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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 26, 1999
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SFX ENTERTAINMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 7922 13-3977880
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
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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)
WITH COPIES TO:
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WILLIAM SCHWITTER
AMAR BUDARAPU
BAKER & MCKENZIE PAUL, HASTINGS, JANOFSKY & WALKER, LLP
1200 SMITH STREET, SUITE 1200 399 PARK AVENUE
HOUSTON, TEXAS 77002 NEW YORK, NEW YORK 10022
(713) 427-5000 (212) 318-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective and the
consummation of the merger of a wholly-owned subsidiary of the Registrant with
and into The Marquee Group, Inc., as described in the Agreement and Plan of
Merger.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
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(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. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) REGISTRATION FEE(3)
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Class A Common Stock,
par value $.01 per share......... 2,281,934 -- $ 75,168,333.19 $ 10,733.94
</TABLE>
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(1) Represents the estimated maximum number of shares of Class A common
stock, par value $.01 per share, of SFX Entertainment, Inc. to be issued
to the holders of securities of The Marquee Group, Inc. pursuant to the
Agreement and Plan of Merger, including shares issuable upon exercise of
all outstanding options and warrants. Estimated solely for purposes of
fee calculation.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and Rule 457(f) of the Securities Act, in the
following manner: (a) on the basis of the average of the high and low
prices per share of the 18,085,614 outstanding shares of common stock of
Marquee on January 21, 1999 ($45/32 per share), which in the aggregate is
equal to $75,168,333.19 and (b) on the basis of the book value per
outstanding option, stock appreciation right or warrant of Marquee on
September 30, 1998, which Marquee has determined is zero.
(3) The total registration fee due is $20,896.80, calculated by multiplying
$75,168,333.19 by .000278. A fee of $10,162.86, calculated pursuant to
Rule 0-11 of the Securities and Exchange Act of 1934, as amended, has
been previously paid in connection with the confidential filing of the
preliminary Proxy Statement -- Prospectus pursuant to Section 14(a) of
the Exchange Act. The remaining registration fee for the securities
registered hereby of $10,733.94, calculated by subtracting $10,162.86
from $20,896.80, the total registration fee, is being paid herewith.
--------------
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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
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THE INFORMATION CONTAINED IN THIS PROXY STATEMENT--PROSPECTUS IS NOT COMPLETE
AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROXY STATEMENT--PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 26, 1999
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[GRAPHIC OMITTED]
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[GRAPHIC OMITTED]
THE MARQUEE GROUP, INC. SFX ENTERTAINMENT, INC.
PROXY STATEMENT PROSPECTUS
SPECIAL MEETING TO BE HELD ON , 1999 CLASS A COMMON STOCK
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SFX Entertainment, Inc. has agreed to acquire The Marquee Group, Inc. in a
merger transaction. If the merger is completed, SFX will issue to you shares of
SFX Class A common stock in exchange for your shares of Marquee stock. For each
share of Marquee stock that you own on the day of the merger, you will receive
0.1111 of a share of SFX Class A common stock--except that, if the SFX stock
price is more than $42.75, then you will receive $4.75 to $5.35 worth of SFX
stock for each share of Marquee stock. The SFX stock price that we will use to
calculate this exchange ratio will be the average of the last reported sale
price of the SFX Class A common stock for the 15 trading days ending 5 days
before the merger. SFX will issue a maximum of approximately 2,183,867 shares
of SFX Class A common stock in the merger, assuming the exercise of all Marquee
stock options and warrants.
The SFX Class A common stock trades on the Nasdaq National Market System
under the symbol "SFXE." The SFX Class A common stock has one vote per share,
while SFX's Class B common stock is not publicly traded and generally has ten
votes per share.
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The date, time and place of the special , 1999, 10:00 a.m.
meeting of Marquee stockholders are: 888 Seventh Avenue, 37th Floor
New York, New York 10019
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At the special meeting, you will vote on whether to adopt the merger
agreement and the merger, and will transact any other business that properly
comes before the meeting. We cannot complete the merger unless the holders of a
majority of the outstanding shares of Marquee common stock vote to adopt the
merger agreement and the merger. YOUR VOTE IS VERY IMPORTANT. Whether or not
you plan to attend the special meeting, please take the time to vote by
completing and mailing the enclosed proxy card to us. Marquee's board of
directors recommends that you vote FOR adoption of the merger agreement and the
merger.
This document provides you with detailed information about the proposed
merger. Please read this entire document carefully. AN INVESTMENT IN SFX CLASS
A COMMON STOCK WILL INVOLVE RISKS AND UNCERTAINTIES. SEE "RISK FACTORS"
BEGINNING ON PAGE 17.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
document is truthful or complete. Any representation to the contrary is a
criminal offense.
This document is dated , 1999 and was first mailed to stockholders on ,
1999.
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TABLE OF CONTENTS
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PAGE
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Questions and Answers about the
Merger .................................. 1
Summary .................................... 3
The Companies ........................... 3
The Merger .............................. 3
Market Price Information ................ 7
Selected Consolidated Financial
Data ................................. 8
Comparative Per Share Data .............. 15
Risk Factors ............................... 17
Decreases in the SFX stock price
can decrease the value you
receive in the merger ................ 17
Increases in the SFX stock price
can decrease the amount of your
interest in the combined company 17
If SFX is unable to integrate the
operations of its various
businesses, its overall business
may suffer ........................... 17
SFX has a substantial amount of
debt which may harm it and its
shareholders ......................... 18
SFX's credit facility and indentures
restrict its operations .............. 18
If SFX is unable to complete other
acquisitions in the future, SFX's
business and stock price may
suffer ............................... 19
SFX will be required to make large
payments upon a change of
control, which may harm SFX's
financial condition .................. 19
SFX and its management may have
conflicts of interest with Marquee 20
SFX may be forced to sell some of
its subsidiaries, which may
prevent SFX from realizing the
full value of these subsidiaries ..... 20
SFX may have lower revenues
because it is unable to secure
appropriate artists, events
and venues ........................... 21
SFX may have environmental
liabilities that could affect its
results of operations or financial
condition ............................ 21
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The Department of Justice
investigation may harm SFX's
operations ........................... 21
Because a change of control of SFX
would be difficult to achieve,
holders of SFX stock may not
have the opportunity to receive a
premium for their shares ............. 21
SFX's operations may suffer from
Year 2000 computer problems .......... 22
The Special Meeting ........................ 23
Special Meeting ......................... 23
Matters to be Considered ................ 23
Recommendation .......................... 23
Record Date; Quorum ..................... 23
Share Ownership of Management
and Certain Stockholders ............. 23
Votes Required; Effect of
Abstentions and Non-Votes ............ 23
Voting and Revocation of Proxies ........ 23
Solicitation of Proxies; Expenses ....... 24
The Merger ................................. 25
