and all
existing rights to indemnification. SFX and its Subsidiaries, effective as of
the Effective Time (or effective as of the Distribution Date as to any member
of the Distribution Employees that devotes substantially all of his or her
business time to the Entertainment Business), shall be indemnified by
Entertainment from all obligations arising under such employment agreements or
arrangements (except in respect of the Termination Options and all existing
rights to indemnification). Neither party shall, directly or indirectly,
solicit the employment of any employees of the other party or its subsidiaries
(other than as a result of a general solicitation for employment); provided
however that Entertainment may offer to employ the Distribution Employees.
Section 4.4 SFX Board Action.
(a) This Agreement, the Related Agreements and any other agreement
contemplated hereby and the consummation of each of the transactions provided
for herein or therein shall be subject to approval of the Board of Directors of
SFX.
(b) The Board of Directors of SFX, in its discretion, shall establish
the Record Date and the Distribution Date and all appropriate procedures in
connection with the Distribution, subject to the satisfaction or waiver of the
conditions contained in Article X.
Section 4.5 Registration and Listing; SEC Filings.
(a) Prior to the Distribution Date:
(i) SFX and Entertainment shall register the Distribution under
applicable federal and state securities laws if such registration is either
required under applicable law or would otherwise be required to cause the
securities issued in connection with the Distribution to be freely transferable
by Persons not Affiliates with Entertainment. SFX and Entertainment shall use
reasonable efforts to cause the Registration Statement to become effective
under the Securities Act as promptly as reasonably practicable. In connection
with such registration, Entertainment shall file a Form 8-A, if necessary, with
the SEC.
(ii) The parties hereto shall use reasonable efforts to take all such
action as may be necessary or appropriate under state securities and blue sky
laws in connection with the transactions contemplated by this Agreement.
(iii) Entertainment shall prepare, and Entertainment shall file and
seek to make effective, an application for the listing of the Entertainment
Class A Common Stock on the a national exchange, subject to official notice of
issuance, or for the inclusion of quotations for the Entertainment Class A
Common Stock on the Nasdaq Stock Market.
(iv) The parties hereto shall cooperate in preparing, filing with the
SEC
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and causing to become effective any registration statements or amendments
thereto which are necessary or appropriate in order to effect the transactions
contemplated hereby.
(b) Entertainment agrees that the Registration Statement and each
amendment or supplement thereto will not, at the time it becomes effective,
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
provided, however, that the foregoing shall not apply to the extent that any
such untrue statement or material omission was made by Entertainment in
reliance upon and in conformity with written information furnished by Parent,
its representatives or affiliates to Entertainment specifically for use in such
filing.
Section 4.6 Third Party Consents. SFX shall obtain all necessary third
party consents to the Distribution except where the failure to obtain such
consents, in the aggregate, would not (a) have a Material Adverse Effect on
SFX, (b) impair the ability of SFX to perform its obligations under the
Transaction Documents in any material respect or (c) delay in any material
respect or prevent the consummation of any of the transactions contemplated by
the Transaction Documents. The Distribution shall be effected in compliance
with SFX's certificate of incorporation and by-laws and in material compliance
with all applicable laws and shall be subject to obtaining all applicable
consents of Governmental Entities.
Section 4.7 Waivers. Prior to the Distribution Date, SFX and
Entertainment shall obtain from Ron Delsener and Mitch Slater a release or
waiver of any rights that either of them may have to purchase or acquire all of
part of the Delsener/Slater Group.
Section 4.8 Termination of Merger Agreement. If the Merger Agreement
is terminated for any reason in accordance with its terms, the Boards of
Directors of SFX and Entertainment shall appoint committees (the "Independent
Committees") composed solely of independent directors (none of whom shall serve
on both Boards of Directors) and shall authorize the Independent Committees to
negotiate with each other in good faith with respect to (a) the Distribution
Employees, (b) a lease arrangement for the office space of Entertainment
utilized by SFX and (c) any other matters which the Boards deem necessary to
effectuate the separation of the affairs of SFX and Entertainment.
ARTICLE 5
SURVIVAL; MUTUAL RELEASE AND INDEMNIFICATION
Section 5.1 Survival and Indemnification.
(a) Except as otherwise contemplated by this Agreement, all covenants
and agreements of the parties contained in this Agreement shall survive the
Distribution Date.
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(b) Except as specifically provided herein, the indemnification
provisions of this Article 5 shall terminate and be of no further force and
effect on the sixth (6th) anniversary of the Distribution Date; provided,
however, that such provisions shall survive thereafter as to any claims for
indemnification asserted prior to the sixth (6th) anniversary of the
Distribution Date. Such termination shall in no way limit the obligations of
Entertainment with respect to the Assumed Liabilities or the obligations of SFX
with respect to the Retained Liabilities and related indemnification rights
under this Agreement, which shall survive indefinitely.
(c) The obligations of Entertainment and SFX under this Article 5
shall survive the sale or other transfer by either of them of any assets or
businesses or the assignment by either of them of any Liabilities. To the
extent that SFX assigns any of its Retained Liabilities (except for such
amounts of Retained Liabilities which are not material individually or in the
aggregate), SFX shall cause such transferee of such Retained Liabilities to
assume specifically its obligations with respect thereto under this Agreement
and to fulfill its obligations related to such Retained Liabilities. To the
extent Entertainment transfers to another party other than a Subsidiary of
Entertainment any of the Assumed Liabilities (except for such amounts of
Assumed Liabilities which are not material individually or in the aggregate),
Entertainment will cause the transferee of such Assumed Liabilities to assume
specifically its obligations with respect thereto under this Agreement and will
cause such transferee to fulfill its obligations related to such Assumed
Liabilities. In the event the transferee of the Retained Liabilities or Assumed
Liabilities does not fulfill its obligations with respect thereto, SFX and
Entertainment, respectively, shall fulfill their obligations with respect
thereto.
Section 5.2 Mutual Release, Etc.
(a) Effective on the Distribution Date, and except for Claims arising
from or attributable to the transactions contemplated by the Transaction
Documents, this Agreement, the Related Agreements or Claims otherwise asserted
prior to the Effective Time, SFX does hereby, for itself and its Subsidiaries,
their respective Affiliates (other than the Delsener/Slater Group), successor
and assigns, and all Persons who at any time prior to the Distribution Date
have been stockholders, directors, officers, agents or employees of SFX or its
Subsidiaries (in each case, in their respective capacities as such), remise,
release and forever discharge the Delsener/Slater Group, their respective
Affiliates (other than SFX and its Subsidiaries), successors and assigns, the
Executive Group, and all Persons who at any time prior to the Distribution Date
have been shareholders, directors or agents or employees of any member of the
Delsener/Slater Group (in each case, in their respective capacities as such),
and their respective heirs, executors, administrators, successors and assigns,
from any and all Claims whatsoever, whether in law or in equity (including any
right of contribution), whether arising under any contract or arrangement, by
operation of law or otherwise, existing or arising from any acts or events
occurring or failing to occur aor alleged to have occurred or to have failed to
occur or any conditions existing or alleged to have existed on or before the
Distribution Date.
(b) Effective on the Distribution Date, and except for Claims arising
from or
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attributable to the transactions contemplated by the Transaction Documents,
this Agreement, the Related Agreements or Claims otherwise asserted prior to
the Effective Time, Entertainment does hereby, for itself and its Subsidiaries,
their respective Affiliates (other than SFX and its Subsidiaries), successor
and assigns, and all Persons who at any time prior to the Distribution Date
have been stockholders, directors, officers, agents or employees of
Entertainment or its Subsidiaries (in each case, in their respective capacities
as such), remise, release and forever discharge the SFX, their respective
Affiliates (other than the Delsener/Slater Group), successors and assigns and
all Persons who at any time prior to the Distribution Date have been
shareholders, directors or agents or employees of any member of the SFX and its
Subsidiaries (in each case, in their respective capacities as such), and their
respective heirs, executors, administrators, successors and assigns, from any
and all Claims whatsoever, whether in law or in equity (including any right of
contribution), whether arising under any contract or arrangement, by operation
of law or otherwise, existing or arising from any acts or events occurring or
failing to occur or alleged to have occurred or to have failed to occur or any
conditions existing or alleged to have existed on or before the Distribution
Date.
Section 5.3 Indemnification.
(a) SFX shall indemnify, defend and hold harmless the Delsener/Slater
Group and each of its directors, officers, employees and agents from and
against any and all Indemnifiable Losses (other than income tax liabilities) to
which the Delsener/Slater Group may be or become subject that relate to the
Retained Liabilities, assets, business, operations, debts or Liabilities of SFX
or its Subsidiaries (other than the Delsener/Slater Group) whether arising
prior to, concurrent with or after the Distribution.
(b) Entertainment shall indemnify, defend and hold harmless SFX and
its Subsidiaries (other than the Delsener/Slater Group) and each of its
directors, officers, employees and agents from and against any and all
Indemnifiable Losses (other than income tax liabilities) to which SFX or any of
its Subsidiaries (other than the Delsener/Slater Group) may be or become
subject that relate to the Transferred Businesses, Transferred Assets, assets,
business, operations, debts or Liabilities of the Delsener/Slater Group
including, without limitation, Liabilities arising under the Guarantees and
Liabilities to be assumed by any member of the Delsener/Slater Group as
contemplated herein, whether arising prior to, concurrent with or after the
Distribution or as a result of the failure to obtain all necessary third party
consents to the Distribution.
(c) The amount which any party (an "Indemnifying Party") is required
to pay to any other party (an "Indemnitee") pursuant to Section 5.3(a) or
Section 5.3(b) shall be reduced (including, without limitation, retroactively)
by any insurance proceeds and other amounts actually recovered by such
Indemnitee in reduction of the related Indemnifiable Loss. Amounts required to
be paid are hereafter sometimes collectively called "Indemnity Payments" and
are individually called an "Indemnity Payment." If an Indemnitee shall have
received an Indemnity Payment in respect of an Indemnifiable Loss and shall
subsequently actually receive insurance proceeds or other amounts in respect of
such Indemnifiable Loss, then such Indemnitee shall pay
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to such Indemnifying Party a sum equal to the lesser of the amount of such
insurance proceeds or other amounts actually received or the net amount of
Indemnity Payments actually received previously. The Indemnitee agrees that the
Indemnifying Party shall be subrogated to such Indemnitee under any insurance
policy and that the Indemnitee shall not waive any right of subrogation.
Section 5.4 Procedure for Indemnification.
(a) If an Indemnitee shall receive notice of the assertion by a person
who is not a party to this Agreement of any claim or of the commencement by any
such person of any Action (a "Third Party Claim") with respect to which an
Indemnifying Party is or may be obligated to make an Indemnity Payment, such
Indemnitee shall give such Indemnifying Party prompt notice thereof after
becoming aware of such Third Party Claim, specifying in reasonable detail the
nature of such Third Party Claim and the amount or estimated amount thereof to
the extent then feasible (which estimate shall not be conclusive of the final
amount of such claim); provided, however, that the failure of any Indemnitee to
give notice as provided in this Section 5.4 shall not relieve the related
Indemnifying Party of its obligations under this Article 5, except to the
extent that such Indemnifying Party is actually prejudiced by such failure to
give notice.
(b) An Indemnifying Party may elect to defend, at such Indemnifying
Party's own expense and by such Indemnifying Party's own counsel (which counsel
shall be reasonably satisfactory to the Indemnitee), any Third Party Claim. If
an Indemnifying Party elects to defend a Third Party Claim, it shall, within 10
days of notice of such Third Party Claim (or sooner, if the nature of such
Third Party Claim so requires), notify the related Indemnitee of its intent to
do so, and such Indemnitee shall cooperate in the defense of such Third Party
Claim. such Indemnifying Party shall pay such Indemnitee's actual out-of-pocket
expenses (other than officers' or employees' salaries) reasonably incurred in
connection with such cooperation. After notice from an Indemnifying Party to an
Indemnitee of its election to assume the defense of a Third Party Claim, such
Indemnifying Party shall not be liable to such Indemnitee under this Article 5
for any legal or other expenses subsequently incurred by such Indemnitee in
connection with the defense thereof; provided, however, that such Indemnitee
shall have the right to employ separate counsel to represent such Indemnitee
if, in such Indemnitee's reasonable judgment, a conflict of interest between
such Indemnitee and such Indemnifying Party exists in respect of such claim,
and in that event the reasonable fees and expenses of such separate counsel
shall be paid by such Indemnifying Party. Except as so provided, if an
Indemnitee desires to participate in the defense of a Third Party Claim, it may
do so but it shall not control the defense and such participation shall be at
its sole cost and expense. If an Indemnifying Party elects not to defend
against a Third Party Claim, or fails to notify an Indemnitee of its election
as provided in this Section 5.4, such Indemnitee may defend, compromise and
settle such Third Party Claim; provided, however, that no such Indemnitee may
compromise or settle any such Third Party Claim without prior written notice to
such Indemnifying Party and except by payment of
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monetary damages or other money payments. No Indemnifying Party shall consent
to entry of any judgment or enter into any compromise or settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnitee of a release from all Liability in respect to such
Third Party claim.
(c) If an Indemnifying Party chooses to defend any claim, the
Indemnitee shall make available to such Indemnifying Party any personnel or any
books, records or other documents within its control that are necessary or
appropriate for such defense (the cost of copying thereof to be paid by the
Indemnifying Party).
(d) Upon any final determination of a Third Party Claim pursuant to
this Section 5.4, except as provided by Section 5.4(d), the Indemnifying Party
shall pay promptly on behalf of the Indemnitee, or to the Indemnitee in
reimbursement of any amount theretofore required to be paid by it, the amount
so determined. Upon the payment in full by the Indemnifying Party of any such
amount, the Indemnifying Party shall be subrogated to the rights of such
Indemnitee, to the extent not waived in settlement, against the persons who
made such Third Party Claim with respect to the subject matter of such claim.
(e) Notwithstanding the foregoing provisions of this Section 5.4,
there may be Third Party Claims which reasonably could result in both SFX and
Entertainment being liable to the other under indemnification provisions of
this Agreement. In any such events, the parties shall endeavor, acting
reasonably and in good faith, to agree upon a manner of conducting the defense
of or settlement of the Third Party Claim with a view to minimizing the legal
expenses and associated costs that might otherwise be incurred by the parties,
including to the use of the same legal counsel for the defense of such claim.
(f) Except to the extent expressly provided otherwise in this Section
5.4, the indemnification provided for by this Section 5.4 shall not inure to
the benefit of any third party or parties and shall not relieve any insurer who
would otherwise be obligated to pay any claim of the responsibility with
respect thereto or, solely by virtue of the indemnification provisions hereof,
provided any subrogation rights with respect thereto.
(g) Any claim on account of an Indemnifiable Loss which does not
result from a Third Party Claim shall be asserted by written notice given by
the related Indemnitee to the related Indemnifying Party. Such Indemnifying
Party shall have a period of 60 days within which to respond thereto. If such
Indemnifying Party does not respond within such 60-day period, such
Indemnifying Party shall be deemed to have accepted responsibility to make
payment and shall have no further right to contest the validity of such claim.
If such Indemnifying Party does respond within such 60-day period and rejects
such claim in whole or in party, such Indemnitee shall be free to pursue
mediation as provided in Article 10 hereof.
ARTICLE 6
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RELATED AGREEMENTS
Section 6.1 Tax Sharing Agreement. Except as contemplated in Section
6.2 hereof, any tax sharing agreement between any of the Delsener/Slater Group
and any of SFX and its Subsidiaries shall be terminated as of the Distribution
Date and will have no further effect for any taxable year (whether the current
year, a future year, or a past year). On or prior to the Distribution Date, SFX
and the Delsener/Slater Group shall enter into a Tax Sharing Agreement in the
form attached hereto as Exhibit A.
Section 6.2 Employee Benefits Agreement. On or prior to the
Distribution Date, SFX and the Delsener/Slater Group shall enter into a
Employee Benefits Agreement in the form attached hereto as Exhibit B.
ARTICLE 7
CERTAIN ADDITIONAL MATTERS
Section 7.1 Conveyancing and Assumption Instruments. In connection
with the transfer, conveyance, assignment and delivery of the Transferred
Assets and the assumption of Liabilities contemplated by this Agreement, SFX
and Entertainment agree to execute or cause to be executed by the appropriate
parties and to deliver to each other, as appropriate, the Conveyancing and
Assumption Instruments.
Section 7.2 No Representations or Warranties. Entertainment
understands and agrees that SFX is not in this Agreement or in any other
agreement or document contemplated by this Agreement, nor shall SFX be deemed
or implied to be, representing or warranting in any way as to the value or
freedom from encumbrance of, or any other matter concerning, any Transferred
Assets or as to the legal sufficiency to convey title to any Transferred Assets
of the execution, delivery and filing of the Conveyancing and Assumption
Instruments, IT BEING AGREED AND UNDERSTOOD THAT ALL SUCH ASSETS ARE BEING
TRANSFERRED "AS IS, WHERE IS" and that Entertainment shall bear the economic
and legal risk that any conveyances of such assets shall prove to be
insufficient or that Entertainment's title to any such assets shall be other
than good and marketable and free from encumbrances.
Section 7.3 Further Assurances; Subsequent Transfers.
(a) Each of SFX and Entertainment will execute and deliver such
further instruments of conveyance, transfer and assignment and will take such
other actions as each of them may reasonably request of the other in order to
effectuate the purposes of this Agreement and to carry out the terms hereof.