Background of the Merger ................ 25
Marquee's Reasons for the Merger ........ 31
Opinion of Marquee's Financial
Advisor .............................. 33
SFX's Reasons for the Merger ............ 38
Accounting Treatment .................... 39
Federal Income Tax Consequences ......... 39
Regulatory Matters ...................... 41
Appraisal Rights ........................ 41
Federal Securities Laws
Consequences; Resale
Restrictions ......................... 41
Interests of Marquee's Management
and Directors in the Merger .......... 41
Litigation .............................. 43
Comparative Per Share Market Price
and Dividend Information ................ 45
The Merger Agreement ....................... 46
The Merger .............................. 46
The Exchange Ratio ...................... 46
Stock Options ........................... 47
Warrants ................................ 47
Stock Appreciation Rights ............... 48
Representations and Warranties .......... 48
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Covenants ................................ 49
Non-Solicitation ......................... 49
Conditions ............................... 50
Termination; Fees and Expenses ........... 51
SFX Unaudited Pro Forma
Condensed Combined Financial
Statements ............................... 53
Marquee Unaudited Pro Forma
Condensed Combined Financial
Statements ............................... 78
SFX Management's Discussion and
Analysis of Financial Condition and
Results of Operations .................... 84
The Spin-Off ............................. 84
Financings ............................... 85
1997 Acquisitions ........................ 86
1998 Acquisitions ........................ 86
Recent Acquisition ....................... 89
Marquee Merger ........................... 89
Cellar Door Acquisition .................. 90
ISI Acquisition .......................... 90
Agreement with Ticketmaster .............. 91
Proposed Stock Option Plan ............... 91
Results of Operations .................... 91
Historical Results ....................... 94
Pro Forma Results ........................ 97
Liquidity and Capital Resources .......... 99
Recent Accounting
Pronouncements ........................ 106
Marquee Management's Discussion
and Analysis of Financial Condition
and Results of Operations ............... 108
Business ................................. 108
Results of Operations .................... 110
Pro Forma Results of Operations .......... 112
Liquidity and Capital Resources .......... 113
Recent Accounting
Pronouncements ........................ 118
Overview of the Live Entertainment
Industry ................................. 119
Concert Promotion Industry ............... 119
Theatrical Industry ...................... 120
Motor Sports Industry .................... 121
Talent Representation Industry ........... 121
SFX's Business .............................. 122
Summary .................................. 122
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Broadcasting Merger and the
Spin-Off .............................. 123
1997 Acquisitions ........................ 123
1998 Acquisitions ........................ 124
Recent Acquisition ....................... 126
Marquee Merger ........................... 126
Cellar Door Acquisition .................. 126
ISI Acquisition .......................... 126
Agreement with Ticketmaster .............. 126
Services Provided by SFX ................. 126
Operating Strategy ....................... 139
Regulatory Matters ....................... 141
Properties ............................... 142
Litigation ............................... 142
Employees ................................ 142
Additional Information ................... 143
Marquee's Business .......................... 144
Summary .................................. 144
1997 Acquisitions ........................ 144
1998 Acquisitions ........................ 145
Acquisition and Operating Strategy 145
Services Provided by Marquee ............. 147
Dependence on a Limited Number
of Clients and Events; Revenue
Recognition ........................... 153
Competition .............................. 154
Employees ................................ 154
Properties ............................... 154
Litigation ............................... 154
Potential Conflicts of Interest .......... 155
Additional Information ................... 155
Agreement Related to the Cellar
Door Acquisition ......................... 156
SFX Management .............................. 157
Directors and Executive Officers ......... 157
Compensation of Directors ................ 161
Executive Compensation ................... 163
Aggregated Option Exercises in
Last Fiscal Year and Fiscal-End
Option Values ......................... 164
Spin-Off Shares .......................... 165
Employment Agreements and
Arrangements with Certain
Officers and Directors ................ 165
Marquee Management .......................... 170
Directors and Executive Officers ......... 170
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Management Compensation .............. 172
Aggregate Option/SAR Exercises in
1997 and Fiscal Year-end
Option/SAR Values ................. 175
Employment Agreements ................ 175
Director Compensation ................ 176
SFX Principal Stockholders .............. 177
Possible Change in Control ........... 179
Marquee Principal Stockholders .......... 180
Escrow Shares ........................ 182
Certain Relationships and Related
Transactions of SFX .................. 183
Potential Conflicts of Interest ...... 183
Agreements Prior to the Spin-Off ..... 183
Employment Agreements ................ 184
Assumption of Employment
Agreements; Certain Change of
Control Payments .................. 184
Indemnification of Mr. Sillerman ..... 185
Relationship Between Howard J.
Tytel and Baker & McKenzie ........ 185
Arrangement Between Robert F.X.
Sillerman and Howard J. Tytel ..... 185
Triathlon Fees ....................... 186
Agreements with Broadcasting ......... 186
Common Stock Received in the
Spin-Off .......................... 186
Issuance of Stock to Holders of
Broadcasting's Options and SARs 187
Meadows Repurchase ................... 187
Certain Relationships and Related
Transactions of Marquee .............. 188
Consulting Agreement ................. 188
ProServ Acquisition .................. 189
Stockholders' Agreement .............. 190
Potential Conflicts of Interest with
SFX ............................... 190
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Founders' Stock ...................... 190
Escrow Agreement ..................... 191
Private Placement and Corporate
Indebtedness ...................... 192
SMTI Acquisition ..................... 193
A&A Acquisition ...................... 193
Transactions at Arm's Length ......... 194
Description of Capital Stock of SFX ..... 195
Common Stock ......................... 195
Preferred Stock ...................... 197
Certain Statutory, Charter and Bylaw
Provisions of SFX .................... 198
Charter and Bylaw Provisions ......... 198
Certain Anti-Takeover Provisions ..... 198
Comparison of Stockholders' Rights ...... 199
Authorized Capital Stock ............. 199
Voting ............................... 199
Cumulative Voting .................... 200
No Preemptive Rights ................. 200
Special Meetings of Stockholders ..... 200
Legal Matters ........................... 200
Submission of Future Stockholder
Proposals ............................ 200
Experts ................................. 200
Where You Can Find More
Information .......................... 203
Safe Harbor for Forward-Looking
Statements ........................... 204
Annex I -- Agreement and Plan of
Merger, as amended ................... I-1
Annex II -- Opinion of Prudential
Securities Incorporated .............. II-1
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---------------------
This proxy statement--prospectus incorporates important information that
we are not including or delivering with the document. You can obtain this
information without charge. Please direct requests to:
SFX Entertainment, Inc.
650 Madison Avenue, 16th Floor
New York, New York 10022
Attn: Timothy Klahs
Director of Investor Relations
(212) 407-9126
To ensure timely delivery of the documents in advance of the special
meeting, you should make your request no later than , 1999. [five
business days before the meeting.]
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT--PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT IS DATED , 1999. YOU SHOULD NOT
ASSUME THAT THE INFORMATION CONTAINED IN THIS DOCUMENT IS ACCURATE AS OF ANY
OTHER DATE.
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QUESTIONS AND ANSWERS ABOUT THE MERGER
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Q.: WHY SHOULD MARQUEE MERGE WITH SFX?
A.: Marquee believes that the merger will benefit its stockholders because:
o the merger will combine Marquee's strength in event management,
television programming, production, marketing, talent representation
and consulting services with SFX's leadership in promoting and
producing a broad variety of live entertainment events locally,
regionally and nationally and in representing team sports athletes;
o its business is a good strategic complement to SFX's business;
o it will have greater ability to access larger pools of funds that
might be used to acquire other companies in the future; and
o it can better implement its growth strategy by becoming a subsidiary
of SFX.
Q.: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A.: We are working towards completing the merger as quickly as possible and, if Marquee
stockholders approve the merger, we expect to complete the merger shortly after the special
meeting.
Q.: IF I AM NOT GOING TO ATTEND THE SPECIAL MEETING, SHOULD I RETURN MY PROXY CARD INSTEAD?
A.: Yes. Just complete, sign and mail your proxy card in the enclosed return envelope as soon
as possible. Returning your proxy card ensures that your shares will be represented at the
special meeting.
Q.: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR
ME?
A.: You should instruct your broker to vote your shares, following the directions your broker
provides. If you do not instruct your broker, your broker will generally not have the
discretion to vote your shares without your instructions. Such broker non-votes will have the
same effect as votes cast against the merger.
Q.: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A.: No. After the merger closes, SFX will send you written instructions for exchanging your
Marquee certificates for SFX certificates.
Q.: CAN I CHANGE MY VOTE AFTER I MAIL MY PROXY CARD?
A.: Yes. You can change your vote at any time before we vote your proxy at the special
meeting. You can do so in several ways:
o First, you can send a written notice stating that you would like to
revoke your proxy to Marquee at the address listed below.
o Second, you can complete a new proxy card and send it to the address
below, and the new proxy card will automatically replace any earlier
dated proxy card that you returned.
o Third, you can attend the special meeting and vote in person.
o Fourth, if you instructed a broker to vote your shares, follow your
broker's directions for changing those instructions.
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You should send any notice of revocation or your completed new proxy card
to Marquee at the following address:
The Marquee Group, Inc.
c/o Continental Stock Transfer and Trust Company
2 Broadway, 19th Floor
New York, New York 10004
Attn: Proxy Department
Facsimile: (212) 509-5152
Q.: WHO CAN ANSWER MY QUESTIONS?
A.: You should contact:
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SFX: SFX Entertainment, Inc.
650 Madison Avenue, 16th Floor
New York, New York 10022
Attn: Timothy Klahs
(212) 407-9126
Marquee: The Marquee Group, Inc.
888 Seventh Avenue, 37th Floor
New York, New York 10019
Attn: Jan E. Chason
(212) 728-2021
Proxy Solicitor: Georgeson & Company Inc.
Wall Street Plaza, 30th Floor
New York, New York 10005
banks and brokers may call collect at (212) 440-9800
all others should call (800) 223-2064
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SUMMARY
This summary highlights selected information from this proxy
statement--prospectus and does not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, we urge you to read carefully the
entire proxy statement--prospectus, including its annexes, which contains
important information relating to the merger.
THE COMPANIES
SFX ENTERTAINMENT, INC.
650 Madison Avenue, 16th Floor
New York, New York 10022
(212) 838-3100
SFX is the largest diversified promoter, producer and venue operator for
live entertainment events in the United States. SFX owns and/or operates the
largest network of venues in the country used principally for music concerts
and other live entertainment events. After giving effect to its pending
acquisition, SFX has 71 venues--including 14 amphitheaters in 9 of the top 10
markets--in 29 of the top 50 markets, either directly owned, either partially
or entirely, or operated under lease or exclusive booking arrangements. SFX
also develops and manages touring Broadway shows, selling subscription series
in 38 markets. In addition, SFX is a leading full-service marketing and
management company specializing in the representation of team sport athletes,
primarily in professional basketball.
THE MARQUEE GROUP, INC.
888 Seventh Avenue, 37th Floor
New York, New York 10019
(212) 977-0300
Marquee provides event management, television programming and production,
marketing, talent representation and consulting services in the sports, news
and other entertainment industries. Marquee has developed its sports television
programming and production, marketing, sponsorship sales and consulting
businesses since its formation in early 1996.
THE MERGER
WHAT MARQUEE STOCKHOLDERS WILL RECEIVE IN THE MERGER. You will receive
shares of SFX Class A common stock in exchange for your shares of Marquee stock
based on the exchange ratio. The exchange ratio is the number of shares of SFX
Class A common stock that SFX will issue for each share of Marquee stock in the
merger. We will base the exchange ratio on the SFX stock price which, for
purposes of this calculation, is the average of the last reported sale price of
the SFX Class A common stock for the 15 trading days ending 5 days before the
merger.
For each share of Marquee stock:
o If the SFX stock price is $42.75 or less, you will receive 0.1111 shares of
SFX Class A common stock;
o If the SFX stock price is over $42.75 but no more than $60.00, you will
receive $4.75 worth of SFX Class A common stock;
3
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o If the SFX stock price is over $60.00 but no more than $66.00, you will
receive between $4.75 and $5.35 worth of SFX stock; or
o If the SFX stock price is over $66.00, you will receive $5.35 worth of SFX
Class A common stock.
SFX will not issue fractional shares. You will receive an amount of cash based
on the SFX stock price instead of any fractional shares.
Soon after the merger occurs, you will receive a letter of transmittal
describing the surrender of valid certificates representing Marquee stock, and
instructions for use of the letter of transmittal. You should not surrender
your Marquee stock certificates until after the merger and until you receive a
letter of transmittal.
OWNERSHIP OF SFX AFTER THE MERGER. Assuming an SFX stock price of $57.00,
we estimate that SFX will issue to Marquee stockholders, after the exercise of
all Marquee stock options and warrants, approximately 1,637,408 shares of SFX
Class A common stock, representing approximately 5.3% of its Class A common
stock after the merger and approximately 3.5% of its combined common stock
voting power. We estimate the aggregate value of stock SFX will issue in the
merger to be approximately $81.7 million, which does not include shares that
may be issued upon the exercise of warrants and stock options issued in
connection with the merger. SFX contemplates consummating a public offering of
up to 4,000,000 shares of Class A common stock excluding the overallotment
option. If SFX consummates the equity offering and the acquisition of Cellar
Door as contemplated, SFX will issue to Marquee stockholders in the merger SFX
Class A common stock representing approximately 3.2% of SFX's combined common
stock voting power.