Without limiting the generality of the foregoing, at any time and from time to
time after the Distribution Date, at the request of Entertainment, SFX will
execute and deliver to Entertainment such other instruments of transfer,
conveyance, assignment and confirmation and take such action as Entertainment
may reasonably deem necessary or desirable in
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order to more effectively transfer, convey and assign to Entertainment and to
confirm Entertainment's title to all of the Transferred Assets, to put
Entertainment in actual possession and operating control thereof and to permit
Entertainment to exercise all rights with respect thereto (including, without
limitation, rights under contracts and other arrangements as to which the
consent of any third party to the transfer thereof shall not have previously
been obtained) and SFX will take such actions as Entertainment may reasonably
request in order to prepare and implement appropriate plans, agreements and
arrangements for the Employees and Entertainment will execute and deliver to
SFX all instruments, undertakings or other documents and take such other action
as SFX may reasonably request in order to have Entertainment properly assume
and discharge the Assumed Liabilities and relieve SFX of any Liability or
obligations with respect thereto and evidence the same to third parties.
Notwithstanding the foregoing, SFX and Entertainment shall not be obligated, in
connection with the foregoing, to expend monies other than reasonable
out-of-pocket expenses and attorneys' fees (which expenses and fees shall be
reimbursed by the requesting party).
(b) SFX and Entertainment will use their commercially reasonable
efforts to obtain any consent required to assign all agreements, leases,
permits, licenses and other rights of any nature whatsoever relating to the
Transferred Assets to Entertainment; provided, however, that SFX shall not be
obligated to pay any consideration therefor (except as provided in Section 2.2
and except for filing fees and other administrative charges) to the third party
from whom such consents, approvals and amendments are requested. In the event
and to the extent that SFX is unable to obtain any such required consent, SFX
shall continue to be bound thereby and unless not permitted by law or the terms
thereof, Entertainment shall pay, perform and discharge fully all the
obligations of SFX thereunder from and after the Distribution Date and
indemnify SFX for all Indemnifiable Losses arising out of such performance by
Entertainment. SFX shall, without further consideration therefor, pay, assign
and remit to Entertainment promptly all monies, rights and other considerations
received in respect of such performance. SFX shall exercise or exploit its
rights and options under all such agreements, leases, licenses and other rights
and commitments referred to in this Section 7.3(b) only as reasonably directed
by Entertainment and at Entertainment's expense. If and when any such consent
shall be obtained or such agreement, lease, license or other right shall
otherwise become assignable or able to be novated, SFX shall promptly assign
and novate all its rights and obligations thereunder to Entertainment without
payment of further consideration and Entertainment shall, without the payment
of any further consideration therefore, assume such rights and obligations.
Section 7.4 Sales and Transfer Taxes. Entertainment and SFX agree to
cooperate to determine the amount of sales, transfer or other taxes or fees
(including, without limitation, all real estate, patent, copyright and
trademark transfer taxes and recording fees) payable in connection with the
transactions contemplated by this Agreement (the "Transaction Taxes"). SFX
agrees to file promptly and timely the returns for such Transaction Taxes with
the appropriate taxing authorities and remit payment of the Transaction Taxes,
and Entertainment will join in the execution of any such tax returns or other
documentation.
Section 7.5 Change of Name. Within 10 business days after the
consummation of the Merger, SFX and each of its Subsidiaries, if necessary,
shall file certificates of amendment
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with the appropriate Secretary of State, amending such company's certificate of
incorporation to change the name of such Company to any name which does not
include the letters "SFX". At the closing of the Merger, SFX will assign to
Entertainment or its designee all right, title and interest, including all the
good will related thereto, in and to the name "SFX" together with all causes of
action and the right to recover for past infringements of the name "SFX." As
soon as commercially practicable, but in no event later than six months from
the consummation of the Merger, SFX shall cease all use of the name "SFX" or
other trademarks, trade names or their identifiers owned by, licensed to, or
transferred pursuant to this Agreement to, Entertainment ("Non-Permitted
Names") in all modes.
ARTICLE 8
ACCESS TO INFORMATION AND SERVICES
Section 8.1 Provision of Corporate Records. As soon as practicable
after the Distribution Date, SFX shall deliver to Entertainment all Books and
Records in its possession. Such Books and Records shall be the property of
Entertainment, but shall be retained and made available to SFX for review and
duplication until the earlier of notice from SFX that such records are no
longer needed by SFX or the 20th anniversary of the Distribution Date.
Section 8.2 Access to Information. From and after the Distribution
Date, SFX and Entertainment shall afford to each other and to each other's
authorized accountants, counsel and other designated representatives reasonable
access and duplicating rights (with copying costs to be borne by the requesting
party) during normal business hours to all Books and Records and other data and
information (collectively, "Information") within each other's possession
relating to the Transferred Assets, the Transferred Businesses and the
Employees, insofar as such access is reasonably required by SFX or
Entertainment, as the case may be (and shall use reasonable efforts to cause
persons or firms possessing relevant Information to give similar access).
Information may be requested under this Article 8 for, without limitation,
audit, accounting, claims, litigation and tax purposes, as well as for purposes
of fulfilling disclosure and reporting obligations.
Section 8.3 Retention of Records. Except as otherwise required for a
longer period by law or agreed to in writing, SFX and Entertainment shall
retain, for a period of at least 20 years following the Distribution Date, all
material Information relating to the Transferred Businesses. Notwithstanding
the foregoing, in lieu of retaining any specific Information, SFX or
Entertainment may offer in writing to deliver such Information to the other
and, if such offer is not accepted within 90 days, the offered Information may
be destroyed or otherwise disposed of at any time. If a recipient of such offer
shall request in writing prior to the scheduled date for such destruction or
disposal that any of the Information proposed to be destroyed or disposed of be
delivered to such requesting party, the party proposing the destruction or
disposal shall promptly arrange for delivery of such of the Information as was
requested (at cost of requesting party).
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Section 8.4 Confidentiality. Each of SFX and Entertainment shall hold,
and shall cause its officers, employees, agents, consultants and advisors to
hold, in strict confidence, unless compelled to disclose by judicial or
administrative process or, in the opinion of its legal counsel, by other
requirements of law (including, without limitation, any requirements imposed
under state and federal securities laws and stock exchange rules), all
non-public Information concerning the other party furnished it by such other
party or its representatives pursuant to this Agreement (except to the extent
that such Information can be shown to have been available to such party on a
non- confidential basis prior to this disclosure by the other party, in the
public domain through no fault of such party or later lawfully acquired from
other sources by the party to which it was furnished), and each party shall not
release or disclose such Information to any other person, except its auditors,
attorneys, financial advisors, bankers and other consultants and advisors who
shall be bound by the provisions of this Section 8.4. Each party shall be
deemed to have satisfied its obligation to hold confidential Information
concerning or supplied by the other party if its exercises the same care as it
takes to preserve confidentiality for its own similar Information. SFX and
Entertainment agree with each other that each will maintain, preserve and
assert, unless waived in writing by the other, all attorney-client and work
product privileges applicable to documents and other Information which relates,
directly or indirectly, to the Transferred Businesses for any period prior to
the Distribution Date.
Section 8.5 Privileged Matters. Anything herein or in the Merger
Agreement notwithstanding, the transactions contemplated hereby and by the
Merger Agreement shall not be deemed to transfer to or vest in SFX any right to
waive, nor shall they be deemed to waive, any attorney-client privilege between
SFX and its legal counsel, with respect to legal advice concerning the business
or operations of Entertainment including, without limitation, the transactions
contemplated by the Merger Agreement, this Agreement and the Related
Agreements, in either case, concerning privileged communications (or work
product related thereto) at any time prior to the Closing Date. SFX shall
assign to Entertainment SFX's rights (if any) to any attorney-client privilege
with respect to legal advice concerning the business or operations of
Entertainment including, without limitation, the transactions contemplated by
the Merger Agreement, this Agreement and the Related Agreements, concerning
privileged communications (or work product related thereto) at any time prior
to the Closing Date. SFX and its successors and assigns shall not be entitled
to waive or have access, nor shall they attempt to waive or seek access, to any
privileged communications (or work product related thereto) between
Entertainment and its legal counsel with respect to legal advice concerning the
business or operations of Entertainment.
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ARTICLE 9
INSURANCE
Section 9.1 General. SFX shall keep in effect all policies under its
Insurance Program in effect as of the date hereof insuring the Transferred
Assets and operations of the Transferred Businesses until the earlier of (i)
the Effective Time and (ii) 12:00 midnight on the Distribution Date, unless
Entertainment shall have earlier obtained appropriate coverage and notified SFX
in writing to that effect. In so far as any claims made or accrued under
policies under the Insurance Program prior to the Distribution Date relate to
Entertainment, SFX shall use its reasonable efforts to assure that
Entertainment can continue to make and/or pursue such claims under the
policies, or that SFX can continue to make and/or pursue such claims on behalf
of Entertainment, notwithstanding assignment or transfer of the policies
(provided that Entertainment shall reimburse SFX for any reasonable
out-of-pocket expenses incurred by SFX in connection therewith). From and after
the Distribution Date, Entertainment shall be responsible for obtaining and
maintaining insurance coverage for its own account. SFX shall, if so requested
by Entertainment, use reasonable efforts to assist Entertainment in obtaining
such initial insurance coverage for Entertainment from and after the
Distribution Date in such amounts as are agreed upon by SFX and Entertainment.
Following the Distribution Date, each of SFX and Entertainment shall cooperate
with and assist the other party in the prevention of conflicts or gaps in
insurance coverage and/or collection proceeds.
Section 9.2 Certain Insured Claims. Notwithstanding anything to the
contrary in this Agreement, SFX will indemnify and hold Entertainment harmless
from and against any and all Indemnifiable Losses resulting, directly or
indirectly, from claims made or deemed made (under the applicable insurance
policy) which relate to the Transferred Businesses and which arise from or
relate to events or occurrences prior to the Distribution Date, if such claims
would be covered by the Insurance Program; provided, however, that SFX shall be
required to indemnify and hold Entertainment harmless for any Indemnifiable
Loss only up to the amount that is covered by the Insurance Program for each
such claim and collected or received by SFX. SFX will use its reasonable
commercial efforts to obtain coverage for the Entertainment claims that may be
made against current and past insurers. To the extent that Entertainment seeks
any indemnity pursuant to this Section 9.2, the provisions of Article 5 hereof
shall apply thereto, and Entertainment shall be treated as the Indemnitee and
SFX shall be treated as the Indemnifying Party under such provisions; provided,
however, that Entertainment shall pay all costs incurred by SFX after the
Distribution Date in defending any such claims under an insurance policy
relating to the Transferred Businesses, including the salaries of employees
based on the portion of time spent on such claims and Entertainment shall make
available to SFX such of its employees as SFX may reasonably request as
witnesses or deponents in connection with SFX's defense of claims, at
Entertainment's sole cost and expense. In addition to any of the obligations of
Entertainment contained in this Agreement, Entertainment shall be obligated to
pay over to SFX any proceeds that are received from any other party under the
Insurance Program to the extent of, and with respect to, any Indemnifiable Loss
(as limited by the proviso to the first sentence of this Section 9.2) suffered
by Entertainment relating to the Transferred Businesses provided that SFX has
fulfilled its obligations under this Section 9.2.
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ARTICLE 10
CONDITIONS
Section 10.1 Conditions. The obligations of SFX and Entertainment to
consummate the Distribution shall be subject to the fulfillment or waiver of
each of the following conditions:
(a) the Board of Directors of SFX shall be satisfied that SFX's
surplus would be sufficient to permit under Delaware law the Distribution and
shall have formally approved the Distribution;
(b) the Registration Statement shall have been declared effective by
the SEC and no stop order shall have been issued or be pending with respect
thereto;
(c) the Entertainment Class A Common Stock shall have been accepted
for listing or trading, subject to official notice of issuance, on a national
exchange or the Nasdaq Stock Market;
(d) all necessary third party consents to the Distribution shall have
been obtained;
(e) the necessary stockholder approvals shall have been obtained to
consummate the Distribution as presently contemplated;
(f) no 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
Distribution shall be in effect;
(g) SFX and Entertainment shall have entered into the Related
Agreements; and
(h) each of the covenants and provisions in this Agreement required to
be performed or complied with prior to the Distribution shall have been
performed or complied with.
Any determination by the Board of Directors of SFX on behalf of either
party hereto prior to the Distribution Date concerning the satisfaction or
waiver of any or all of the conditions set forth in this Section shall be
conclusive.
ARTICLE 11
MEDIATION
Section 11.1 Mediation and Binding Arbitration. If a dispute arises
between SFX and Entertainment as to the interpretation or the implementation of
this Agreement, the Related Agreements or any other agreement entered into
pursuant hereto (other than a dispute with respect
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to Working Capital which shall be resolved in accordance with the provisions of
Section 2.2. hereof), including, without limitation, any matter involving an
Indemnifiable Loss, SFX and Entertainment agree to use the following
procedures, in lieu of either party pursuing other available remedies and as
the sole remedy, to resolve the dispute.
Section 11.2 Initiation. A party seeking to initiate the procedures
shall give written notice to the other party, describing briefly the nature of
the dispute. A meeting shall be held between the parties within 10 days of the
receipt of such notice, attended by individuals with decision-making authority
regarding the dispute, to attempt in good faith to negotiate a resolution of
the dispute.
Section 11.3 Submission to Mediation. If, within 30 days after such
meeting, the parties have not succeeded in negotiating a resolution of the
dispute, they agree to submit the dispute to mediation in accordance with the
Commercial Arbitration Rules of the American Arbitration Association and to
bear equally the costs of the mediation.
Section 11.4 Selection of Mediator. The parties will jointly appoint a
mutually acceptable mediator, seeking assistance in such regard from the
American Arbitration Association or another mutually agreed-upon organization
if they have been unable to agree upon such appointment within 20 days from the
conclusion of the negotiation period.
Section 11.5 Mediation. The parties agree to participate in good faith
in the mediation and negotiations related thereto for a period of 30 days
following the initial mediation session. If the parties are not successful in
resolving the dispute through the mediation by the end of such 30-day period,
then the parties agree to submit the matter to binding arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association, by a sole arbitrator selected in accordance with the provisions of
Section 11.6 hereof. The arbitration shall be governed by the United States
Arbitration Act, 9 U.S.C. ss. 1-16, and judgment upon the award rendered by the
arbitrator may be entered by any court having jurisdiction thereof.
Section 11.6 Selection of Arbitrator. The parties shall have 10 days
from the end of the mediation period to agree upon a mutually acceptable
neutral person not affiliated with either of the parties to act as arbitrator.
If no arbitrator has been selected within such time, an arbitrator shall be
selected for the Disputing Parties by the American Arbitration Association.
Section 11.7 Cost of Arbitration. The costs of arbitration shall be
apportioned between SFX and Entertainment as determined by the arbitrator in
such manner as the arbitrator deems reasonable taking into account the
circumstances of the case, the conduct of the parties during the proceeding,
and the result of the arbitration.
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ARTICLE 12
MISCELLANEOUS
Section 12.1 Complete Agreement. This Agreement, including the Annexes
and Exhibits and the agreements and other documents referred to herein, shall
constitute the entire agreement between SFX and Entertainment with respect to
the subject matter hereof and shall supersede all previous negotiations,
commitments and writings with respect to such subject matter.
Section 12.2 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware
(regardless of the laws that might otherwise govern under applicable principles
of conflicts law) as to all matters, including, without limitation, matters of
validity, construction, effect, performance and remedies.
Section 12.3 Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given on the date of service if served personally on the part to
whom notice is given, on the day of transmission if set via facsimile
transmission to the facsimile number given below, provided telephonic
confirmation of receipt is obtained promptly after completion of transmission,
on the business day after delivery to an overnight courier service or the
Express mail service maintained by the United States Postal Service, provided
receipt of delivery has been confirmed, or on the fifth day after mailing
provided receipt of delivery is confirmed, if mailed to the party to whom
notice is to be given, by first class mail, registered or certified, postage
prepaid, properly addressed and return-receipt requested, to the party as
follows:
If to SFX
prior to the Effective Time: SFX Broadcasting, Inc.
150 East 58th Street, 19th Floor
New York, New York 10155
Telecopy No.: (212)753-3188
Attention: Howard J. Tytel
with a copy to: Hicks, Muse, Tate & Furst Incorporated
200 Crescent Court, Suite 1600
Dallas, Texas 75201
Telecopy No.: (214) 740-7313
Attention: Lawrence D. Stuart, Jr.
after the Effective Time: Hicks, Muse, Tate & Furst Incorporated
200 Crescent Court, Suite 1600
Dallas, Texas 75201
Telecopy No.: (214) 740-7313
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Attention: Lawrence D. Stuart, Jr.
If to Entertainment: SFX Live Entertainment, Inc.
150 East 58th Street, 19th Floor
New York, New York 10155
Telecopy No.: (212)753-3188
Attention: Howard J. Tytel
with a copy to: Baker & McKenzie
Two Allen Center
1200 Smith Street, Suite 1200
Houston, Texas 77002
Telecopy No.: (713) 427-5099
Attention: Amar Budarapu
Any party may change its address by giving the other party written notice of
its new address in the manner set forth above.
Section 12.4 Amendment and Modification. This Agreement may be
amended, modified or supplemented only by written agreement of SFX and
Entertainment and with the consent of Parent, which consent shall not be
unreasonably withheld..