OUR REASONS FOR THE MERGER. The Marquee board of directors and its
special committee believe that the merger enables you to become a stockholder
in a significantly larger company that will be better positioned to compete in
the sports and entertainment marketing, talent representation and television
industry. In addition, the merger will provide Marquee with greater access to
capital. Marquee's special committee consists of Arthur Barron and Myles
Schumer, both of whom are independent directors on the Marquee board of
directors, and Robert M. Gutkowski, the President and Chief Executive Officer
of Marquee.
To review the background and reasons for the merger in detail, see "The
Merger" beginning on page 25.
RECOMMENDATION OF THE MARQUEE BOARD. The Marquee board of directors and
its special committee believe that the merger is advisable, fair to, and in the
best interests of the Marquee stockholders. The Marquee board of directors has
approved the merger agreement and the merger, and recommends that you vote FOR
the proposal to adopt the merger agreement and the merger.
OPINION OF FINANCIAL ADVISOR. The Marquee board of directors considered an
opinion from its financial advisor, Prudential Securities Incorporated, in
deciding to approve, adopt and declare advisable the merger agreement and the
merger. The opinion expresses the view that the exchange ratio was fair from a
financial point of view to the Marquee stockholders, other than Messrs.
Sillerman and Tytel, on the date of the opinion. This opinion, which sets forth
the assumptions made, matters considered and limitations on the review
undertaken, is Annex II to this proxy statement--prospectus. We encourage you
to read the opinion carefully.
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STOCKHOLDER VOTE REQUIRED TO APPROVE THE MERGER. The holders of a majority
of the outstanding shares of Marquee stock must vote for adoption of the merger
agreement and the merger to approve them. Failure to vote will count as a vote
against adoption of the merger agreement and the merger. On January 20, 1999,
the directors and executive officers of Marquee and their affiliates directly
or indirectly owned approximately 27.1% of the outstanding shares of Marquee
stock. We expect that they will vote their shares for adoption of the merger
agreement and the merger. For more information on the stock ownership of
Marquee's directors and executive officers, see "Marquee Principal
Stockholders."
You will have one vote at the special meeting for each share of Marquee
common stock you owned at the close of business on January 20, 1999. On that
date, 18,085,614 shares of Marquee common stock were outstanding.
INTERESTS OF MARQUEE'S MANAGEMENT AND DIRECTORS IN THE MERGER. When
considering the recommendation of the Marquee board of directors and its
special committee, you should be aware that certain members of Marquee's
management and its board of directors have interests in the merger that differ
from yours. For example:
o they hold Marquee stock options, warrants and stock appreciation rights that
will convert into stock options, warrants and stock appreciation rights of
SFX after the merger;
o they will amend their employment agreements on terms that may be more
favorable to them;
o SFX will indemnify them for six years after the merger for certain claims
against them; and
o each of the two independent directors of the Marquee board of directors
received a fee of $35,000 from Marquee for evaluating the merger.
Members of Marquee's management and board of directors also hold a
substantial number of shares of Marquee common stock. Any or all of these
interests may cause them to have conflicts of interest regarding the merger.
The Marquee board of directors and its special committee were aware of these
interests and considered them, among other matters, in approving, adopting and
declaring advisable the merger agreement and the merger.
Robert F.X. Sillerman, the Chairman of the Marquee board of directors, is
also the Executive Chairman of SFX, while Howard J. Tytel, one of Marquee's
directors, is the Executive Vice President and a director of SFX. Mr. Sillerman
directly or indirectly currently owns approximately 6.1% of the voting power of
Marquee and 39.1% of the combined voting power of SFX, while Mr. Tytel directly
or indirectly currently owns approximately 1.1% of the voting power of Marquee
and 1.0% of the combined voting power of SFX. Mr. Tytel had a significant role
in negotiating the terms of the merger on behalf of SFX. For more information
on interests of Marquee's management and directors in the merger, see "The
Merger--Interests of Marquee's Management and Directors in the Merger."
FEDERAL INCOME TAX CONSEQUENCES. We have structured the merger so that
Marquee stockholders will not recognize gain or loss as a consequence of the
merger, except for tax payable on cash they receive instead of fractional
shares or on any other consideration they are deemed to receive as a result of
the merger. SFX and Marquee have received an opinion from legal counsel that,
based on certain assumptions and certifications, the merger will be a tax-free
reorganization for federal income tax purposes. However, we urge you to consult
your own tax advisor. For more information about tax matters, see "The
Merger--Federal Income Tax Consequences."
5
<PAGE>
TERMINATION FEES AND EXPENSES. The merger agreement requires Marquee to
pay a fee of up to $900,000 to SFX, and expenses of up to $500,000, if the
merger agreement terminates under certain circumstances. For more information
on the fees and expenses that may be paid, and the conditions under which the
merger agreement may terminate, see "The Merger Agreement."
LEGAL PROCEEDINGS RELATED TO THE MERGER. In May 1998, Herbert Beherens, a
Marquee stockholder, filed a class action complaint against SFX, certain of its
directors and Marquee. The complaint alleged that SFX's proposed acquisition of
Marquee would be unfair to Marquee's public stockholders. In July 1998, the
parties agreed to settle the lawsuit.
Subsequently, SFX and Marquee amended the merger agreement, revising the
exchange ratio and other terms. In entering into the amendment, SFX and Marquee
considered the plaintiffs' concerns and interests. The parties also revised the
terms of the settlement. The settlement depends on closing the merger,
completing discovery and obtaining court approval. For more information about
this litigation, see "The Merger--Litigation."
REGULATORY MATTERS. The Hart-Scott-Rodino Antitrust Improvement Act of
1976, as amended, prohibited us from completing the merger until after we had
given certain information and materials to the Antitrust Division of the
Department of Justice and the Federal Trade Commission and until a required
waiting period had expired. Both SFX and Marquee have filed the required
information, and the required waiting period for the merger has expired.
NO APPRAISAL RIGHTS. Marquee stockholders will not have any dissenters'
rights of appraisal under Delaware law in connection with the merger.
COMPARATIVE RIGHTS OF STOCKHOLDERS. When the merger closes, stockholders
of Marquee will become stockholders of SFX. Some differences between the
governing documents of SFX and those of Marquee include:
o SFX has two classes of common stock, while Marquee has only one class;
o each share of SFX's Class A common stock has 1 vote and each share of SFX's
Class B common stock has 10 votes, while each share of Marquee common stock
has 1 vote; and
o SFX's Class A common stockholders elect a portion of SFX's directors, and
SFX's Class A and Class B common stockholders, voting together, elect the
rest of SFX's board of directors, while all Marquee stockholders vote
together to elect all of Marquee's directors.
6
<PAGE>
MARKET PRICE INFORMATION
The SFX Class A common stock trades on the Nasdaq National Market under
the symbol "SFXE." The Marquee common stock trades on the American Stock
Exchange under the symbol "MRT." The following table sets forth the SFX Class A
and Marquee common stock prices on:
o July 22, 1998, the last full trading day before the public announcement of
the proposed merger;
o October 16, the last full trading day before the public announcement of
amendment no. 3 to the merger agreement, which, among other things,
adjusted the exchange ratio;
o January 25, 1999, the last full trading day before the public announcement
of amendment no. 4 to the merger agreement, which again adjusted the
exchange ratio; and
o February , 1999, the latest practicable date.
We urge you to check current stock prices before you decide how to vote.
For more information on stock prices, see "Comparative Per Share Market Price
and Dividend Information."
<TABLE>
<CAPTION>
SFX CLASS A COMMON MARQUEE COMMON MARQUEE EQUIVALENT
STOCK PRICE STOCK PRICE PER SHARE PRICE
-------------------- ---------------- -------------------
<S> <C> <C> <C>
July 22, 1998 ............. $515/8 $515/16 $ 4.75
October 16, 1998 .......... 291/8 21/4 3.24
January 25, 1999 .......... 537/8 41/8 4.75
February , 1999 ......... [ ] [ ] [ ]
</TABLE>
The Marquee equivalent per share price represents the equivalent of one
share of Marquee common stock calculated by multiplying the price per share of
SFX Class A common stock by the exchange ratio. This assumes that the SFX stock
price would have been equal to the closing price of the SFX Class A common
stock on the dates above, and that the exchange ratio would have been 0.0920 on
July 22, 1998, 0.1111 on October 16, 1998, 0.0833 on January 25, 1999 and
on February , 1999. We based the exchange ratio used in calculating the
Marquee equivalent per share price for July 22, 1998 on the terms of the merger
agreement prior to entering into amendment no. 3 to the merger agreement, which
reduced the exchange ratio. For a description of the terms of the original
merger agreement, see "The Merger--Background of the Merger."
7
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
We are providing the following information to aid you in your analysis of
the financial aspects of the merger. We derived this information from the
audited and unaudited financial statements of SFX and its predecessor, and
Marquee. The information is only a summary, and you should read it in
conjunction with our historical financial statements and related notes
appearing elsewhere in this document. See "Index to Financial Statements."
SFX SELECTED FINANCIAL DATA
The pro forma financial data of SFX set forth below gives effect to the
merger, the acquisitions completed by SFX in 1997 and 1998, an offering of
$200.0 million of 91/8% Senior Subordinated Notes due 2008, the contemplated
acquisition of the Cellar Door group of companies and a proposed offering of up
to 4.0 million shares of SFX's Class A common stock, as if they had occurred at
the beginning of the periods presented. See "SFX Unaudited Pro Forma Condensed
Combined Financial Statements" and the table "SFX Entertainment, Inc. Summary
of Completed and Pending Acquisitions" on page 57 for selected financial
information related to each of SFX's acquisitions.
We expect SFX to account for the merger under the "purchase method." For
accounting and financial reporting purposes, SFX will allocate the purchase
price of Marquee to the assets acquired and liabilities assumed based on their
estimated fair values. SFX will allocate any excess purchase consideration to
goodwill and amortize such amount using the straight-line method over a period
of 15 years.
We believe that the operating performance of entertainment companies, such
as SFX and Marquee, is measured, in part, by their ability to generate EBITDA.
Further, we use EBITDA as our primary indicator of our operating performance,
and secondarily as a measure of liquidity. "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, we believe that the
entertainment industry accepts EBITDA as a generally recognized measure of
performance and that analysts who report publicly on the performance of
entertainment companies use EBITDA. Nevertheless, you should not consider this
measure in isolation or as a substitute for operating income, net income, net
cash provided by operating activities or any other measure for determining the
operating performance or liquidity that is calculated in accordance with GAAP.
EBITDA, as we calculate it, may not be comparable to calculations of similarly
titled measures presented by other companies.
We believe there are adjustments that could affect EBITDA, but we have not
reflected them in the pro forma financial information. If we had made such
adjustments, Adjusted EBITDA on a pro forma basis would have been approximately
$116,875,000 for the year ended December 31, 1997 and $131,154,000 for the nine
months ended September 30, 1998. The adjustments include the elimination of
non-cash charges, the expected cost savings associated with the elimination of
duplicative staffing and general and administrative expenses in connection with
SFX's acquisitions, the merger and the Cellar Door acquisition and include
equity income from investments. While management believes that such cost
savings are achievable, our ability to fully achieve such cost savings is
subject to numerous factors, certain of which may be beyond our control.
Depreciation and amortization includes $1,264,000 of integration costs
incurred during the nine months ended September 30, 1998.
8
<PAGE>
We have reduced corporate expenses for consulting fees earned from
Triathlon Broadcasting Company of $1,794,000 for the year ended December 31,
1997 and $398,000 for the nine months ended September 30, 1998. SFX
Broadcasting, Inc. assigned the right to receive consulting fees payable under
the agreement with Triathlon to SFX in connection with the spin-off. Triathlon
has agreed to be acquired by a third party, and when acquired, it will cease
paying consulting fees. If the acquisition does not occur, future fees may
vary, above the minimum annual fee of $500,000, depending upon the level of
acquisition and financing activities of Triathlon.