Section 12.5 Termination. This Agreement may be terminated and the
Distribution abandoned at any time prior to the Distribution Date by and in the
sole discretion of SFX without the approval of Entertainment or Parent. In the
event of such termination, no party shall have any Liability of any kind to any
other party.
Section 12.6 Successor and Assigns. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
and their respective successors and permitted assigns, but neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by either party without the prior written consent of the other party.
Section 12.7 No Third Party Beneficiaries. Except for the
indemnification rights under this Agreement of any Indemnity in their capacity
as such and except for the mutual releases provided for in this Agreement, this
Agreement, the Exhibits hereto and the Related Agreements are solely for the
benefit of the parties hereto and are not intended to confer upon any other
person except the parties hereto any rights or remedies hereunder.
Section 12.8 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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Section 12.9 Interpretation. The Article and Section headings
contained in this Agreement are solely for the purpose of reference, are not
part of the agreement of the parties and shall not in any way affect the
meaning or interpretation of this Agreement. As used in this Agreement, the
term "person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.
Section 12.10 Annexes, Etc. The Annexes, Schedules and Exhibits shall
be construed with and as an integral part of this Agreement to the same extent
as if the same had been set forth verbatim herein.
Section 12.11 Legal Enforceability. Any provision of this Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof. Any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered as of the day and year first above written.
SFX BROADCASTING, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
SFX ENTERTAINMENT, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
SBI HOLDING CORPORATION, with
respect to Section 12.4 only.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
28
<PAGE>
ANNEX I
ASSUMED LIABILITIES
(a) Lease Agreement dated May 1, 1986, as amended, between AR DE
Realty Corp., N.V. and Sillerman-Magee Communications Management Corporation,
assumed by SFX, and that certain Lease Agreement dated May 27, 1997, between
HIRO Real Estate Co. and SFX (the "Leases"),
(b) Debt and Liabilities incurred by SFX Concerts, Inc. or
Entertainment or their respective Subsidiaries after the date of execution of
the Merger Agreement in connection with acquisitions and capital expenditures
approved by their respective Boards of Directors and such other debt and
Liabilities as Entertainment deems appropriate;
(b) Liabilities under the Airplane Agreement and the Triathlon SCMC
Agreement, as well as the New York Leases (both leases);
(c) Liabilities under the following, subject to Section 4.3 of this
Agreement:
(i) Employment Agreement with Ron Delsener dated January 2, 1997;
(ii) Employment Agreement with Mitch Slater dated January 2, 1997;
(iii) Employment Agreement with David Lucas dated June 1997;
(iv) Employment Agreement with Steve Lybesma dated June 1997 and all
other concert division employees;
(v) the employment agreements of all employees located on 150 East
58th Street, New York, New York, 10155.
(d) All Liabilities and obligations of SFX and its Subsidiaries
arising under the Sunshine Agreement.
(e) All Liabilities and obligations arising under the SCMC Termination
Agreement described in Section 4.06 of the Company Disclosure Schedule to the
Merger Agreement; and
(g) obligations which accrue after the Distribution Date for all the
items above.
(h) all liabilities and obligations under SFX Entertainments proposed
private placement of $275 million of debt.
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SFX shall cause Entertainment and its Subsidiaries to be released from
all other debt and accrued liabilities.
I-2
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ANNEX II
TRANSFERRED ASSETS
Transferred Assets. Subject to Section 4.3 of this Agreement, the
following assets and properties as of the Distribution Date:
(a) the assets under the Airplane Agreement
(b) the assets under the Triathlon SCMC Agreement
(c) the New York Leases (both leases), including the cash
collateral on the leases, and all assets located in the New York
offices;
(d) the note receivable resulting from the sale of SFX's radio
stations in Myrtle Beach;
(e) Employment Agreement with Ron Delsener dated January 2, 1997;
(f) Employment Agreement with Mitch Slater dated January 2, 1997;
(g) Employment Agreement with David Lucas dated June 1997;
(h) Employment Agreement with Steve Lybesma dated June 1997 and
all other concert division employees;
(i) the employment agreements of all employees located on 150
East 58th Street, New York, New York, 10155.
(j) rights which accrue after the Distribution Date for all of
the items listed above;
(k) all accounts receivable relating to the Entertainment
Business of SFX; and
(l) all assets used primarily in the Transferred Businesses
including, without limitation, permits, licences, intellectual
property and other rights.
(m) all of the capital stock of SFX Concerts, Inc. and its
subsidiaries.
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TAX SHARING AGREEMENT
This TAX SHARING AGREEMENT, dated as of _________, 1998 is entered
into by SFX Broadcasting, Inc., a Delaware corporation ("SFX"), and SFX
Entertainment, Inc., a Delaware corporation ("Entertainment"), and shall become
effective as of the time and date specified herein.
RECITALS
WHEREAS, pursuant to the Distribution Agreement SFX will distribute
all of the shares of Entertainment it owns to SFX's stockholders.
WHEREAS, Entertainment and its subsidiaries have been or will be
included in the consolidated Federal Income Tax returns filed by SFX, and
Entertainment and certain of its subsidiaries have been or will be included
with one or more members of the SFX Group in state and local unitary or
combined Income Tax and franchise tax returns.
WHEREAS, the parties desire to set forth their agreement with respect
to the Federal, state, and local Taxes attributable to each of them and their
subsidiaries for all taxable periods beginning before the day following the
date defined herein as the "Distribution Date" (including the effect on such
Taxes of carrybacks and other transactions and occurrences that may arise in
taxable periods ending after the Distribution Date).
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following definitions shall apply
in addition to those set forth above:
(a) "Adjustment" shall mean a formal notice given by the IRS or any
other relevant taxing authority which either proposes or assesses a change in
any Pre-Distribution Tax Liability or Post-Distribution Tax Liability (in each
case whether creating a Tax Benefit or a Tax Detriment).
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(b) "Affiliated Group" shall mean an affiliated group of corporations
within the meaning of section 1504(a) of the Code for the taxable period in
question.
(c) "Carryback Item" shall mean any net operating loss, net capital
loss, unused general business tax credit, or any other Tax Item of the
Entertainment Affiliated Group which under the Code or any other applicable
Income Tax law can be used to generate a Tax Benefit for the SFX Affiliated
Group.
(d) "Code" shall mean the Internal Revenue Code of 1986 (or, if
relevant, the Internal Revenue Code of 1954), as amended, in effect for the
taxable period in question and corresponding provisions of any subsequent
federal tax laws.
(e) "Distribution" shall mean the distribution by SFX of the stock of
Entertainment to the holders of SFX stock pursuant to the terms of the
Distribution Agreement.
(f) "Distribution Agreement" shall mean the distribution agreement
between SFX Broadcasting, Inc. and SFX Entertainment, Inc. dated as of
__________, 1998.
(g) "Distribution Date" shall mean the date on which the Distribution
occurs.
(h) "Entertainment Affiliated Group shall mean, for each taxable
period beginning after the Distribution Date, the Affiliated Group of which
Entertainment is the "common parent" within the meaning of section 1504(a) of
the Code.
(i) "Entertainment Group" shall mean, with respect to any taxable
period, the corporations that were members of the SFX Affiliated Group and that
are members of the Entertainment Affiliated Group immediately after the
Distribution Date, including, without limitation, Entertainment.
(j) "Final Determination" shall mean the final resolution of any tax
liability (including all related interest and penalties) for a taxable period.
A Final Determination shall result from the first to occur of:
(i) The expiration of 30 days after official IRS acceptance
of a Waiver of Restrictions on Assessment and Collection of Deficiency
in Tax and Acceptance of Overassessment on IRS Form 870 or 870-AD (or
any successor comparable form or the expiration of a comparable period
with respect to any comparable agreement or form under the laws of
other jurisdictions), unless, within such period, the taxpayer gives
notice to the other party of the taxpayer's intention to attempt to
recover all or part of any amount paid or to be paid pursuant to the
Waiver or comparable form by the filing of a timely claim for refund;
(ii) a decision, judgment, decree, or other order by a court
of competent jurisdiction that has become final and is not subject to
further judicial review (by appeal or otherwise);
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(iii) the execution of a closing agreement under section 7121
of the Code or the official acceptance by the IRS of an offer in
compromise under section 7122 of the Code, or comparable agreements
under the laws of other jurisdictions;
(iv) the expiration of the time for filing a claim for refund
or for instituting suit in respect of a claim for refund disallowed in
whole or part by the IRS or any other taxing authority with which a
claim for refund could be or was filed;
(v) any other final disposition of the tax liability for such
period by reason of the expiration of the applicable statute of
limitations; or
(vi) any other event that the parties agree is a final and
irrevocable determination of the liability at issue.
(k) "Income Taxes" shall mean all federal, state and local Taxes
imposed upon, or measured by, income (including the federal alternative minimum
tax under Section 55 of the Code), and those franchise, excise and similar
Taxes which have been customarily included in the provision for Income Taxes on
SFX's financial statements, together with all related interest, penalties and
additions to tax.
(l) "Indemnified Party" shall have the meaning ascribed to such term
in Section 4.01(a) of this Agreement.
(m) "Indemnifying Party" shall have the meaning ascribed to such term
in Section 4.01(a) of this Agreement.
(n) "IRS" means the United States Internal Revenue Service or any
successor thereto, including, but not limited to, its agents, representatives,
and attorneys.
(o) "Merger Agreement" shall mean the agreement and plan of merger
among SBI Holding Corporation, SBI Radio Acquisition Corporation and SFX
Broadcasting, Inc. dated as of August 24, 1997.
(p) "Other Taxes" shall mean all Taxes (including all related
interest, penalties and additions to tax) other than Income Taxes.
(q) "Post-Distribution Tax Liabilities" shall mean the respective
liabilities of the members of the SFX Affiliated Group and the Entertainment
Affiliated Group for Income Taxes for all taxable periods beginning on or after
the day following the Distribution Date.
(r) "Pre-Distribution Tax Liabilities" shall mean the liability of
members of the SFX Affiliated Group for Income Taxes for all taxable periods
beginning before the day following the Distribution Date. A liability described
in the previous sentence is a Pre-Distribution Tax Liability whether the
liability has been previously assessed in whole or in part or is assessed in
whole or in
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part after the date of this Agreement, and whether the liability is or was
imposed on the SFX Affiliated Group collectively or on any member of such Group
separately.
(s) "SFX Affiliated Group" shall mean, for each taxable period, the
Affiliated Group of which SFX or any successor of SFX is the "common parent"
within the meaning of section 1504(a) of the Code.
(t) "SFX Group" shall mean, with respect to any taxable period, the
corporations that were members of the SFX Affiliated Group during such period
(including, without limitation, SFX), exclusive of the corporations that are
included in the Entertainment Affiliated Group immediately after the
Distribution Date.
(u) "Tax Benefit" shall mean a reduction in the Income Tax liability
of a corporation (or of the Affiliated Group of which it is a member) for any
taxable period. Except as otherwise provided in this Agreement, a Tax Benefit
shall be deemed to have been realized or received from a Tax Item in a taxable
year only if and to the extent that the Income Tax liability of the taxpayer
(or the Affiliated Group of which it is a member) for such period is less than
it would have been if such liability were determined without regard to such Tax
Item.
(v) "Tax Detriment" shall mean an increase in the Income Tax liability
of a corporation (or of the Affiliated Group of which it is a member) for any
taxable period. Except as otherwise provided in this Agreement, a Tax Detriment
(i) shall be deemed to have been realized or suffered from a Tax Item in a
taxable year only if and to the extent that the Income Tax liability of the
taxpayer (or the Affiliated Group of which it is a member) for such period is
greater than it would have been if such liability were determined without
regard to such Tax Item and (ii) shall include the several liability imposed on
a corporation by the provisions of Treasury Regulation ss. 1.1502-6 to the
extent such liability is for Income Taxes for which such corporation is not
responsible pursuant to this Agreement.
(w) "Taxes" shall mean Income Taxes and Other Taxes.
(x) "Tax Item" shall mean any item of income, gain, loss, deduction,
credit, recapture of credit, or any other item which increases or decreases
Income Taxes paid or payable.
ARTICLE II
FILING OF TAX RETURNS
SECTION 2.01. PRE-DISTRIBUTION TAX RETURNS.
(a) SFX shall file all consolidated Federal Income Tax returns (and
any unitary, combined or consolidated state and local Income Tax returns or tax
returns for Other Taxes filed on a unitary, combined or consolidated basis) for
each member of the SFX Affiliated Group that are required to be filed for
periods beginning before (or beginning and ending on) the Distribution Date
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and shall pay all Taxes attributable to these periods, including any deferred
income triggered into income under Treas. Reg. ss. 1.1502-13 and Treas. Reg.
ss. 1.1502-14 and any excess loss accounts taken into income under Treas. Reg.
ss. 1.1502-19. Entertainment acknowledges that Treas. Reg. ss. 1.1502-77(a)
confers certain authority on SFX, as the common parent of the SFX Affiliated
Group, with respect to Federal Income Tax matters for all taxable periods
beginning before the day following the Distribution Date and agrees to enter
into any election or consent reasonably requested by SFX with respect to such
matters for such taxable years. Entertainment agrees (on behalf of itself and
members of the Entertainment Group) (i) not to make any election to exclude any
member of the Entertainment Group from the SFX consolidated Federal Income Tax
return (or any comparable state or local combined or consolidated return) for
taxable periods beginning before (or beginning and ending on) the Distribution
Date and (ii) not to take, advocate or fail to oppose any position relating to
the tax treatment of any transaction occurring prior to the Distribution Date
which is inconsistent with the manner in which such transaction was treated on
the consolidated return of the SFX Affiliated Group for the taxable periods
during which members of the Entertainment Group were members of the SFX
Affiliated Group. SFX agrees not to take, advocate or fail to oppose any
position relating to the tax treatment of any transaction occurring prior to
the Distribution which is inconsistent with the manner in which such
transaction was treated on the consolidated return of the SFX Affiliated Group
for the taxable periods during which members of the Entertainment Group were
members of the SFX Affiliated Group, except for any such actions requested by
Entertainment.
(b) SFX shall be responsible for filing all returns relating to
members of the SFX Group with respect to Other Taxes and with respect to any
Income Taxes as to which consolidated, unitary or combined returns are not made
for a period beginning before (or beginning and ending on) the Distribution
Date. Entertainment shall be responsible for filing all returns relating to
members of the Entertainment Group with respect to Other Taxes and with respect
to any Income Taxes as to which consolidated, unitary or combined returns are
not made for a period beginning before (or beginning and ending on) the
Distribution Date.
SECTION 2.02. POST-DISTRIBUTION TAX RETURNS. For taxable periods
beginning after the Distribution Date: (i) SFX shall be responsible for filing
tax returns relating to members of the SFX Group; and (ii) Entertainment shall
be responsible for filing tax returns relating to members of the Entertainment
Group.
ARTICLE III
PAYMENT OF TAXES
SECTION 3.01. PRE-DISTRIBUTION CONSOLIDATED INCOME TAXES AND CERTAIN
OTHER TAXES.
(a) So as to enable the SFX Affiliated Group to prepare accurately and
completely the consolidated returns which include the Income Tax liability of
members of the Entertainment Group and in order to provide for accurate
financial reporting for tax periods or portions thereof ending on or before the
Distribution Date, Entertainment shall prepare and submit to SFX, no later than
180 days after the end of each such tax period or portion thereof (or such
later date as consented to by
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SFX, which consent shall not be unreasonably withheld), complete draft Federal
Income Tax returns reflecting the Tax Items of the members of the Entertainment
Group for each such tax period or portion thereof, modified as provided in the
following sentence and provide such other information with respect to Income
Taxes (or Other Taxes, the returns for which are filed on a unitary, combined
or consolidated basis) as SFX may reasonably request. Income Taxes shall be
calculated (i) using, to the extent permitted by law, such methods, conventions
and principles of taxation and making such elections as are consistent with the
methods, conventions, principles and elections previously used by the SFX
Affiliated Group or such member of the Entertainment Group in preparing prior
Income Tax returns; and (ii) for the taxable period which ends on the
Distribution Date, by apportioning Tax Items based upon an interim closing of
the books of the Entertainment Group as of the end of the Distribution Date.
Entertainment agrees not to make a ratable allocation election under Treas.
Reg. ss. 1.1502-76(b)(2)(ii)(D). Entertainment shall bear all costs and
expenses of preparation and submission of such information, including
accountants' and attorneys' fees.
(b) For taxable periods in which the Entertainment Group is included
in the SFX Affiliated Group, Entertainment shall pay to SFX an amount equal to
the Income Tax liability of the Entertainment Group (and any liability of the
Entertainment Group for Other Taxes the returns for which are filed on a
unitary, combined or consolidated basis), as determined on a separate company
basis; but only to the extent such separate Income Tax Liability of the
Entertainment Group (or separate Other Tax liability of the Entertainment
Group) is not included in the computation of working capital under Section
5.07(i) of the Merger Agreement. In addition, Entertainment shall not be
obligated to SFX under the preceding sentence to the extent the SFX Affiliated
Group's Income Tax Liability for the tax period including the Distribution Date
is less than the Income Tax Liability of the Entertainment Group for the tax
period of the Entertainment Group ending on the Distribution Date as result of
a net operating losses of the SFX Group.
SECTION 3.02. RESPONSIBILITY FOR TAX ADJUSTMENTS.