9
<PAGE>
SFX SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
PRO FORMA
FOR THE 1997
ACQUISITIONS, THE
1998
ACQUISITIONS,
THE MERGER,
THE CELLAR DOOR
ACQUISITION,
THE NEW
NOTE OFFERING
PREDECESSOR AND THE PROPOSED
------------------------------------------------- EQUITY OFFERING
1993 1994 1995 1996 1997 1997
------------- ------------- ---------- ---------- -------------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue ....................... $46,526 $92,785 $47,566 $ 50,362 $ 96,144 $ 1,001,191
Operating expenses ............ 45,635 90,598 47,178 50,686 83,417 892,159
Depreciation &
amortization ................. 762 755 750 747 5,431 91,545
Corporate expenses ............ -- -- -- -- 2,206 8,000
Non-cash compensation
and other non-cash
charges ...................... -- -- -- -- -- 1,367
------- ------- ------- -------- ------------ -----------
Operating income (loss) 129 1,432 (362) (1,071) 5,090 8,120
Interest expense .............. (148) (144) (144) (60) (1,590) (67,725)
Other income
(expense) .................... 85 138 178 198 295 4,280
Equity income (loss)
from investments ............. -- (9) 488 524 509 5,489
------- --------- ------- -------- ------------ -----------
Income (loss) before
income taxes ................. 66 1,417 160 (409) 4,304 (49,836)
Income tax provision .......... (57) (5) (13) (106) (490) (4,915)
------- --------- ------- -------- ------------ -----------
Net income (loss) ............. 9 1,412 147 (515) 3,814 (54,751)
Accretion on temporary
equity--stock subject
to redemption (1) ............ -- -- -- -- -- (3,601)
------- -------- ------- -------- ------------ -----------
Net income (loss)
applicable to common
shares ....................... $ 9 $1,412 $ 147 $ (515) $ 3,814 $ (58,352)
======= ======== ======= ======== ============ ===========
Net income (loss) per
common share (2) ............. $ 0.26 $ (1.63)
------------ -----------
Weighted average
common shares
outstanding (2) .............. 14,445,061 36,234,111
OTHER OPERATING
DATA (3)
Cash flow from:
Operating activities ......... $2,959 $ (453) $ 4,214 $ 1,005
Investing activities ......... -- -- (435) (73,296)
Financing activities ......... (477) (216) (1,431) 78,270
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM PREVIOUS PAGE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------
PRO FORMA
FOR THE 1997
ACQUISITIONS, THE
1998
ACQUISITIONS,
THE MERGER,
THE CELLAR DOOR
ACQUISITION,
THE NEW
NOTE OFFERING
AND THE PROPOSED
ACTUAL ACTUAL EQUITY OFFERING
1997 1998 1998
-------------- -------------- ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue ....................... $ 74,396 $ 680,376 $ 1,037,148
Operating expenses ............ 63,045 602,538 910,731
Depreciation &
amortization ................. 4,041 40,381 73,601
Corporate expenses ............ 1,307 5,839 6,000
Non-cash compensation
and other non-cash
charges ...................... -- 32,895 33,262
------------ ------------ -----------
Operating income (loss) 6,003 (1,277) 13,554
Interest expense .............. (956) (31,709) (50,794)
Other income
(expense) .................... 213 2,152 (670)
Equity income (loss)
from investments ............. 1,344 3,964 5,968
------------ ------------ -----------
Income (loss) before
income taxes ................. 6,604 (26,870) (31,942)
Income tax provision .......... (2,952) (3,333) (4,617)
------------ ------------ -----------
Net income (loss) ............. 3,652 (30,203) (36,559)
Accretion on temporary
equity--stock subject
to redemption (1) ............ -- (1,925) (2,711)
------------ ------------ -----------
Net income (loss)
applicable to common
shares ....................... $ 3,652 $ (32,128) $ (39,270)
============ ============ ===========
Net income (loss) per
common share (2) ............. $ 0.25 $ (1.38) $ (1.10)
------------ ------------ -----------
Weighted average
common shares
outstanding (2) .............. 14,382,778 23,262,122 36,234,111
OTHER OPERATING
DATA (3)
Cash flow from:
Operating activities ......... $ 789 $ 22,307
Investing activities ......... (71,997) (852,240)
Financing activities ......... 78,302 889,543
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1998
---------------------------------------------------------- -------------------------------
PRO FORMA
FOR THE MERGER,
THE CELLAR DOOR
ACQUISITION,
THE NEW
PREDECESSOR NOTE OFFERING
----------------------------------------------- AND THE PROPOSED
1993 1994 1995 1996 1997 ACTUAL EQUITY OFFERING
------------- ------------- --------- --------- ---------- ------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets ................. $1,823 $4,453 $3,022 $6,191 $ 11,220 $ 165,727 $ 284,719
Property and equipment, net..... 4,484 3,728 2,978 2,231 59,685 275,000 312,881
Intangible assets, net ......... -- -- -- -- 60,306 904,929 1,088,607
Total assets ................... 6,420 8,222 6,037 8,879 146,942 1,391,548 1,739,635
Current liabilities ............ 4,356 3,423 3,138 7,973 21,514 166,540 175,512
Long-term debt, including
current portion ............... -- 1,830 -- -- 16,178 742,474 757,039
Temporary equity--stock
subject to redemption(1) ...... -- -- -- -- -- 16,500 19,920
Shareholders' equity ........... 6,420 2,969 2,900 907 102,144 396,211 714,305
</TABLE>
- ----------
(1) The PACE acquisition agreement provides that each PACE seller shall have an
option, exercisable during a period beginning on the fifth anniversary of
the closing of the PACE acquisition and ending 90 days thereafter, to
require SFX to purchase up to one-third of SFX's Class A common stock
received by that PACE seller, representing 500,000 shares in the
aggregate, for a cash purchase price of $33.00 per share. With certain
limited exceptions, the sellers may not assign these fifth year put option
rights. We have recorded the maximum amount payable under all fifth year
put options, $16,500,000, as temporary equity. For more information
regarding the fifth year put options, see "SFX Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The ProServ acquisition agreement provides that Marquee may be required to
repurchase up to all of the 545,000 shares of Marquee common stock, which
equals 45,416 shares of SFX Class A common stock after giving effect to the
merger. The maximum amount payable under the put option, $3,420,000, has
been recorded as temporary equity.
(2) Includes 500,000 shares of SFX's Class A common stock issued to the PACE
sellers in connection with the fifth year put options and 45,416 shares of
SFX Class A common stock related to the ProServ put options issued by
Marquee; these shares are not included in calculating the net loss per
common share.
(3) For a calculation of EBITDA and Adjusted EBITDA, see page 12.
11
<PAGE>
SFX CALCULATION OF EBITDA AND ADJUSTED EBITDA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
PRO FORMA
FOR THE 1997
ACQUISITIONS, THE
1998
ACQUISITIONS,
THE MERGER,
THE CELLAR DOOR
ACQUISITION,
THE NEW
NOTE OFFERING
PREDECESSOR AND THE PROPOSED
----------------------------------------------- EQUITY OFFERING
1993 1994 1995 1996 1997 1997
------------- ------------ --------- ---------- ----------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) .......... $ 9 $1,412 $ 147 ($ 515) $ 3,814 ($ 54,751)
Add back:
Depreciation and
amortization ............. 762 755 750 747 5,431 91,545
Interest expense .......... 148 144 144 60 1,590 67,725
Income tax provision ...... 57 5 13 106 490 4,915
Less:
Other income (expense)..... (85) (138) (178) (198) (295) (4,280)
Equity income from
investments .............. -- 9 (488) (524) (509) (5,489)
----- ------ ------- ----- ------- --------
EBITDA ..................... 891 2,187 388 (324) 10,521 99,665
Add:
Non-cash compensation
and other non-cash
charges .................. -- -- -- -- -- 1,367
Equity income from
investments .............. -- (9) 488 524 509 5,489
Expected acquisition
related cost savings
related to the
elimination of
duplicative staffing
and general and
administrative
expenses ................. -- -- -- -- -- 10,354
----- ------- ------- ----- ------- --------
Adjusted EBITDA ............ $ 891 $2,178 $ 876 $ 200 $11,030 $116,875
===== ======= ======= ===== ======= ========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM PREVIOUS PAGE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
PRO FORMA
FOR THE 1997
ACQUISITIONS, THE
1998
ACQUISITIONS,
THE MERGER,
THE CELLAR DOOR
ACQUISITION,
THE NEW
NOTE OFFERING
AND THE PROPOSED
ACTUAL ACTUAL EQUITY OFFERING
1997 1998 1998
------------- ------------- ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net income (loss) .......... $ 3,652 ($ 30,203) ($ 36,559)
Add back:
Depreciation and
amortization ............. 4,041 40,381 73,601
Interest expense .......... 956 31,709 50,794
Income tax provision ...... 2,952 3,333 4,617
Less:
Other income (expense)..... (213) (2,152) 670
Equity income from
investments .............. (1,344) (3,964) (5,968)
-------- -------- --------
EBITDA ..................... 10,044 39,104 87,155
Add:
Non-cash compensation
and other non-cash
charges .................. -- 32,895 33,262
Equity income from
investments .............. 1,344 3,964 5,968
Expected acquisition
related cost savings
related to the
elimination of
duplicative staffing
and general and
administrative
expenses ................. -- -- 4,769
-------- -------- --------
Adjusted EBITDA ............ $ 11,388 $ 75,963 $131,154
======== ======== ========
</TABLE>
12
<PAGE>
MARQUEE SELECTED FINANCIAL DATA
The pro forma financial data of Marquee set forth below gives effect to
the acquisitions completed by Marquee in 1997 and 1998 as well as a $35.0
million revolving credit facility entered into in 1998, as if, where indicated,
they had occurred at the beginning of the period presented. See "Marquee
Unaudited Pro Forma Condensed Combined Financial Statements."