(a) Entertainment shall pay, reimburse and indemnify SFX as common
parent of the SFX Affiliated Group for any Pre-Distribution Tax Liabilities
arising from an Adjustment with respect to a Tax Item of a member of the
Entertainment Group; and
(b) SFX shall pay, reimburse and indemnify Entertainment as common
parent of the Entertainment Affiliated Group for:
(i) any Tax Benefit derived by the SFX Group from an
Adjustment with respect to a Tax Item of a member of the Entertainment
Group; and
(ii) any Tax Detriment suffered by any member of the
Entertainment Group from an Adjustment with respect to a Tax Item of a
member of the SFX Group.
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SECTION 3.03. NON-CONSOLIDATED OTHER TAXES AND INCOME TAXES. Unless
otherwise provided in this Agreement, the SFX Group shall pay all Other Taxes
and any Income Taxes as to which consolidated, unitary or combined returns are
not made (and shall be entitled to receive and retain all refunds of such
Taxes) that are attributable to members of the SFX Group. Unless otherwise
provided in this Agreement, the Entertainment Group shall pay all Other Taxes
and any Income Taxes as to which consolidated, unitary or combined returns are
not made (and shall be entitled to receive and retain all refunds of such
Taxes) which are attributable to members of the Entertainment Group.
SECTION 3.04. CARRYBACKS.
(a) To the extent that any carryback period for a Carryback Item would
include any taxable period beginning before the day following the Distribution
Date, Entertainment agrees to elect (under section 172(b)(3) of the Code and,
to the extent feasible, any similar provision of any applicable state or local
Income Tax law) to relinquish such carryback period as to any Carryback Item
which could thereby be used to create or carry forward a Tax Benefit for the
SFX Group (in which event no payment shall be due from SFX to Entertainment in
respect of such Carryback Item). SFX shall not elect to retain any net
operating loss carryovers or capital loss carryovers of the Entertainment
Group.
(b) If, notwithstanding the foregoing, for any taxable period ending
after the Distribution Date, a Carryback Item is incurred, then SFX shall pay
to Entertainment an amount equal to the Tax Benefit (adjusted as provided in
the next sentence) obtained by the SFX Affiliated Group in any taxable year as
a direct consequence of the Carryback Item. In determining the Tax Benefit
obtained by SFX with respect to a taxable year, if, in addition to the
Entertainment Group Carryback Items, there are also any Tax Items or Carryback
Items generated by the SFX Group which are properly taken into account in
determining the Income Tax liability of the SFX Affiliated Group for such
taxable year, SFX shall be credited with a pro rata portion of any resulting
Tax Benefit; the amount of such Tax Benefit to be paid to Entertainment shall
be reduced by the present value (determined at the then applicable short-term
Federal rate under the Code) of any future Tax Detriment that may be suffered
by any member of the SFX Group as a consequence of such Entertainment Group
Carryback Item. Entertainment agrees to indemnify and hold the SFX Group
harmless from any Taxes resulting from the disallowance of a Tax Benefit which
previously resulted in a payment from SFX to Entertainment under this Section
3.04(b).
(c) SFX shall cooperate fully in obtaining the Tax Benefit
attributable to any Carryback Item, but any reasonable out-of-pocket expenses
incurred by SFX that are directly attributable to such efforts shall be borne
by Entertainment. In lieu of such cooperation, SFX may elect to pay to
Entertainment the Tax Benefit which would have been payable under this section
if such Carryback Item were allowed.
(d) Any refund of Tax (including any interest thereon) attributable to
the SFX Affiliated Group for any period beginning before (or beginning and
ending on) the Distribution Date shall be the property of SFX and any refund of
Tax (including any interest thereon) attributable to the
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Entertainment Group for the period beginning before (or beginning and ending
on) the Distribution Date shall be the property of Entertainment.
SECTION 3.05. RESPONSIBILITY FOR DISTRIBUTION TAXES. Subject to
Section 4.01, Entertainment and any successor corporation shall be responsible
for, and shall indemnify and hold harmless SFX and each member of the SFX Group
from Income Taxes, Other Taxes and all reasonable out-of-pocket costs and
expenses arising out of, based upon or attributable to the Distribution, but,
in the case of Income Taxes, only to the extent such Income Taxes are based
upon any gain recognized by the SFX Group as a result of the Distribution in
excess of the net operating losses of the SFX Affiliated Group that are
available to offset such gain in the tax period including the Distribution
(without regard to subsequent tax years). SFX agrees to consult in good faith
with Entertainment regarding the amount of gain, if any, recognized by SFX as a
result of the Distribution.
SECTION 3.06. PAYMENT. If SFX is required to make a payment to a
member of the Entertainment Group under this Agreement, such payment shall be
made to Entertainment or any successor corporation as the parent of the
Entertainment Affiliated Group, and any payment due under this Agreement from
any member of the Entertainment Group to SFX shall be made by Entertainment to
SFX or any successor corporation as common parent of the SFX Group. The payment
shall be made by the earlier of (i) 20 days after SFX (or a member of the
Entertainment Group, as applicable) (x) receives a refund (including, without
limitation, a refund in the form of a credit against tax liability) or realizes
a reduction in its tax liability (including, without limitation, estimated
Taxes) or (y) makes a tax payment (including, without limitation, any payment
made in connection with either an estimated or annual tax liability), (ii) 20
days after a Final Determination with respect to such tax or (iii) 20 days
after the determination by the parties or pursuant to Article V that such
payment is due. The amount of any payment required to be made by any party to
another under this Agreement shall be an amount which, after subtraction of any
additional federal, state or local Taxes payable by the recipient in respect of
the receipt of such payment, is equal to the amount payable hereunder. SFX and
Entertainment agree that, without limiting the ultimate payment obligation of
the payor set forth in the preceding sentence, to the extent there is
substantial authority (within the meaning of section 6662 of the Code) for such
position or such position is otherwise permissible under applicable law, any
payment shall be reported as non-deductible and non-taxable.
ARTICLE IV
COOPERATION AND EXCHANGE OF INFORMATION
SECTION 4.01. MATTERS GIVING RISE TO INDEMNITY.
(a) NOTICE. If any tax authority shall propose an Adjustment to the
tax liability of either Entertainment or SFX ("Indemnified Party") which would
result, if such Adjustment were to be confirmed by a Final Determination, in a
loss against which the other party ("Indemnifying Party") may be required to
indemnify Indemnified Party pursuant to this Agreement, Indemnified Party shall
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promptly notify Indemnifying Party thereof in writing. Such notice to
Indemnifying Party shall include sufficient information with respect to the
issues as to which indemnity may be sought to enable Indemnifying Party to
determine whether to request Indemnified Party to contest the Adjustment.
(b) CONDUCT OF EXAMINATIONS. Indemnified Party shall keep Indemnifying
Party informed as to the status and progress of all matters materially related
to any issue that arises on the audit of Indemnified Party's tax returns that
could give rise to an obligation of Indemnifying Party to make payments to
Indemnified Party hereunder. Indemnified Party shall discuss with
representatives of Indemnifying Party the course and conduct of all material
matters that are the subject of this Agreement and shall permit such
representatives to participate in discussions with such tax authorities.
Indemnified Party will consider in good faith written proposals in connection
with contesting such Adjustment that Indemnifying Party shall submit to it from
time to time, provided that Indemnified Party shall control the nature of all
action to be taken to contest such Adjustment.
(c) CONTEST RIGHTS AND CONDITIONS. Upon receipt of any formal notice
from the IRS (including, without limitation, a 30-day letter) or any other tax
authority proposing an Adjustment which could impose liability on Indemnifying
Party hereunder, Indemnified Party shall promptly give notice thereof to
Indemnifying Party, and Indemnified Party will contest such Adjustment if
Indemnifying Party shall so request in writing within 20 days of Indemnifying
Party's receipt of such notice from Indemnified Party. In no event, however,
shall Indemnified Party be required to contest any Adjustment unless coincident
with Indemnifying Party's request (A) Indemnified Party shall have received (i)
an indemnity from Indemnifying Party for any Income Taxes, Other Taxes and all
other liability, expense or loss arising out of or relating to the Indemnifying
Party's issues involved in the contest or claim (including, without limitation,
all out-of pocket expenses, costs, reasonable legal, accounting, engineers' and
other professional fees and disbursements, but excluding any independent
expense incurred by Indemnified Party for the purpose of monitoring the
progress of the issue) and (ii) an opinion of independent tax counsel to
Indemnifying Party (which counsel shall be reasonably acceptable to Indemnified
Party) to the effect that a reasonable basis exists for contesting the
Adjustment to the extent that the contest involves such issues; and (B) if such
contest is to be conducted in a manner requiring payment of a proposed tax
deficiency, Indemnifying Party shall have advanced to Indemnified Party, on an
interest-free basis, an amount sufficient to make payment of the proposed tax
deficiency attributable to the Adjustment, together with any required interest
or penalties in respect of such proposed tax deficiency. If any funds are
advanced by Indemnifying Party in connection with any tax contest, any refund
received to the extent fairly attributable to such advance shall be returned to
Indemnifying Party, together with any interest thereon paid by the relevant
taxing authority, promptly upon Indemnified Party's receipt of such funds. If
Indemnifying Party shall have requested Indemnified Party to contest an
Adjustment and complied with each of the terms and conditions set forth above,
such contest shall be conducted by independent tax counsel selected by
Indemnifying Party and reasonably acceptable to Indemnified Party.
(d) SETTLEMENT; RELEASE OF INDEMNIFICATION. If Indemnifying Party
shall have requested Indemnified Party to contest an Adjustment and complied
with each of the terms and conditions set
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forth above, Indemnified Party shall not settle or compromise any Adjustment
for which indemnity is sought hereunder without the written consent of
Indemnifying Party (which consent shall not be unreasonably withheld) unless it
simultaneously releases Indemnifying Party from its obligations to indemnify
and reimburse Indemnified Party with respect to the issues so settled or
compromised, and in the event that Indemnified Party concludes such a
settlement or compromise without Indemnifying Party's written consent,
Indemnifying Party shall be deemed conclusively to have been so released. If
Indemnifying Party shall fail to request Indemnified Party to contest any
Adjustment or shall fail to comply with the terms and conditions entitling it
to make such request as set forth in subparagraph (c), Indemnified Party may in
its sole discretion elect to contest (or not contest) such Adjustment with
counsel selected by it and may at any time settle or compromise the matter
without the consent of Indemnifying Party and without releasing its rights to
indemnity from Indemnifying Party. If Indemnifying Party shall be willing to
accept any settlement proposed by any taxing authority with respect to an issue
as to which Indemnifying Party has an indemnity obligation hereunder, but
Indemnified Party refuses to approve such settlement, Indemnifying Party's
obligation to indemnify Indemnified Party with respect to such issue shall
thereafter be limited in amount to the amount Indemnifying Party would have
been required to pay pursuant to such settlement.
SECTION 4.02. TAX RETURN INFORMATION. Without limiting Section 4.01
hereof, SFX and Entertainment agree to cooperate fully with each other in
connection with the preparation of any tax return or claim for refund or in
conducting any audit or other proceeding in respect of Taxes for all open
taxable periods. Such cooperation shall include making personnel and records
available promptly and within 30 days (or such other period as may be
reasonable under the circumstances) after a request for such personnel or
records is made by the tax-imposing authority or the other party, in either
such case at the expense of the requesting party or the party whose Taxes are
being examined by the tax-imposing authority. If any member of the SFX Group or
the Entertainment Group, as the case may be, fails to provide any information
requested pursuant to this section, then the requesting party shall have the
right to engage a public accountant of its choice to gather such information.
Entertainment and SFX agree to permit any such public accountant full access to
all appropriate records or other information in the possession of any member of
the SFX Group or the Entertainment Group, as the case may be, during reasonable
business hours, and to reimburse or pay directly all costs and expenses in
connection with the engagement of such public accountant.
SFX agrees to indemnify and hold harmless each member of the
Entertainment Group and its officers and employees, and Entertainment agrees to
indemnify and hold harmless each member of the SFX Group and its officers and
employees, against any cost, fine, penalty or other expense of any kind
attributable to the negligence or misconduct of a member of the SFX Group or
the Entertainment Group, as the case may be, in supplying a member of the other
group with inaccurate or incomplete information.
SECTION 4.03. RECORD RETENTION. SFX and Entertainment agree to retain
all records which may contain information or provide evidence relevant to the
determination of the Income Tax liability of the SFX Affiliated Group or the
Entertainment Affiliated Group or the shareholders of either for any taxable
period until such time as a Final Determination occurs with respect to such
taxable period, provided, however, that such records need not be retained
longer than 20 years after
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the end of the latest taxable period to which they relate so long as such
records are offered to the other party before they are destroyed by the party
that possesses them.
ARTICLE V
MISCELLANEOUS
SECTION 5.01. EFFECTIVE DATE AND TERM OF AGREEMENT. This Agreement
shall become effective as of the day immediately prior to the Distribution
Date. Except as otherwise expressly provided herein, the respective covenants
of the parties contained herein shall continue in full force and effect
indefinitely.
SECTION 5.02. PRIOR TAX-SHARING AGREEMENTS. At the time this Agreement
becomes effective, this Agreement shall supersede any other tax-sharing or
allocation agreement or arrangement in effect between members of the SFX Group
and members of the Entertainment Group prior to the date hereof.
SECTION 5.03. ELECTION UNDER SECTION 1552 OF THE CODE. Nothing in this
Agreement is intended to change or otherwise affect any election made by or on
behalf of the SFX Affiliated Group with respect to the calculation of earnings
and profits under section 1552 of the Code or applicable Treasury Regulations.
SFX, in its sole discretion, is authorized to seek any change in the method of
calculating earnings and profits as it deems desirable, provided, however, that
no such change shall modify the rights or obligations of the parties hereto.
SECTION 5.04. INJUNCTIONS. The parties acknowledge that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or were otherwise
breached. The parties hereto shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically the terms and provisions hereof in any court having jurisdiction,
such remedy being in addition to any other remedy to which they may be entitled
at law or in equity.
SECTION 5.05. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to
be invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any thereof which may be hereafter declared invalid, void or
unenforceable. In the event that any such term, provision, covenant or
restriction is held to be invalid, void or unenforceable, the parties hereto
shall use their best efforts to find and employ an alternate means to achieve
the same or substantially the same result as that contemplated by such term,
provision, covenant or restriction.
SECTION 5.06. ASSIGNMENT. Except by operation of law or in connection
with the sale of all or substantially all the assets of a party hereto, this
Agreement shall not be assignable, in whole or
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in part, directly or indirectly, by any party hereby without the written
consent of the other party; and any attempt to assign any rights or obligations
arising under this Agreement without such consent shall be void; provided,
however, that the provisions of this Agreement shall be binding upon, inure to
the benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns.
SECTION 5.07. FURTHER ASSURANCES. Subject to the provisions hereof,
the parties hereto shall make, execute, acknowledge and deliver such other
instruments and documents, and take all such other actions, as may be
reasonably required in order to effectuate the purposes of this Agreement and
to cause the performance as contemplated by this Agreement. Subject to the
provisions hereof, each of the parties shall, in connection with entering into
this Agreement, performing its obligations hereunder and taking any and all
actions relating hereto, comply with all applicable laws, regulations, orders
and decrees, obtain all required consents and approvals and make all required
filings with any governmental agency, other regulatory or administrative
agency, commission or similar authority and promptly provide the other parties
with all such information as they may reasonably request in order to be able to
comply with the provisions of this sentence.
SECTION 5.08. PARTIES IN INTEREST. Except as herein otherwise
specifically provided, nothing in this Agreement expressed or implied is
intended to confer any right or benefit upon any person, firm or corporation
other than the parties and their respective successors and permitted assigns.
SECTION 5.09. WAIVERS, ETC. No failure or delay on the part of the
parties in exercising any power or right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power,
or any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No modification or waiver of any provision of this Agreement
nor consent to any departure by the parties therefrom shall in any event be
effective unless the same shall be in writing, and then such waiver or consent
shall be effective only in the specific instance and for the purpose for which
given.
SECTION 5.10. SETOFF. All payments to be made by any party under this
Agreement shall be made without setoff, counterclaim or withholding, all of
which are expressly waived.
SECTION 5.11. CHANGE OF LAW. If, due to any change in applicable law
or regulations or the interpretation thereof by any court of law or other
governing body having jurisdiction subsequent to the date of this Agreement,
performance of any provision of this Agreement or any transaction contemplated
thereby shall become impracticable or impossible, the parties hereto shall use
their best efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such provision.
SECTION 5.12. HEADINGS. Descriptive headings are for convenience only
and shall not control or affect the meaning or construction of any provision of
this Agreement.
SECTION 5.13. COUNTERPARTS. For the convenience of the parties, any
number of counterparts of this Agreement may be executed by the parties hereto,
and each such executed
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counterpart shall be, and shall be deemed to be, an original instrument.
SECTION 5.14. NOTICES. All notices, consents, requests, instructions,
approvals and other communications provided for herein shall be validly given,
made or served, if in writing and delivered personally, by telegram or sent by
registered mail, postage prepaid to
SFX at: SFX Broadcasting, Inc.
200 Crescent Court, Suite 1600
Dallas, Texas 75201
Entertainment at: SFX Entertainment, Inc.
650 Madison Avenue
16th Floor
New York, New York 10022
or to such other address as any party may, from time to time, designate in a
written notice given in a like manner. Notice given by telegram shall be deemed
delivered when received by the recipient. Notice given by mail as set out above
shall be deemed delivered five calendar days after the date the same is mailed.