MARQUEE SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
PRO FORMA
FOR THE 1997
ACQUISITIONS,
THE 1998
PRO FORMA ACQUISITIONS
FOR THE 1997 AND THE CREDIT
ACTUAL ACTUAL ACTUAL ACQUISITIONS AGREEMENT
1995 1996 1997 1997 1997
--------- ----------- ------------ -------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................. -- $ 2,869 $ 21,268 $34,953 $ 53,324
Operating expenses ................... -- 2,563 14,459 23,154 34,383
General and administrative
expenses ............................ -- 2,199 6,316 8,991 12,095
Loss on abandonment of lease ......... -- -- 466 466 466
Deferred compensation and other
non-cash compensation and
other non-cash charge ............... -- 56 145 145 145
Depreciation and amortization ........ -- 5 371 1,429 4,561
-- -------- --------- ------- --------
Income (loss) from operations ........ -- (1,954) (489) 768 1,674
Interest expense, net ................ -- 283 22 22 3,323
Financing expense .................... -- 193 756 756 756
-- -------- --------- ------- --------
Income (loss) before income
taxes ............................... -- (2,430) (1,267) (10) (2,405)
Income taxes ......................... -- (20) 45 90 53
-- -------- --------- ------- --------
Net income (loss) .................... -- (2,410) (1,312) (100) (2,458)
Accretion of obligation related to
the put option issued in
connection with the ProServ
acquisition ......................... -- -- 59 301 301
-- -------- --------- ------- --------
Net income (loss) applicable to
common stockholders ................. -- $ (2,410) $ (1,371) $ (401) $ (2,759)
== ======== ========= ======= ========
Net income (loss) per share
applicable to common
stockholders -- basic and
dilutive ............................ -- $ (1.03) $ (0.15) $ (0.03) $ (0.16)
== ======== ========= ======= ========
Weighted average common stock
outstanding ......................... 2,067 2,347 9,377 16,559 17,108
===== ======== ========= ======= ========
OTHER OPERATING DATA (1)
Cash flows:
Operations .......................... -- $ (1,834) $ (3,789)
Investing Activities ................ -- (8,663) (21,638)
Financing Activities ................ $ 20 17,708 27,140
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM PREVIOUS PAGE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
PRO FORMA
FOR THE 1997
ACQUISITIONS,
THE 1998
ACQUISITIONS
AND THE CREDIT
ACTUAL ACTUAL AGREEMENT
1997 1998 1998
------------- ------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................. $ 11,991 $ 35,470 $48,848
Operating expenses ................... 7,664 23,726 30,777
General and administrative
expenses ............................ 4,502 8,239 10,650
Loss on abandonment of lease ......... -- -- --
Deferred compensation and other
non-cash compensation and
other non-cash charge ............... 165 367 367
Depreciation and amortization ........ 91 1,463 3,569
-------- --------- -------
Income (loss) from operations ........ (431) 1,675 3,485
Interest expense, net ................ 224 120 2,359
Financing expense .................... 756 -- --
-------- --------- -------
Income (loss) before income
taxes ............................... (1,411) 1,555 1,126
Income taxes ......................... 77 541 1,000
-------- --------- -------
Net income (loss) .................... (1,488) 1,014 126
Accretion of obligation related to
the put option issued in
connection with the ProServ
acquisition ......................... -- 236 236
-------- --------- -------
Net income (loss) applicable to
common stockholders ................. $ (1,488) $ 778 $ (110)
======== ========= =======
Net income (loss) per share
applicable to common
stockholders -- basic and
dilutive ............................ $ (0.20) $ 0.05 $ (0.01)
======== ========= =======
Weighted average common stock
outstanding ......................... 7,494 16,801 17,124
======== ========= =======
OTHER OPERATING DATA (1)
Cash flows:
Operations .......................... $ (2,184) $ (3,547)
Investing Activities ................ (4,432) (32,408)
Financing Activities ................ 289 31,511
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30, 1998
-------------------------------- ----------------------
ACTUAL ACTUAL ACTUAL
1995 1996 1997 ACTUAL
-------- -------- ---------- ----------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets .................................. $20 $9,085 $17,567 $21,825
Total assets .................................... 20 9,361 46,790 90,182
Current liabilities ............................. -- 1,850 6,520 11,451
Long-term debt .................................. -- 1,759 2,144 36,917
Common Stock subject to put options in connection
with the ProServ acquisition ................... -- -- 3,184 3,420
Stockholders' equity ............................ 20 5,409 33,286 36,779
</TABLE>
- --------
(1) For a calculation of EBITDA and Adjusted EBITDA, see page 14.