SECTION 5.15. GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the domestic substantive laws of The
State of Delaware without regard to any choice or conflict of laws rule or
provision that would cause the application of the domestic substantive laws of
any other jurisdiction.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to
be duly executed by their respective officers, each of whom is duly authorized,
all as of the day and year first above written.
SFX BROADCASTING INC.
By:
------------------------------------
Title:
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SFX ENTERTAINMENT, INC.
By:
------------------------------------
Title:
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Exhibit 3.2
BY-LAWS
OF
SFX ENTERTAINMENT, INC.
(ORGANIZED UNDER THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE)
ARTICLE I--STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in
the Corporation shall be signed by, or in the name of, the Corporation
by the Executive Chairman or Vice-Chairman of the Board of Directors,
if any, or by the President or a Vice President (including any
Executive Vice President) and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the
Corporation. Any or all of the signatures on any such certificate may
be a facsimile. In the event any officer, transfer agent, or registrar
of the Corporation who has signed or whose facsimile signature has
been placed upon such a certificate shall have ceased to be such
officer, transfer agent, or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if
he were such officer, transfer agent, or registrar at the date of
issue.
Whenever the Corporation shall be authorized to issue more than one
class of stock or more than one series of any class of stock, and
whenever the Corporation shall issue any shares of its stock as partly
paid stock, the certificates representing shares of any such class or
series or of any such partly paid stock shall set forth thereon the
statements prescribed by the General Corporation Law. Any restrictions
on the transfer or registration of transfer of any shares of stock of
any class or series of the Corporation shall be noted conspicuously on
the certificate representing such shares.
The Corporation may issue a new certificate of stock or uncertificated
shares in place of any certificate theretofore issued by it, alleged
to have been lost, stolen, or destroyed, and the Board of Directors
may require the owner of the lost, stolen, or destroyed certificate,
or his legal representative, to give the Corporation a bond sufficient
to indemnify the Corporation against any claim that may be made
against it on account of the alleged loss, theft, or destruction of
any such certificate or the issuance of any such new certificate or
uncertificated shares.
2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the
General Corporation Law, the Board of Directors may provide by
resolution or resolutions that some or all of any or all classes or
series of the stock of the Corporation shall be uncertificated shares.
Within a reasonable time after the issuance or transfer of any
uncertificated shares, the Corporation shall send to the registered
owner thereof any written notice prescribed by the General Corporation
Law.
3. FRACTIONAL SHARE INTERESTS. The Corporation may, but shall not be
required to, issue fractions of a share. If the Corporation does not
issue fractions of a share, it shall (1) arrange for the disposition
of fractional interests by those entitled thereto, (2) pay in cash the
fair value of fractions of a share as of the time when those entitled
to receive such fractions are determined, or (3) issue scrip or
warrants in registered form (either represented by a certificate or
uncertificated) or bearer form (represented by a certificate) which
shall entitle the holder to receive a full share upon the surrender of
such scrip or warrants aggregating a full share. A certificate for a
fractional share or an uncertificated fractional share shall (but,
unless otherwise provided therein, scrip or warrants shall not)
entitle the holder to exercise voting rights, to receive dividends
thereon, and to participate in any of the assets of the Corporation in
the event of liquidation. The Board of Directors may cause scrip or
warrants to be issued subject to the conditions that such scrip or
warrants shall become void if not exchanged
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for certificates representing the full shares or uncertificated full
shares before a specified date, or subject to the conditions that the
shares of the Corporation's stock for which scrip or warrants are
exchangeable may be sold by the Corporation and the proceeds thereof
distributed to the holders of scrip or warrants, or subject to any
other conditions which the Board of Directors may impose.
4. STOCK TRANSFERS. Upon compliance with provisions restricting the
transfer or registration of transfer of shares of stock, if any,
transfers or registration of transfers of shares of stock of the
Corporation shall be made only on the stock ledger of the Corporation
by the registered holder thereof, or by such holder's attorney
thereunto authorized by power of attorney duly executed and filed with
the Secretary of the Corporation or with a transfer agent or a
registrar, if any, and, in the case of shares represented by
certificates, upon surrender of the certificate or certificates for
such shares of stock, which certificate or certificates shall have
been properly endorsed, and the payment of all taxes due thereon.
5. RECORD DATE FOR STOCKHOLDERS. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of
stockholders of the Corporation or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or
the allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which record date shall not be more than sixty
(60) days nor less than ten (10) days before the date of such meeting,
nor more than sixty (60) days prior to any other action, If no record
date is fixed by the Board of Directors, the record date for
determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day preceding
the day on which notice is given, or, if notice is waived, at the
close of business on the day preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders of the Corporation shall apply
to any adjournment of such meeting; provided, however, that the Board
of Directors may fix a new record date for the adjourned meeting. In
order that the Corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the Board of
Directors may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted
by the Board of Directors, and which date shall not be more than ten
(10) days after the date upon which the resolution fixing the record
date is adopted by the Board of Directors. If no record date has been
fixed by the Board of Directors, the record date for determining the
stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the Board of Directors is
required by the General Corporation Law, shall be the first date on
which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation by delivery to
its registered office in the State of Delaware, its principal place of
business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Corporation 's registered office shall
be by hand or by certified or registered mail, return receipt
requested. If no record date has been fixed by the Board of Directors
and prior action by the Board of Directors is required by the General
Corporation Law, the record date for determining stockholders entitled
to consent to corporate action in writing without a meeting shall be
at the close of business on the day on which the Board of Directors
adopts the resolution taking such prior action. In order that the
Corporation may determine the stockholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or
the stockholders entitled to exercise any rights in respect of any
change, conversion, or exchange of stock, or for the purpose of any
other lawful action, the Board of Directors may fix a record date,
which record date shall not precede the date upon which the resolution
fixing the record date is adopted, and which record date shall be not
more than sixty (60) days prior to such action. If no record date is
fixed, the record date for determining stockholders for any such
purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
6. MEANING OF CERTAIN TERMS. As used herein in respect of the right to
notice of a meeting of stockholders or a waiver thereof or to
participate or vote thereat or to consent or dissent in writing in
lieu of a meeting, as the case may be, the term "share" or "shares" or
"share of stock" or "shares of stock" or "stockholder" or
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"stockholders" refers to an outstanding share or shares of stock of
the Corporation and to a holder or holders of record of such
outstanding shares of stock when the Corporation is authorized to
issue only one class of shares of stock. Said reference also is
intended to include any outstanding share or shares of stock and any
holder or holders of record of outstanding shares of stock of any
class upon which or upon whom the Certificate of Incorporation of the
Corporation confers such rights where there are two or more classes or
series of shares of stock or upon which or upon whom the General
Corporation Law confers such rights notwithstanding that the
Certificate of Incorporation may provide for more than one class or
series of shares of stock, one or more of which are limited or denied
such rights thereunder; provided, however, that no such right shall
vest in the event of an increase or a decrease in the authorized
number of shares of stock of any class or series which is otherwise
denied voting rights under the provisions of the Corporation's
Certificate of Incorporation, except as any provision of law may
otherwise require.
7. MEETINGS OF STOCKHOLDERS.
(a) Time. The annual meeting of the stockholders of the
Corporation shall be held on the date and at the time fixed,
from time to time, by the Board of Directors, provided that
the first annual meeting of the stockholders of the
Corporation shall be held on a date within thirteen (13)
months after the organization of the Corporation, and each
successive annual meeting shall be held on a date within
thirteen (13) months after the date of the preceding annual
meeting. A special meeting of the stockholders of the
Corporation shall be held on the date and at the time fixed
by the Board of Directors.
(b) Place. Annual meetings and special meetings of the
stockholders of the Corporation shall be held at such place,
within or without the State of Delaware, as the Board of
Directors may, from time to time, fix. Whenever the Board of
Directors shall fail to fix such place, the meeting shall be
held at the registered office of the Corporation in the State
of Delaware.
(c) Call. Annual meetings and special meetings of the
stockholders of the Corporation may be called by the Board of
Directors or by any officer of the Corporation instructed by
the Board of Directors to call such meeting.
(d) Notice or Waiver of Notice. Written notice of all meetings of
the stockholders of the Corporation shall be given and shall
set forth the place, the date, and the hour of the meeting
and stating the place within the city or other municipality
or community at which the list of stockholders of the
Corporation may be examined. The notice of an annual meeting
of the stockholders of the Corporation shall state that the
meeting is called for the election of Directors and for the
transaction of any other business which may properly come
before the meeting, and shall (if any other action which
could be taken at a special meeting is to be taken at such
annual meeting) state the purpose or purposes. The notice of
a special meeting shall in all instances state the purpose or
purposes for which the meeting is called. The notice of any
meeting of the stockholders of the Corporation also shall
include, or be accompanied by, any additional statements,
information, or documents prescribed by the General
Corporation Law of the State of Delaware. Except as otherwise
provided by the General Corporation Law, a copy of the notice
of any meeting shall be given, personally or by mail, not
less than ten (10) days nor more than sixty (60) days before
the date of the meeting, unless the lapse of the prescribed
period of time shall have been waived, and directed to each
stockholder at such stockholder's record address or at such
other address which the stockholder may have furnished by
request in writing to the Secretary of the Corporation.
Notice by mail shall be deemed to be given when deposited,
with postage thereon prepaid, in the United States Mail. If a
meeting is adjourned to another time, not more than thirty
(30) days hence, and/or to another place, and if an
announcement of the adjourned time and/or place is made at
the meeting, it shall not be necessary to give notice of the
adjourned meeting unless the Board of Directors, after
adjournment, fix a new record date for the adjourned meeting.
Notice need not be given to any stockholder who submits a
written waiver of notice signed by him
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before or after the time stated therein. Attendance of a
stockholder at a meeting of stockholders of the Corporation
shall constitute a waiver of notice of such meeting, except
when the stockholder attends the meeting for the express
purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special
meeting of the stockholders of the Corporation need be
specified in any written waiver of notice.
(e) Stockholder List. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least
ten (10) days before every meeting of stockholders of the
Corporation, a complete list of the stockholders, arranged in
alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name
of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of
at least ten (10) days prior to the meeting, either (i) at a
place within the city or other municipality or community
where the meeting is to be held, which place shall be
specified in the notice of the meeting, or (ii) if not so
specified, at the place where the meeting is to be held. The
list of stockholders also shall be produced and kept at the
time and place of the meeting during the whole time thereof,
and may be inspected by any stockholder of the Corporation
who is present at the meeting. The stock ledger shall be the
only evidence as to who are the stockholders entitled to
examine the stock ledger, the list required by this
subsection (e) or the books of the Corporation, or to vote at
any meeting of stockholders of the Corporation.
(f) Conduct of Meeting. Meetings of the stockholders of the
Corporation shall be presided over by one of the following
officers in the order of seniority and if present and acting:
(i) the Executive Chairman (if any); (ii) the Vice-Chairman
of the Board (if any); (iii) the President of the
Corporation; (iv) any Executive Vice President; (v) any Vice
President; or (vi) if none of the foregoing officers is in
office and present and acting, by a chairman of the meeting
to be chosen by the stockholders. The Secretary of the
Corporation, or, in his absence, an Assistant Secretary,
shall act as secretary of every meeting; however, if neither
the Secretary nor an Assistant Secretary is present the
person presiding at the meeting shall appoint a secretary of
the meeting.
(g) Proxy Representation. Every stockholder of the Corporation
may authorize another person or persons to act for him by
proxy in all matters in which a stockholder is entitled to
participate, whether by waiving notice of any meeting, voting
or participating at a meeting, or expressing consent or
dissent without a meeting. Every proxy must be signed by the
stockholder or by his attorney-in-fact. No proxy shall be
voted or acted upon after three years from its date unless
such proxy provides for a longer period. A duly executed
proxy shall be irrevocable if it states that it is
irrevocable and if, and only as long as, it is coupled with
an interest sufficient in law to support an irrevocable
power. A proxy may be made irrevocable regardless of whether
the interest with which it is coupled is an interest in the
stock itself or an interest in the Corporation generally.
(h) Inspectors. The Board of Directors, in advance of any meeting
of the stockholders of the Corporation, may, but need not,
appoint one or more inspectors of election to act at the
meeting of stockholders or any adjournment thereof. If an
inspector or inspectors are not appointed, the person
presiding at the meeting may, but need not, appoint one or
more inspectors. In the event any person who may be appointed
as an inspector fails to appear or act at the meeting, the
vacancy may be filled by appointment made by the Board of
Directors in advance of the meeting or at the meeting by the
person presiding thereat. Each inspector, if any, before
entering upon the discharge of his duties, shall take and
sign an oath to faithfully execute the duties of inspector at
such meeting with strict impartiality and according to the
best of his ability. The inspector or inspectors, if any,
shall determine (i) the number of shares of stock outstanding
as of the record date and the voting power of each, (ii) the
shares of stock represented at the meeting, (iii) the
existence of a quorum, and (iv) the validity and effect of
proxies, and shall (i) receive votes, ballots, or consents,
(ii) hear and determine all challenges
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and questions arising in connection with the right to vote,
(iii) count and tabulate all votes, ballots, or consents,
(iv) determine the result, and (v) do such acts as are proper
to conduct the election or vote with fairness to all
stockholders. At the request of the person presiding at the
meeting, the inspector or inspectors, if any, shall make a
report in writing of any challenge, question, or matter
determined by him or them, and shall execute a certificate of
any fact found by him or them. Except as otherwise required
by subsection (e) of Section 231 of the General Corporation
Law, the provisions of that Section shall not apply to the
Corporation.
(i) Quorum. The holders of a majority of the outstanding shares
of stock of the Corporation shall constitute a quorum at a
meeting of stockholders for the transaction of any business.
The stockholders present at such meeting may adjourn the
meeting despite the absence of a quorum.
(j) Voting. Directors shall be elected and any other action shall
be taken by stockholders of the Corporation as set forth in
the Corporation's Certificate of Incorporation, as it may be
amended from time to time. In the election of Directors and
for any other action voting need not be by ballot.
8. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the
General Corporation Law to be taken at any annual or special meeting
of stockholders, or any action which may be taken at any annual or
special meeting of stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting
at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. Action taken pursuant
to this paragraph 8 shall be subject to the provisions of Section 228
of the General Corporation Law.
ARTICLE II--DIRECTORS
1. FUNCTIONS AND DEFINITION. The business and affairs of the Corporation
shall be managed by or shall be under the direction of the Board of
Directors. The Board of Directors shall have the authority to fix the
compensation of the members thereof. The use of the phrase "whole
board" herein refers to the total number of Directors which the
Corporation would have if there were no vacancies.
2. QUALIFICATIONS AND NUMBER. A Director need not be a stockholder of the
Corporation, a citizen of the United States, or a resident of the
State of Delaware. The initial Board of Directors shall consist of
nine (9) persons. Thereafter, the number of Directors constituting the
whole Board of Directors shall be at least one. Subject to the
foregoing limitation and except for the initial Board of Directors,
such number of Directors may be fixed from time to time by action of
the stockholders or of the Board of Directors. The number of Directors
may be increased or decreased by action of the stockholders or of the
Board of Directors.
3. ELECTION AND TERM. The initial Board of Directors (unless the members
thereof shall have been named in the Certificate of Incorporation of
the Corporation) shall be elected by the incorporator or
incorporators, and the members thereof shall hold office until the
first annual meeting of the stockholders of the Corporation and until
their successors are elected and qualified or until their earlier
resignation or removal from the initial Board of Directors.
Thereafter, Directors who are elected at an annual meeting of
stockholders of the Corporation, and Directors who are elected in the
interim to fill vacancies and newly created directorships, shall hold
office until the next annual meeting of stockholders of the
Corporation and until their successors are elected and qualified or
until their earlier resignation or removal. Except as the General
Corporation Law may otherwise require, in the interim between annual
meetings of the stockholders or of special meetings of the
stockholders called for the election of Directors and/or for the
removal of one or more Directors and for the filling of any vacancy on
the Board of Directors in that connection, newly created directorships
and any vacancies in the Board of
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Directors, including unfilled vacancies resulting from the removal of
Directors for cause or without cause, may be filled by the vote of a
majority of the remaining Directors then in office, although less than
a quorum, or by the sole remaining Director. Any Director may resign
at any time, upon written notice to the Corporation. Unless otherwise
specified therein, such resignation shall be effective upon delivery.
4. MEETINGS OF THE BOARD OF DIRECTORS
(a) Time. Meetings shall be held at such time as the Board of
Directors shall fix, except that the first meeting of a newly
elected Board shall be held as soon after its election as the
members thereof may conveniently assemble.
(b) Place. Meetings of the Board of Directors shall be held at
such place within or without the State of Delaware as shall
be fixed by the Board of Directors.
(c) Call. No call shall be required for regular meetings for
which the time and place have been fixed. Special meetings
may be called by or at the direction of either the Executive
Chairman (if any), the Vice-Chairman of the Board (if any),
or the President of the Corporation, or by or at the
direction of a majority of the Directors then in office.
(d) Notice or Actual or Constructive Waiver. No notice of a
meeting of the Board of Directors shall be required for
regular meetings for which the time and place have been
fixed. Written, oral, or any other mode of notice of the time
and place shall be given for special meetings in sufficient
time for the convenient assembly of the Directors thereat.
Notice need not be given to any Director or to any member of
any committee of the Board of Directors who submits a written
waiver of notice signed by him before or after the time
stated therein. Attendance of any Director or committee
member at a meeting shall constitute a waiver of notice of
such meeting, except when such Director or committee member
attends a meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Directors
needs be specified in any written waiver of notice.
(e) Quorum and Action. A majority of the whole Board of Directors
shall constitute a quorum except when a vacancy or vacancies
prevents such majority, whereupon a majority of the Directors
then in office shall constitute a quorum, provided, that such
majority shall constitute at least one-third of the entire
Board of Directors. A majority of the Directors present at a
meeting, whether or not a quorum is present, may adjourn such
meeting to another time and place. Except as herein otherwise
provided, and except as otherwise provided by the General
Corporation Law, the vote of a majority of the Directors
present at a meeting at which a quorum is present shall be
the act of the Board of Directors. The quorum and voting
provisions herein stated shall not be construed as
conflicting with any provisions of the General Corporation
Law and these By-Laws which govern a meeting of Directors
held to fill vacancies in and newly created directorships on
the Board of Directors or an action of disinterested
Directors.
(f) Chairman of the Meeting. The Executive Chairman, if any and
if present and acting, shall preside at all meetings of the
Board of Directors. Otherwise, the Vice-Chairman of the
Board, if any and if present and acting, or the President, if
present and acting, or any other Director chosen by the whole
Board, shall preside.
5. REMOVAL OF DIRECTORS. Except as may otherwise be provided by the
General Corporation Law, any Director may be removed at any time, with
or without cause, upon the affirmative vote of the holders of a
majority of the outstanding shares of stock of the Corporation
entitled to vote for the election of such Director, cast at a special
meeting of stockholders called for the purpose. Subject to applicable
law and the Certificate of
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Incorporation, any vacancy in the Board of Directors caused by any
such removal may be filled at that meeting by the stockholders
entitled to vote for the election of the Director so removed. If such
stockholders do not fill the vacancy at that meeting (or in the
written instrument effecting the removal, if the removal was effected
by consent without a meeting), the vacancy may be filled in the manner
provided in Section 3 of this Article II.
6. COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the Directors of the
Corporation. The Board of Directors may designate one or more
Directors as alternate members of any committee, which alternate
committee member may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of any
member of any such committee or committees, the member or members
thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member. Any such committee,
to the extent provided in the resolution of the Board of Directors
designating such committee, shall have and may exercise the powers and
authority of the Board of Directors in the management of the business
and affairs of the Corporation, with the exception of any authority
the delegation of which is prohibited by Section 141 of the General
Corporation Law, and may authorize the seal of the Corporation to be
affixed to all papers which may require it.
7. INFORMAL ACTION. Any member or members of the Board of Directors or of
any committee designated by such Board may participate in a meeting of
the Board of Directors or any such committee, as the case may be, by
means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each
other.
8. WRITTEN ACTION. Any action required or permitted to be taken at any
meeting of the Board of Directors or any committee thereof may be
taken without a meeting if all members of the Board or committee, as
the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or
committee.
ARTICLE III--OFFICERS
1. DESIGNATION. The officers of the Corporation shall consist of the
President, a Secretary, a Treasurer, and, if deemed necessary,
expedient, or desirable by the Board of Directors, an Executive
Chairman, a Vice-Chairman of the Board, one or more Executive Vice
Presidents, one or more Vice Presidents, one or more Assistant
Secretaries, one or more Assistant Treasurers, and such other officers
with such titles as the resolution of the Board of Directors choosing
them shall designate.
2. QUALIFICATION. Except as may otherwise be provided in the resolution
of the Board of Directors choosing him, no officer other than the
Executive Chairman or Vice-Chairman of the Board, if any, need be a
Director. Any number of offices may be held by the same person, as the
Board of Directors may determine.
3. TERM OF OFFICE. Unless otherwise provided in the resolution or
instrument appointing him, each officer of the Corporation shall be
chosen for a term which shall continue until the meeting of the Board
of Directors following the next annual meeting of stockholders and
until his successor shall have been appointed and qualified.
Any officer of the Corporation may be removed, with or without cause
by the Board of Directors, and any subordinate or junior officer not
appointed by the Board of Directors, but appointed under duly
constituted authority conferred by the Board of Directors, may be
removed, with or without cause, by the officer or officers who
appointed him.
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<PAGE>
Any vacancy in any office may be filled by the Board of Directors. A
vacancy in any junior or subordinate office not filled by the Board of
Directors may be filled by the officer or officers duly vested with
the authority to appoint the person to fill such office.
4. APPOINTMENT OF OFFICERS. The Board of Directors shall appoint the
President, the Secretary, the Treasurer, the Executive Chairman (if
any), the Vice Chairman of the Board (if any) and the Executive Vice
President (if any), and one or more additional Vice Presidents (if
any), and such other officers as may be designated by it, and may
confer upon any executive officer or executive officers the authority
to appoint junior or subordinate officers.
5. DUTIES AND AUTHORITY. In addition to those duties that may from time
to time be delegated to them by the Board of Directors, the officers
of the Corporation shall have the following duties:
(a) Executive Chairman. The Executive Chairman shall preside at
all meetings of the stockholders of the Corporation and of
the Board of Directors at which he is present; shall be an
active participant in the management of the business of the
Corporation; shall have authority to do anything the
President may do; and shall have such other duties and powers
as the Board of Directors may prescribe.
(b) The President. The President shall be the chief executive
officer of the Corporation, unless a Chief Executive Officer
is appointed, and shall: together with the Executive
Chairman, have general and active management of the business
of the Corporation; see that all orders and resolutions of
the Board of Directors are carried into effect; and, in the
absence or non-election of the Executive Chairman, preside at
all meetings of the stockholders of the Corporation and the
Board of Directors at which he is present if he is also a
Director. The President also shall execute bonds, mortgages
and other contracts requiring a seal under the seal of the
Corporation, except where required or permitted by law to be
otherwise signed and executed and except where the signing
and execution thereof shall be delegated expressly by the
Board of Directors to some other officer or agent of the
Corporation, and shall have such other powers and duties as
the Board of Directors may prescribe.
(c) Vice President. The Vice President and Executive Vice
President (if any) shall have such duties and powers as the
Board of Directors or the President may prescribe. In the
absence of the President or in the event of his inability or
refusal to act, the Executive Vice President (if any) or, if
there be more than one, the Executive Vice Presidents, in the
order designated by the Board of Directors, or, in the
absence of such designation, then in the order of their
appointment, shall perform the duties and exercise the powers
of the President. In the absence of any Executive Vice
Presidentor in the event of his inability or refusal to act,
the Vice President (if any) or, if there be more than one,
the Vice Presidents, in the order designated by the Board of
Directors, or, in the absence of such designation, then in
the order of their appointment, shall perform the duties and
exercise the powers of the President.
(d) Secretary and Assistant Secretary. The Secretary shall record
the proceedings of all meetings and actions in writing of the
stockholders of the Corporation and the Board of Directors in
books to be kept for that purpose; shall perform like duties
for the standing committees of the Board of Directors when
required; and shall give, or cause to be given, calls and/or
notices of all meetings of the stockholders of the
Corporation and meetings of the Board of Directors in
accordance with these By- Laws. The Secretary also shall have
custody of the corporate seal and shall attest thereto when
authorized by the Board of Directors or the President, and
shall have such other duties and powers as the Board of
Directors may prescribe.
The Assistant Secretary (if any) or, if there be more than
one, the Assistant Secretaries, in the order designated by
the Board of Directors, or, in the absence of such
designation, then in the order of their appointment, shall,
in the absence of the Secretary or in the event of the
Secretary's inability or refusal
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<PAGE>
to act, perform the duties and exercise the powers of the
Secretary; and shall have such other duties and powers as the
Board of Directors may prescribe. Any officer of the
Corporation may be removed, with or without cause, by the
Board of Directors. Any vacancy in any office may be filled
by the Board of Directors.
In the absence of the Secretary or an Assistant Secretary, or
in the event of the inability or refusal of such officer to
give or cause to be given any call and or notice required by
law or these By-Laws, any such all and/or notice may be given
by any person so directed by the Board of Directors, the
President or stockholders of the Corporation upon whose
requisition the meeting is called in accordance with these
By-Laws.
(e) Treasurer and Assistant Treasurer. The Treasurer (who may
alternatively be titled the Chief Financial Officer) shall
have custody of the corporate funds and securities of the
Corporation; shall keep full and accurate accounts of
receipts and disbursements in books belonging to the
Corporation; and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of
Directors. The Treasurer also shall disburse such funds of
the Corporation as may be ordered by the Board of Directors,
taking proper vouchers for such disbursements; shall render
the Board of Directors, when the Board of Directors so
requires, an account of all such officer's transactions and
of the financial condition of the Corporation; and shall have
such other duties and powers as the Board of Directors may
prescribe. If required by the Board of Directors, the
Treasurer shall give the Corporation a bond, which instrument
shall be renewed every six years, in such sum and with such
surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his
office and for the restoration to the corporation, in case of
such officer's death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other
property of whatever kind in his possession or under his
control belonging to the Corporation.
The Assistant Treasurer (if any) or if there be more than
one, the Assistant Treasurers, in the order designated by the
Board of Directors, or, in the absence of such designation,
then in the order of their appointment, shall, in the absence
of the Treasurer or in the event of the Treasurer's inability
or refusal to act, perform the duties and exercise the powers
of the Treasurer; and shall have such other duties and powers
as the Board of Directors may prescribe.
(f) Other Officers. Any other officer of the Corporation shall
have such powers and duties as the Board of Directors may
prescribe.
6. RESOLUTIONS AND INSTRUMENTS; EFFECT. The Secretary of the Corporation
shall keep, or cause to be kept, with these By-Laws a copy of every
resolution or instrument designation and appointing officers and
prescribing their qualifications, tenure, authority, duties,
compensation and other appropriate incidents and attributes of office;
and each such resolution or instrument shall be deemed to be a
component part of these By-Laws.
ARTICLE IV--INDEMNIFICATION
The Corporation shall indemnify its officers, Directors, employees and agents
to the full extent permitted by the General Corporation Law, as it may be
amended from time to time.
The Corporation shall purchase and maintain insurance on behalf of any person
who is or was or has agreed to become a Director or officer of the Corporation,
or is or was serving at the request of the Corporation as a Director or officer
of another corporation, partnership, joint venture, trust, limited liability
company, limited partnership, limited liability partnership or other enterprise
against any liability asserted against him and incurred by him or on his behalf
in any such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him
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<PAGE>
against such liability under the provisions of this Article IV, provided that
such insurance is available on acceptable terms, which determination shall be
made by a vote of a majority of the Board of Directors.
Expenses incurred by a Director in defending a civil or criminal action, suit
or proceeding by reason of the fact that he is/was a Director (or was serving
at the Corporation's request as a director or officer of another corporation)
shall be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on behalf of
such Director to repay such amount if it ultimately shall be determined that
such Director is not entitled to be indemnified by the Corporation as
authorized by relevant sections of the General Corporation Law.
The indemnification and advancement of expenses provided by this Bylaw shall
not be deemed exclusive of any other rights provided by any agreement, vote of
stockholders or disinterested Directors or otherwise.
ARTICLE V--GENERAL PROVISIONS
1. DIVIDENDS. Dividends upon the capital stock of the Corporation may be
declared by the Board of Directors in any regular or special meeting,
pursuant to law. Dividends may be paid in cash, in property or in
shares of capital stock. Before payment of any dividend, there may be
set aside out of any funds of the Corporation available for dividends
such sum or sums as the Board of Directors, from time to time, in
their absolute discretion, think proper as a reserve or reserves to
meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the Corporation, or for such other
purposes as the Board of Directors shall think conducive to the
interests of the Corporation, and the Board of Directors may modify or
abolish any such reserve in the manner in which it was created.
2. CHECKS. All checks or demand for money and notes of the Corporation
shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
3. FISCAL YEAR. The fiscal year of the Corporation shall be fixed, and
shall be subject to change, by the Board of Directors.
4. CORPORATE SEAL. The corporate seal shall be in such form as the Board
of Directors shall prescribe.
5. AMENDMENT. Except as may otherwise be reuired by applicable law or the
Certificate of Incorporation, these By-Laws may be amended, altered or
repealed:
a. by resolution adopted by a majority of the Board of
Directors, except that the Board of Directors shall have no
power to change any provisions of the By-Laws with respect to
the removal of Directors or the filling of vacancies on the
Board of Directors; or
b. at any regular or special meeting of the stockholders if, in
the case of a special meeting only, notice of the amendment,
alteration or repeal is contaned in the notice or waiver of
notice of the special meeting.
Notwithstanding the foregoing, no section of Article IV of these
By-Laws, and no provision of any such section, may be amended,
modified or repealed, except:
a. by resolution adopted by two-thirds of the total number of
members of the Board of Directors at any special or regular
meeting of the Board; or
b. at any regular or special meeting of the stockholders upon
the affirmative vote of the holders of 75% or more of the
outstanding shares of each class of stock eligible to vote at
the meeting if, in the case
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<PAGE>
of a special meeting only, notice of the amendment,
alteration or repeal is contained in the notice or waiver of
notice of the meeting.
6. CONSTRUCTION. If there arises any conflict between the provisions of
these By-Laws, as in effect from time to time, and the provisions of
the Corporation's Certificate of Incorporation, as in effect from time
to time, then the provisions of the Certificate of Incorporation shall
be controlling.
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Exhibit 3.4
SFX ENTERTAINMENT, INC.
1998 STOCK OPTION AND RESTRICTED STOCK PLAN
EFFECTIVE JANUARY 15, 1998
SECTION 1
ESTABLISHMENT AND PURPOSE
This Plan is established to (i) offer selected Employees and Consultants
of the Company or its Subsidiaries an equity ownership interest in the
financial success of the Company, (ii) provide the Company an opportunity to
attract and retain the best available personnel for positions of substantial
responsibility and (iii) to encourage equity participation in the Company by
eligible Participants. This Plan provides for the grant by the Company of (i)
Options to purchase Shares, and (ii) shares of Restricted Stock. Options
granted under this Plan may include Nonstatutory Options as well as ISOs
intended to qualify under section 422 of the Code.
SECTION 2
DEFINITIONS
"BOARD OF DIRECTORS" shall mean the board of directors of the Company,
as duly elected from time to time.
"CHANGE IN CONTROL" shall mean such time as either (i) any "person", as
such term is used in section 14(d) of the Exchange Act (other than the Company,
a wholly-owned subsidiary of the Company, any employee benefit plan of the
Company or its Subsidiaries or Mr. Sillerman together with his affilates (as
such term is defined in Rule 12b-2 of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act (or any
successor rule), directly or indirectly, of fifty percent (50%) or more of the
combined voting power of the Company's common stock or (ii) individuals who
constitute the Board of the Directors on the effective date of this Plan (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election or nomination for election by the Company's shareholders
was approved by a vote of at least three quarters of the directors comprising
the Incumbent Board (either by a specific vote or by approval of the proxy
statement of the Company in which such person is named as a nominee for the
director without objection to such nomination) shall be, for purposes of this
clause (ii) considered as though such person was a member of the Incumbent
Board.
"CODE" shall mean the Internal Revenue Code of 1986, as amended, and as
interpreted by the regulations thereunder.
"COMMITTEE" shall mean the Stock Option Committee of the Company, or
such other Committee as may be appointed by the Board of Directors from time to
time.
"COMPANY" shall mean SFX Entertainment, Inc., a Delaware corporation.
"CONSULTANT" shall mean any individual that is expressly designated as a
consultant of the Company or its Subsidiaries by the Committee in its sole
discretion.
<PAGE>
"DATE OF GRANT" shall mean the date on which the Committee resolves to
grant an Option to an Optionee or grant Restricted Stock to a Participant, as
the case may be.
"DISINTERESTED DIRECTOR" shall mean a member of the Board of Directors
who is both (a) a Non-Employee Director, within the meaning of Rule 16b-3
promulgated under the Exchange Act, as amended from time to time and (b) an
Outside Director, within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder, as amended from time to time.
"EMPLOYEE" shall include every individual performing Services to the
Company or its Subsidiaries if the relationship between such individual and the
Company or its Subsidiaries is the legal relationship of employer and employee.
This definition of "Employee" is qualified in its entirety and is subject to
the definition set forth in section 3401(c) of the Code and the regulations
thereunder.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and as interpreted by the rules and regulations promulgated
thereunder.
"EXERCISE PRICE" shall mean the amount for which one Share may be
purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement, but in no event less than the par value per
Share.
"FAIR MARKET VALUE" shall mean the closing price of the shares on the
national securities exchange on which the Shares are listed (if the shares are
so listed) as reported in the Wall Street Journal on the applicable date (or,
if not so reported, as otherwise reported by the National Association of
Securities Dealers Automated Quotation System) or on the NASDAQ National Market
System (if the Shares are regularly quoted thereon), or, if not so listed or
regularly quoted, the mean of the closing bid and asked prices of the
securities in the over-the-counter market, on the applicable date or, if such
bid and asked prices shall not be available, as reported by any nationally
recognized quotation service selected by the Company, or as determined by the
Committee in a manner consistent with the provisions of the Code.
"ISO" shall mean a stock option which is granted to an individual and
which meets the requirements of section 422(b) of the Code, pursuant to which
the Optionee has no tax consequences resulting from the grant or, subject to
certain holding period requirements, exercise of the option and the employer is
not entitled to a business expense deduction with respect thereto.
"NONSTATUTORY OPTION" shall mean any Option granted by the Committee
that does not meet the requirements of sections 421 through 424 of the Code, as
amended.
"OPTION" shall mean either an ISO or Nonstatutory Option, as the context
requires.
"OPTIONEE" shall mean a Participant who holds an Option.
"PARTICIPANTS" shall mean those individuals described in Section 1 of
this Plan selected by the Committee who are eligible under Section 4 of this
Plan for grants of either Options or Restricted Stock under this Plan.
"PERMANENT AND TOTAL DISABILITY" shall mean that an individual is unable
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
more than twelve (12) months. An individual shall not be considered to suffer
from Permanent and Total Disability unless such individual furnishes proof of
the existence thereof in such form and manner, and at such times, as the
<PAGE>
Committee may reasonably require. The scope of this definition shall
automatically be reduced or expanded to the extent that section 22(e)(3) of the
Code is amended to reduce or expand the scope of the definition of Permanent
and Total Disability thereunder.
"PLAN" shall mean this SFX Entertainment, Inc. 1998 Stock Option and
Restricted Stock Plan, as amended from time to time.
"PLAN AWARD" shall mean the grant of either an Option or Restricted
Stock, as the context requires.
"RESTRICTED STOCK" shall have that meaning set forth in Section 7(a) of
this Plan.
"RESTRICTED STOCK ACCOUNT" shall have that meaning set forth in Section
7(a)(ii) of this Plan.
"RESTRICTED STOCK CRITERIA" shall have that meaning in Section 7(a)(iv)
of this Plan.
"RESTRICTION PERIOD" shall have that meaning in Section 7(a)(iii) of
this Plan.
"SERVICES" shall mean services rendered to the Company or any of its
Subsidiaries as an Employee or Consultant, as the context requires.
"SHARE" shall mean one share of Stock, as adjusted in accordance with
Section 9 of this Plan (if applicable).
"STOCK" shall mean the Class A Common Stock of the Company, par value
$.01 per share.
"STOCK OPTION AGREEMENT" shall mean the agreement executed between the
Company and an Optionee that contains the terms, conditions and restrictions
pertaining to the granting of an Option.
"SUBSIDIARY" shall mean any corporation as to which more than fifty
(50%) percent of the outstanding voting stock or shares shall now or hereafter
be owned or controlled, directly by a person, any Subsidiary of such person, or
any Subsidiary of such Subsidiary.
"TEN-PERCENT SHAREHOLDER" shall mean a person that owns more than ten
percent (10%) of the total combined voting power of all classes of outstanding
stock of the Company or any Subsidiary, taking into account the attribution
rules set forth in section 424 of the Code, as amended. For purposes of this
definition of "Ten Percent Shareholder" the term "outstanding stock" shall
include all stock actually issued and outstanding immediately after the grant
of an Option to an Optionee. "Outstanding stock" shall not include reacquired
shares or shares authorized for issuance under outstanding Options held by the
Optionee or by any other person.
"VEST DATE" shall have that meaning in Section 7(a)(v) of this Plan.
SECTION 3
ADMINISTRATION
(A) GENERAL ADMINISTRATION. This Plan shall be administered by the
Committee, which shall consist of at least two persons, each of whom shall be
Disinterested Directors. The members of the Committee shall be appointed by the
Board of Directors for such terms as the Board of Directors may determine. The
Board of Directors may from time to time remove members from, or add members
to, the Committee. Vacancies on the Committee, however caused, may be filled by
the Board of Directors.
<PAGE>
(B) COMMITTEE PROCEDURES. The Board of Directors shall designate one of
the members of the Committee as chairman. The Committee may hold meetings at
such times and places as it shall determine. The acts of a majority of the
Committee members present at meetings at which a quorum exists, or acts reduced
to or approved in writing by a majority of all Committee members, shall be
valid acts of the Committee. A majority of the Committee shall constitute a
quorum.
(C) AUTHORITY OF COMMITTEE. This Plan shall be administered by, or under
the direction of, the Committee constituted in such a manner as to comply at
all times with Rule 16b-3 (or any successor rule) under the Exchange Act. The
Committee shall administer this Plan so as to comply at all times with the
Exchange Act and, subject to the Code, shall otherwise have absolute and final
authority to interpret this Plan and to make all determinations specified in or
permitted by this Plan or deemed necessary or desirable for its administration
or for the conduct of the Committee's business including without limitation the
authority to take the following actions:
(i) To interpret this Plan and to apply its provisions;
(ii) To adopt, amend or rescind rules, procedures and forms
relating to this Plan;
(iii) To authorize any person to execute, on behalf of the
Company, any instrument required to carry out the purposes of this Plan;
(iv) To determine when Plan Awards are to be granted under this
Plan;
(v) To select the Optionees and Participants;
(vi) To determine the number of Shares to be made subject to each
Plan Award;
(vii) To prescribe the terms, conditions and restrictions of each
Plan Award, including without limitation the Exercise Price and the
determination whether an Option is to be classified as an ISO or a Nonstatutory
Option;
(viii) To amend any outstanding Stock Option Agreement (other
than the Exercise Price) or the terms, conditions and restrictions of a grant
of Restricted Stock, subject to applicable legal restrictions and the consent
of the Optionee or Participant, as the case may be, who entered into such
agreement, or accelerate the vesting of any Plan Award;
(ix) To establish procedures so that an Optionee may obtain a
loan through a registered broker-dealer under the rules and regulations of the
Federal Reserve Board, for the purpose of exercising an Option;
(x) To establish procedures for an Optionee (1) to have withheld
from the total number of Shares to be acquired upon the exercise of an Option
that number of Shares having a Fair Market Value, which, together with such
cash as shall be paid in respect of fractional shares, shall equal the Exercise
Price, and (2) to exercise a portion of an Option by delivering that number of
Shares already owned by an Optionee having a Fair Market Value which shall
equal the partial Exercise Price and to deliver the Shares thus acquired by
such Optionee in payment of Shares to be received pursuant to the exercise of
additional portions of the Option, the effect of which shall be that an
Optionee can in sequence utilize such newly acquired shares in payment of the
Exercise Price of the entire Option, together with such cash as shall be paid
in respect of fractional shares;
<PAGE>
(xi) To establish procedures whereby a number of Shares may be
withheld from the total number of Shares to be issued upon exercise of an
Option, to meet the obligation of withholding for federal and state income and
other taxes, if any, incurred by the Optionee upon such exercise; and
(xii) To take any other actions deemed necessary or advisable for
the administration of this Plan.
All interpretations and determinations of the Committee made with
respect to the granting of Plan Awards shall be final, conclusive, and binding
on all interested parties. The Committee may make grants of Plan Awards on an
individual or group basis. No member of the Committee shall be liable for any
action that is taken or is omitted to be taken if such action or omission is
taken in good faith with respect to this Plan or grant of any Plan Award.
(D) HOLDING PERIOD. The Committee may in its sole discretion require as
a condition to the granting of any Plan Award, that a Participant hold the Plan
Awards for a period of six months following the date of such acquisition. This
condition shall be satisfied with respect to a derivative security if at least
six months elapse from the date of acquisition of the derivative security to
the date of disposition of the derivative security (other than upon exercise or
conversion) or its underlying equity security.
SECTION 4
ELIGIBILITY
(A) GENERAL RULE. Subject to the limitations set forth in subsection b
below or elsewhere in this Plan, Participants shall be eligible to participate
in this Plan.
(B) NON-EMPLOYEE INELIGIBLE FOR ISOS. In no event shall an ISO be
granted to any individual who is not an Employee on the Date of Grant.
SECTION 5
SHARES SUBJECT TO PLAN
BASIC LIMITATION. Shares offered under this Plan may be authorized but
unissued Shares or Shares that have been reacquired by the Company. The
aggregate number of Shares that are available for issuance under this Plan
shall not exceed two million (2,000,000) Shares, subject to adjustment pursuant
to Section 9 of this Plan. The Committee shall not issue more Shares than are
available for issuance under this Plan. The number of Shares that are subject
to unexercised Options at any time under this Plan shall not exceed the number
of Shares that remain available for issuance under this Plan. The Company,
during the term of this Plan, shall at all times reserve and keep available
sufficient Shares to satisfy the requirements of this Plan.
ADDITIONAL SHARES. In the event any outstanding Option for any reason
expires, is canceled or otherwise terminates, the Shares allocable to the
unexercised portion of such Option shall again be available for issuance under
this Plan. In the event that Shares issued under this Plan revert to the
Company prior to the Vest Date under a grant of Restricted Stock, such Shares
shall again be available for issuance under this Plan.
SECTION 6
TERMS AND CONDITIONS OF OPTIONS
<PAGE>
(A) TERM OF OPTION. The term of each Option shall be ten (10) years from
the Date of Grant or such shorter term as may be determined by the Committee;
provided, however, in the case of an ISO granted to a Ten-Percent Shareholder,
the term of such ISO shall be five (5) years from the Date of Grant or such
shorter time as may be determined by the Committee.
(B) EXERCISE PRICE AND METHOD OF PAYMENT.
(I) EXERCISE PRICE. The Exercise Price shall be such price as
is determined by the Committee in its sole discretion and set forth in the
Stock Option Agreement; provided, however, in the case of an ISO granted to an
Optionee, the Exercise Price shall not be less than 100% of the Fair Market
Value of the Shares subject to such option on the Date of Grant (or 110% in the
case of an Option granted to a Participant who is a Ten-Percent Shareholder on
the Date of Grant).
(II) PAYMENT OF SHARES. Payment for the Shares upon exercise of
an Option shall be made in cash, by certified check, or if authorized by the
Committee, by delivery of other Shares having a Fair Market Value on the date
of delivery equal to the aggregate exercise price of the Shares as to which
said Option is being exercised, or by any combination of such methods of
payment or by any other method of payment as may be permitted under applicable
law and this Plan and authorized by the Committee under Section 3(c) of this
Plan.
(C) EXERCISE OF OPTION.
(I) PROCEDURE FOR EXERCISE; RIGHTS OF SHAREHOLDER. Any Option
granted hereunder shall be exercisable at such times under such conditions as
shall be determined by the Committee, including without limitation performance
criteria with respect to the Company and/or the Optionee and in accordance with
the terms of this Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Stock Option Agreement by the Optionee entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the Committee,
consist of any form of consideration and method of payment allowable under
Section 6(b)(ii) of this Plan. Upon the receipt of notice of exercise and full
payment for the Shares, the Shares shall be deemed to have been issued and the
Optionee shall be entitled to receive such Shares and shall be a shareholder
with respect to such Shares, and the Shares shall be considered fully paid and
nonassessable. No adjustment will be made for a dividend or other right for
which the record date is prior to the date on which the stock certificate is
issued, except as provided in Section 9 of this Plan.
Each exercise of an Option shall reduce, by an equal number, the total
number of Shares that may thereafter be purchased under such Option.
(II) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. Except
as provided in Subsections 6(c)(iii) and 6(c)(iv) below, an Optionee holding an
Option who ceases to be an Employee or Consultant of the Company may, but only
until the earlier of the date (x) the Option held by the Optionee expires, or
(y) thirty (30) days after the date such Optionee ceases to be an Employee or a
Consultant, exercise the Option to the extent that the Optionee was entitled to
exercise it on such date; provided, however, that in the event the Optionee is
an Employee and is terminated without cause (as determined in the sole
discretion
<PAGE>
of the Committee) then the thirty (30) day period described in this sentence
shall be automatically extended to ninety (90) days (and in the case of a
Nonstatutory Option, such period shall be automatically extended to six (6)
months), unless the Committee further extends such period in its sole
discretion. To the extent that the Optionee was not entitled to exercise an
Option on such date, or if the Optionee does not exercise it within the time
specified herein, such Option shall terminate. The Committee shall have the
authority to determine the date an Optionee ceases to be an Employee or a
Consultant.
(III) PERMANENT AND TOTAL DISABILITY.
Notwithstanding the provisions of Section 6(c)(ii)
above, in the event an Optionee is unable to continue to perform Services for
the Company or any of its Subsidiaries as a result of such Optionee's Permanent
and Total Disability (and, for ISOs, at the time such Permanent and Total
Disability begins, the Optionee was an Employee and had been an Employee since
the Date of Grant), such Optionee may exercise an Option in whole or in part
notwithstanding that such Option may not be fully exercisable, but only until
the earlier of the date (x) the Option held by the Optionee expires, or (y)
twelve (12) months from the date of termination of Services due to such
Permanent and Total Disability. To the extent the Optionee is not entitled to
exercise an Option on such date or if the Optionee does not exercise it within
the time specified herein, such Option shall terminate.
(IV) DEATH OF AN OPTIONEE. Upon the death of an Optionee, any
Option held by an Optionee shall terminate and be of no further effect;
provided, however, notwithstanding the provisions of Section 6(c)(ii) above, in
the event an Optionee's death occurs during the term of an Option held by such
Optionee and, at the time of death, the Optionee was an Employee or Consultant
(and, for ISOs, the Optionee had been an Employee since the Date of Grant), the
Option may be exercised in whole or in part notwithstanding that such Option
may not have been fully exercisable on the date of the Optionee's death, but
only until the earlier of the date (x) the Option held by the Optionee expires,
or (y) twelve (12) months from the date of the Optionee's death, by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance. To the extent the Option is not entitled to be
exercised on such date or if the Option is not exercised within the time
specified herein, such Option shall terminate.
(D) NON-TRANSFERABILITY OF OPTIONS. Except as may be permitted by the
Committee in its sole discretion, any Option granted under this Plan may not be
sold, pledged, assigned, hypothecated, transferred or disposed of in any manner
other than by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Code or Title I of the
Employee Retirement Income Security Act, or the rules thereunder, and is not
assignable by operation of law or subject to execution, attachment or similar
process. Duting the Optinee's lifetime, any Option granted under this Plan can
only be exercised by such Optionee. Any attempted sale, pledge, assignment,
hypothecation or other transfer of the Option contrary to the provisions hereof
and the levy of any execution, attachment or similar process upon the Option
shall be null and void and without force or effect. No transfer of the Option
by will or by the laws of descent and distribution shall be effective to bind
the Company unless the Company shall have been furnished written notice thereof
and an authenticated copy of the will and/or such other evidence as the
Committee may deem necessary to establish the validity of the transfer and the
acceptance by the transferee or transferees of the terms and conditions of the
Option. The terms of any Option transferred by will or by the laws of descent
and distribution shall be binding upon the executors, administrators, heirs and
successors of Optionee.
(E) TIME OF GRANTING OPTIONS. Any Option granted hereunder shall be
deemed to be granted on the Date of Grant. Written notice of the Committee's
determination to grant an Option to an Employee,
<PAGE>
evidenced by a Stock Option Agreement, dated as of the Date of Grant, shall be
given to such Employee within a reasonable time after the Date of Grant.
(F) MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Within the
limitations of this Plan, the Committee may modify, extend or renew outstanding
Options or may accept the cancellation of outstanding Options (to the extent
not previously exercised) for the granting of new Options in substitution
therefor. The foregoing notwithstanding, no modification of an Option shall,
without the consent of the Optionee, alter or impair the Optionee's rights or
obligations under such Option; provided that the Committee may, in its sole
discretion, and without the consent of the Optionee or any other person, reduce
the exercise price of all or any part of any Option or accelerate the vesting
of all or part of any Option.
(G) RESTRICTIONS ON TRANSFER OF SHARES. Any Shares issued upon exercise
of an Option shall be subject to such rights of repurchase and other transfer
restrictions as the Committee may determine in its sole discretion. Such
restrictions shall be set forth in the applicable Stock Option Agreement.
(H) SPECIAL LIMITATION ON ISOS. To the extent that the aggregate Fair
Market Value (determined on the Date of Grant) of the Shares with respect to
which ISOs are exercisable for the first time by an individual during any
calendar year under this Plan, and under all other plans maintained by the
Company, exceeds $100,000, such Options shall be treated as Options that are
not ISOs.
(I) LEAVES OF ABSENCE. Leaves of absence approved by the Committee which
conform to the policies of the Company shall not be considered termination of
employment if the employer-employee relationship as defined under the Code or
the regulations promulgated thereunder otherwise exists.
(J) LIMITATION ON GRANTS OF OPTIONS TO COVERED EMPLOYEES. The total
number of Shares for which Options may be granted and which may be awarded as
Restricted Stock to any "covered employee" within the meaning of Section 162(m)
of the Code and the regulations promulgated thereunder, as amended from time to
time, during any one-year period shall not exceed 350,000 in the aggregate.
(K) DISQUALIFYING DISPOSITIONS. The Stock Option Agreement evidencing
any ISO granted under this Plan shall provide that if the Optionee makes a
disposition, within the meaning of Section 425(c) of the Code and the
regulations promulgated thereunder, of any share or shares issued to him
pursuant to the exercise of the ISO within the two-year period commencing on
the day after the Date of Grant of such Option or within a one-year period
commencing on the day after the date of transfer of the share or shares to him
pursuant to the exercise of such Option, he shall, within ten days of such
disposition, notify the Company thereof and immediately deliver to the Company
any amount of federal income tax withholding required by law.
(L) WITHHOLDING TAXES. The Committee shall require an Optionee to pay to
the Company at the time of exercise of an Option the amount that the Company
deems necessary to satisfy its obligation to withhold federal, state or local
income or other taxes incurred by reason of the exercise. Upon the exercise of
an Option requiring tax withholding, an Optionee may either pay such taxes in
cash or make a written election to have Shares withheld by the Company from the
shares otherwise to be received by the Optionee. The acceptance of any such
election by an Optionee shall be at the sole discretion of the Committee. In
addition, the Committee may require the Company to withhold Shares from the
Shares otherwise to be received by an Optionee upon exercise of an option. The
number of Shares withheld pursuant to this paragraph shall have an aggregate
Fair Market Value on the date of exercise sufficient to satisfy the applicable
withholding taxes.
SECTION 7
RESTRICTED STOCK
<PAGE>
(A) AUTHORITY TO GRANT RESTRICTED STOCK. The Committee shall have the
authority to grant to Participants Shares that are subject to certain terms,
conditions and restrictions (the "Restricted Stock"). The Restricted Stock may
be granted by the Committee either separately or in combination with Options.
The terms, conditions and restrictions of the Restricted Stock shall be
determined from time to time by the Committee without limitation, except as
otherwise provided in this Plan; provided, however, that each grant of
Restricted Stock shall require the Participant to remain an Employee of (or
otherwise provide Services to) the Company or any of its Subsidiaries for at
least six (6) months from the Date of Grant. The granting, vesting and issuing
of the Restricted Stock shall also be subject to the following provisions:
(I) NATURE OF GRANT. Restricted Stock shall be granted to
Participants for Services rendered and at no additional cost to Participant;
provided, however, that the value of the Services performed must, in the
opinion of the Committee, equal or exceed the par value of the Restricted Stock
to be granted to the Participant.
(II) RESTRICTED STOCK ACCOUNT. The Company shall establish a
restricted stock account (the "Restricted Stock Account") for each Participant
to whom Restricted Stock is granted, and such Restricted Stock shall be
credited to such account. No certificates will be issued to the Participant
with respect to the Restricted Stock until the Vest Date as provided herein.
Every credit of Restricted Stock under this Plan to a Restricted Stock Account
shall be considered "contingent" and unfunded until the Vest Date. Such
contingent credits shall be considered bookkeeping entries only,
notwithstanding the "crediting" of "dividends" as provided herein. Such
accounts shall be subject to the general claims of the Company's creditors. The
Participant's rights to the Restricted Stock Account shall be no greater than
that of a general creditor of the Company. Nothing contained herein shall be
construed as creating a trust or fiduciary relationship between the
Participants and the Company, the Board of Directors or the Committee.
(III) RESTRICTIONS. The terms, conditions and restrictions of
the Restricted Stock shall be determined by the Committee on the Date of Grant.
The Restricted Stock may not be sold, assigned, transferred, redeemed, pledged
or otherwise encumbered during the period in which the terms, conditions and
restrictions apply (the "Restriction Period"). More than one grant of
Restricted Stock may be outstanding at any one time, and the Restriction
Periods may be of different lengths. Receipt of the Restricted Stock is
conditioned upon satisfactory compliance with the terms, conditions and
restrictions of this Plan and those imposed by the Committee.
(IV) RESTRICTED STOCK CRITERIA. At the time of each grant of
Restricted Stock, the Committee in its sole discretion may establish certain
criteria to determine the times at which restrictions placed on Restricted
Stock shall lapse (i.e., the termination of the Restriction Period), which
criteria may include without limitation performance measures and targets and/or
holding period requirements (the "Restricted Stock Criteria"). The Committee
may establish a corresponding relationship between the Restricted Stock
Criteria and (x) the number of Shares of Restricted Stock that may be earned,
and (y) the extent to which the terms, conditions and restrictions on the
Restricted Stock shall lapse. Restricted Stock Criteria may vary among grants
of Restricted Stock; provided, however, that once the Restricted Stock Criteria
are established for a grant of Restricted Stock, the Restricted Stock Criteria
shall not be modified with respect to such grant.
(V) VESTING. On the date the Restriction Period terminates, the
Restricted Stock shall vest in the Participant (the "Vest Date"), who may then
require the Company to issue certificates evidencing the Restricted Stock
credited to the Restricted Stock Account of such Participant.
<PAGE>
(VI) DIVIDENDS. The Committee may provide from time to time
that amounts equivalent to dividends shall be payable with respect to the
Restricted Stock held in the Restricted Stock Account of a Participant. Such
amounts shall be credited to the Restricted Stock Account and shall be payable
to the Participant on the Vest Date.
(VII) TERMINATION OF SERVICES. If a Participant (x) with the
consent of the Committee, ceases to be an Employee of, or otherwise ceases to
provide Services to, the Company or any of its Subsidiaries, or (y) dies or
suffers from Permanent and Total Disability, the vesting or forfeiture
(including without limitation the terms, conditions and restrictions) of any
grant under this Section 7 shall be determined by the Committee in its sole
discretion, subject to any limitations or terms of this Plan. If the
Participant ceases to be an Employee of, or otherwise ceases to provide
Services to, the Company or any of its Subsidiaries for any other reason, all
grants of Restricted Stock under this Plan shall be forfeited (subject to the
terms of this Plan).
(B) DEFERRAL OF PAYMENTS.
The Committee may establish procedures by which a Participant
may elect to defer the transfer of Restricted Stock to the Participant. The
Committee shall determine the terms and conditions of such deferral in its sole
discretion.
SECTION 8
ISSUANCE OF SHARES
As a condition to the transfer of any Shares issued under this Plan, the
Company may require an opinion of counsel, satisfactory to the Company, to the
effect that such transfer will not be in violation of the Securities Act of
1933, as amended (the "Securities Act"), or any other applicable securities
laws, rules or regulations, or that such transfer has been registered under
federal and all applicable state securities laws. The Company may refrain from
delivering or transferring Shares issued under this Plan until the Committee
has determined that the Participant has tendered to the Company any and all
applicable federal, state or local tax owed by the Participant as the result of
the receipt of a Plan Award, the exercise of an Option or the disposition of
any Shares issued under this Plan, in the event that the Company reasonably
determines that it might have a legal liability to satisfy such tax. The
Company shall not be liable to any person or entity for damages due to any
delay in the delivery or issuance of any stock certificate evidencing any
Shares for any reason whatsoever.
SECTION 9
CAPITALIZATION ADJUSTMENTS; MERGER; CHANGE IN CONTROL
(A) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any required
action by the stockholders of the Company, the number of Shares covered by each
outstanding Option, the aggregate number of Shares that have been authorized
for issuance under this Plan and the number of Shares of Restricted Stock
credited to any Restricted Stock Account of a Participant (as well as the
Exercise Price covered by any outstanding Option), shall be proportionately
adjusted for any increase or decrease in the number of issued Shares resulting
from a stock split, payment of a stock dividend with respect to the Stock or
any other increase or decrease in the number of issued Shares effected without
receipt of consideration by the Company. Such adjustment shall be made by the
Committee in its sole discretion, which adjustment shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class shall affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of Shares subject to an
Option.
<PAGE>
(B) DISSOLUTION, LIQUIDATION, SALE OF ASSETS OR MERGER. In the event of
the dissolution or liquidation of the Company, other than pursuant to a
Reorganization (hereinafter defined), any Option granted under the Plan shall
terminate as of a date to be fixed by the Committee, provided that not less
than 30 days written notice of the date so fixed shall be given to each
Optionee and each such Optionee shall have the right during such period to
exercise his Options as to all or any part of the Shares covered thereby
including Shares as to which such Options would not otherwise be exercisable by
reason of an insufficient lapse of time.
In the event of a Reorganization in which the Company is not the
surviving or acquiring company, or in which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization, then
(i) if there is no plan or agreement respecting the
Reorganization ("Reorganization Agreement") or if
the Reorganization Agreement does not specifically
provide for the change, conversion or exchange of
the Shares under outstanding unexercised Options for
securities of another corporation, then the
Committee shall take such action, and the Options
shall terminate, as provided above; or
(ii) if there is a Reorganization Agreement and if the
Reorganization Agreement specifically provides for
the change, conversion or exchange of the shares
under outstanding or unexercised options for
securities of another corporation, then the
Committee shall adjust the shares under such
outstanding unexercised Options (and shall adjust
the Shares which are then available to be optioned,
if the Reorganization Agreement makes specific
provisions therefore) in a manner not inconsistent
with the provisions of the Reorganization Agreement
for the adjustment, change, conversion or exchange
of such stock and such options.
The term "Reorganization" as used in this Subsection 9(b) shall mean any
statutory merger, statutory consolidation, sale of all or substantially all of
the assets of the Company, or sale, pursuant to an agreement with the Company,
of securities of the Company pursuant to which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization.
Except as provided above in this Section 9(b) and except as otherwise
provided by the Committee in its sole discretion, any Options shall terminate
immediately prior to the consummation of such proposed action.
Fractional shares resulting from any adjustments pursuant to this
Section may be settled in cash or othewise as the Committee shall determine.
Notice of any adjustment shall be given by the Company to each holder of an
Option or share of Restricted Stock which shall have been so adjusted and such
adjustment (whether or not such notice is given) shall be effective and binding
for all purposes of the Plan.
(C) CHANGE IN CONTROL. Subject to Section 9(b), in the event there
occurs a Change of Control, (i) the Optionees shall have the right to exercise
from and after the date of the Change in Control the Option held by such
Optionee in whole or in part notwithstanding that such Option may not be fully
exercisable, and (ii) any and all restrictions on any Restricted Stock credited
to a Restricted Stock Account shall lapse and such stock shall immediately vest
in the Participants notwithstanding that the Restricted Stock held in such
account was unvested.
<PAGE>
SECTION 10
NO EMPLOYMENT RIGHTS
No provision of this Plan, under any Stock Option Agreement or under any
grant of Restricted Stock shall be construed to give any Participant any right
to remain an Employee of, or provide Services to, the Company or any of its
Subsidiaries or to affect the right of the Company to terminate any
Participant's service at any time, with or without cause.
SECTION 11
TERM OF PLAN; EFFECT OF AMENDMENT OR TERMINATION
(A) EFFECTIVE DATE; TERM OF PLAN. This Plan shall become effective
upon its adoption by the Board of Directors. This Plan shall continue in
effect for a term of ten (10) years unless sooner terminated under this
Section 11.
(B) AMENDMENT AND TERMINATION. The Board of Directors in its sole
discretion may terminate this Plan at any time. The Board of Directors may
amend this Plan at any time in such respects as the Board of Directors may deem
advisable; provided, that any change in the aggregate number of Shares that may
be issued under this Plan, other than in connection with an adjustment under
Section 9 of this Plan, shall require approval of the holders of a majority of
the outstanding Shares entitled to vote.
(C) EFFECT OF TERMINATION. In the event this Plan is terminated, no
Shares shall be issued under this Plan, except upon exercise of an Option
granted prior to such termination or issuance of Shares of Restricted Stock
previously credited to a Restricted Stock Account. The termination of this
Plan, or any amendment thereof, shall not affect any Shares previously issued
to a Participant, any Option previously granted under this Plan or any
Restricted Stock previously credited to a Restricted Stock Account.
SECTION 12
GOVERNING LAW
THIS PLAN AND ANY AND ALL STOCK OPTION AGREEMENTS AND AGREEMENTS
RELATING TO THE GRANT OF RESTRICTED STOCK EXECUTED IN CONNECTION WITH THIS PLAN
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
DELAWARE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
<PAGE>
January 30, 1998
To the Board of Directors of
SFX Entertainment, Inc.
650 Madison Avenue
New York, New York 10022
Re: Securities and Exchange Commission
Registration Statement on Form S-1
Gentlemen:
As counsel to SFX Entertainment, Inc., a Delaware corporation
(the "Company"), we have assisted in the preparation and filing with the
Securities and Exchange Commission, under the Securities Act of 1933, as
amended, of the Company's Registration Statement on Form S-1 (Registration No.
333-43287) (the "Registration Statement"). The Registration Statement relates
to the distribution as a dividend of up to 14,792,884 shares of the Company's
Class A Common Stock, par value $.01 per share, and up to 1,047,037 shares of
the Company's Class B Common Stock, par value $.01 per share (collectively, the
"Shares"), to the stockholders and certain other security holders of SFX
Broadcasting, Inc. ("SFX") pursuant to the Company's spin-off from SFX (the
"Spin-Off").
In connection with this opinion, we have examined and
considered the original or copies, certified or otherwise identified to our
satisfaction, of the Company's Certificate of Incorporation, as amended to
date, its By-laws, resolutions of its Board of Directors, officers'
certificates and such other documents and corporate records as we have deemed
appropriate for purposes of rendering this opinion.
In all examinations of documents, instruments and other
papers, we have assumed the genuineness of all signatures on original and
certified documents and the conformity to original and certified documents of
all copies submitted to us as conformed, photostat or other copies. As to
matters of fact which have not been independently established, we have relied
upon representations of officers of the Company.
<PAGE>
SFX Entertainment, Inc.
January 30, 1998
Page 2
Based upon the foregoing examination and subject to the
assumptions and qualifications herein contained, we are of the opinion that the
Shares will be legally issued, fully paid and non-assessable when and to the
extent distributed by SFX pursuant to the Spin-Off and in the manner
contemplated by the Registration Statement.
The foregoing opinion is subject to the following
assumptions:
(A) The common stock of SFX, outstanding on the record date of the
Spin-Off, was legally issued, fully paid and non-assessable.
(B) SFX distributes the Shares in accordance with Section 170 of the
General Corporation Law of the State of Delaware.
(C) The distribution of Shares does not render SFX insolvent.
(D) The Company has sufficient surplus at the time of its
recapitalization.
We hereby expressly consent to the reference to our Firm in
the Registration Statement under the Prospectus caption "Legal Matters," to the
inclusion of this opinion as an exhibit to the Registration Statement and to
the filing of this opinion with any other appropriate government agency.
Very truly yours,
BAKER & McKENZIE
HMB/AC
<PAGE>
Baker & McKenzie
Exhibit 21.1
Subsidiaries of SFX Entertainment, Inc.
NAME STATE OF INCORPORATION /
STATE OF FORMATION
1. SFX Concerts, Inc. Delaware
2. Delsener/Slater Enterprises, Inc. Delaware
3. In House Tickets, Inc. New York
4. Connecticut Performing Arts, Inc. Connecticut
5. Connecticut Amphitheater Development Corp. Connecticut
6. Connecticut Concerts, Incorporated Connecticut
7. Ardee Festivals N.J., Inc. New Jersey
8. Beach Concerts, Inc. New York
9. Ardee Productions, Ltd. New York
10. Exit 116 Revisited, Inc. New Jersey
11. Dumb Deal, Inc. New York
12. Broadway Concerts, Inc. New York
13. NOC, Inc. Connecticut
14. FPI Concerts, Inc. Delaware
15. Irving Plaza Concerts, Inc. Delaware
16. Sunshine Concerts, LLC Delaware
17. Northeast Ticketing Company Connecticut
18. Southeast Ticketing Company Connecticut
19. QN Corp. Connecticut
20. Atlanta Concerts, Inc. Delaware
21. SFX Broadcasting of the Midwest, Inc. Delaware
22. Sunshine Designs, Inc. Delaware
23. Sunshine Designs, LP Delaware
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Baker & McKenzie
NAME STATE OF INCORPORATION /
STATE OF FORMATION
24. Suntex Acquisition, Inc. Delaware
25. Suntex Acquisition, LP Delaware
26. Deer Creek Amphitheater Concerts, Inc. Delaware
27. Deer Creek Amphitheater Concerts, LP Delaware
28. Murat Center Concerts, Inc. Delaware
29. Murat Center Concerts, LP Delaware
30. Polaris Amphitheater Concerts, Inc. Delaware
31. Westbury Music Fair, LLC Delaware
32. Contemporary Group Acquisition Corp. Delaware
33. BGP Acquisition, LLC Delaware
34. SFX Network Group, LLC Delaware
35. Connecticut Performing Arts Partners Connecticut
36. Conn Ticketing Company Connecticut
37. ProTix Connecticut General Partnership
(50% ownership) Wisconsin
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CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated (i) January 16, 1998 with respect to SFX
Entertainment, Inc. and Subsidiaries; (ii) October 2, 1997 with respect to
Delsener/Slater Enterprises, Ltd. and Affiliated Companies; (iii) December 13,
1996, except for note 10 as to which the date is August 22, 1997, with
respect to PACE Entertainment Corporation and Subsidiaries; (iv) November 25,
1997 with respect to Contemporary Group; (v) November 20, 1997 with respect
to SJS Entertainment Corporation and Affiliated Company; (vi) November 20, 1997
with respect to The Album network, Inc. and Affiliated Companies;
(vii) December 18, 1997 with respect to BG Presents, Inc. and Subsidiaries;
and (viii) November 14, 1997 with respect to Concert/Southern Promotions and
Affiliated Companies, each included in the Registration Statement on Form S-1
and related Prospectus of SFX Entertainment, Inc. for the registration of
15,839,921 shares of its common stock.
/s/ Ernst & Young LLP
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ERNST & YOUNG LLP
New York, New York
January 30, 1998
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CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of
our report on the combined financial statements of Deer Creek Partners, L.P.
and Murat Centre, L.P. dated September 29, 1997 (and to all references
to our Firm) included in or made a part of this registration statement
on Form S-1.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
January 28, 1998.
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ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of
our report on the combined financial statements of Connecticut Performing
Arts, Inc. and Connecticut Performing Arts Partners dated March 21, 1997
(and to all references to our Firm) included in or made a part of this
registration statement on Form S-1.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 28, 1998
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CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Amendment No. 2 to the Registration Statement on Form S-1 of our
report dated December 12, 1996 relating to the financial statements
of Pavilion Partners, which appears in such Prospectus. We also consent
to the reference to us under the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Houston, Texas
January 28, 1998