13
<PAGE>
MARQUEE CALCULATION OF EBITDA AND ADJUSTED EBITDA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
PRO FORMA
FOR THE 1997
PRO FORMA ACQUISITIONS, THE
FOR THE 1997 1998 ACQUISITIONS
ACTUAL ACTUAL ACTUAL ACQUISITIONS AND THE CREDIT
1995 1996 1997 1997 AGREEMENT 1997
-------- ------------ ------------ -------------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss) ................. $-- $ (2,410) $ (1,312) $ (100) $ (2,458)
Add back (less)
Depreciation and amortization..... -- 5 371 1,429 4,561
Interest expense ................. -- 283 22 22 3,323
Financing expense ................ -- 193 756 756 756
Income taxes ..................... -- (20) 45 90 53
--- -------- -------- ------ --------
EBITDA -- (1,949) (118) 2,197 6,235
Add:
Deferred compensation and
other non-cash compensation
and other non-cash charges ....... -- 56 145 145 145
Loss on abandonment of lease...... -- -- 466 466 466
--- -------- -------- ------ --------
Adjusted EBITDA ................... $-- $ (1,893) $ 493 $2,808 $ 6,946
=== ======== ======== ====== ========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
PRO FORMA
FOR THE 1997
ACQUISITIONS, THE
1998 ACQUISITIONS
ACTUAL ACTUAL AND THE CREDIT
1997 1998 AGREEMENT 1998
------------- ------------- ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net income (loss) ................. $ (1,488) $1,014 $ 126
Add back (less)
Depreciation and amortization..... 91 1,463 3,569
Interest expense ................. 224 120 2,359
Financing expense ................ 756 -- --
Income taxes ..................... 77 541 1,000
-------- ------ ------
EBITDA (340) 3,138 7,054
Add:
Deferred compensation and
other non-cash compensation
and other non-cash charges ....... 165 367 367
Loss on abandonment of lease...... -- -- --
-------- ------ ------
Adjusted EBITDA ................... $ (175) $3,505 $7,421
======== ====== ======
</TABLE>
14
<PAGE>
COMPARATIVE PER SHARE DATA
We have summarized below the per share information for our respective
companies on a historical, pro forma and equivalent basis. The exchange ratio
of 0.0833 used in the pro forma and equivalent calculations assumes an SFX
stock price of $57.00. Please read this table together with the unaudited pro
forma consolidated financial statements and selected historical financial data
of SFX and Marquee and their notes, which we have included in this proxy
statement--prospectus. The pro forma information does not necessarily portray
the historical results that we would have had or the future results that we
will experience after the merger. Neither SFX nor Marquee has ever paid cash
dividends on its stock.
We calculated the net income (loss) per common share using the weighted
average number of common shares outstanding. We calculated the historical book
value and historical tangible book value per common share by dividing
shareholders' equity for each company by the number of shares of common stock
outstanding exclusive of shares subject to put options at the end of each
period.
We presented the pro forma per share data as if SFX had completed all
recent and pending acquisitions and related financing and the proposed equity
offering as of January 1, 1997. We calculated the pro forma book value and pro
forma tangible book value per common share by dividing pro forma shareholders'
equity by the pro forma number of shares of common stock outstanding exclusive
of shares subject to put options at the end of the period.
The pro forma per equivalent common share data represents the equivalent
of one share of Marquee common stock to one share of SFX Class A common stock.
We calculated it by multiplying the pro forma per common share data of SFX by
the exchange ratio in the merger.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
SFX
Historical Per Common Share:
Net income (loss) -- Basic and Dilutive ......... $ 0.26 $ (1.38)
Book value ...................................... 6.98 13.23
Tangible book value ............................. 2.86 (16.99)
Pro Forma Per Common Share:
Net income (loss) ............................... $ (1.63) $ (1.10)
Book value ...................................... -- 20.01
Tangible book value ............................. -- (10.49)
MARQUEE
Historical Per Common Share:
Net income (loss) -- Basic and Dilutive ......... $ (0.15) $ 0.05
Book value ...................................... 1.92 2.10
Tangible book value ............................. 0.54 ( 1.30)
Pro Forma Per Equivalent Common Share:
Net income (loss) ............................... $ (0.14) $ (0.09)
Book value ...................................... -- 1.67
Tangible book value ............................. -- ( 0.87)
</TABLE>
15
<PAGE>
If the SFX stock price is greater than $66.00, SFX will issue fewer shares
for each outstanding share of Marquee. However, if the SFX stock price is equal
to or less than $42.75, then SFX will issue 0.1111 shares of its Class A common
stock for each outstanding share of Marquee stock. If the SFX stock price is
equal to or less than $42.75, then the pro forma net income (loss) per share of
SFX Class A common stock would be $(1.56) for the year ended December 31, 1997
and $(1.05) for the nine months ended September 30, 1998. The pro forma book
value per share of SFX Class A common stock would be $18.98 for the nine months
ended September 30, 1998. The pro forma tangible book value per share would be
$(10.35) for the nine months ended September 30, 1998.
In addition, the pro forma net income (loss) per equivalent share of
Marquee common stock would be $(0.17) for the year ended December 31, 1997 and
$(0.12) for the nine months ended September 30, 1998. The pro forma book value
per equivalent share of Marquee common stock would be $2.11 for the nine months
ended September 30, 1998. The pro forma tangible book value per equivalent
share would be $(1.15) for the nine months ended September 30, 1998.
16
<PAGE>
RISK FACTORS
When the merger closes, holders of Marquee common stock will become
holders of SFX Class A common stock. Many factors will affect SFX's operating
and financial results, as well as the price of SFX Class A common stock; some
of these factors will be different from those affecting Marquee's operating and
financial results and the price of Marquee common stock. Before you vote on the
merger, you should consider carefully the risk factors discussed below as well
as all of the other business, financial and legal information in this proxy
statement-- prospectus, including the annexes. See "Safe Harbor for Forward
Looking Statements."
DECREASES IN THE SFX STOCK PRICE CAN DECREASE THE VALUE YOU RECEIVE IN THE
MERGER
If the SFX stock price is $42.75 or less, then each share of Marquee
common stock will convert into 0.1111 shares of SFX Class A common stock in the
merger. This amount will not increase, even if the SFX stock price drops
substantially. For example, if the SFX stock price is greater than $42.75, you
will receive at least $4.75 worth of SFX Class A common stock per share of
Marquee common stock; however, if the SFX stock price is $20.00, you will
receive only $2.22 worth of SFX Class A common stock.
The prices of the SFX Class A common stock and the Marquee common stock
have been volatile in the past. Therefore, we encourage you to check the
current price of the SFX Class A common stock before the special meeting. For
more information on SFX's stock prices, see "Comparative Per Share Market Price
and Dividend Information."
INCREASES IN THE SFX STOCK PRICE CAN DECREASE THE AMOUNT OF YOUR INTEREST IN
THE COMBINED COMPANY
If the SFX stock price is more than $42.75 but no more than $60.00, then
each share of Marquee common stock will convert into $4.75 worth of SFX Class A
common stock. As long as the SFX stock price is between $42.75 and $60.00, this
amount will not increase. As the SFX stock price increases over $42.75 --
except between $60.00 and $66.00 -- you will receive a proportionately smaller
interest in the combined company after the merger. For example, if the SFX
stock price is $45.00, then you will receive 0.1056 of a share of SFX Class A
common stock per share of Marquee common stock; if the SFX stock price is
$57.00, then you will receive only 0.0833 of a share; and if the SFX stock
price is $70.00, then you will receive only 0.0764 of a share.
IF SFX IS UNABLE TO INTEGRATE THE OPERATIONS OF ITS VARIOUS BUSINESSES, ITS
OVERALL BUSINESS MAY SUFFER
SFX has grown rapidly since it was formed in December 1997, mainly by
acquiring established live entertainment businesses. If SFX is unable to
integrate its various businesses effectively, then SFX's business, financial
condition and operating results may suffer. As of September 30, 1998, on a pro
forma basis, SFX's 1998 acquisitions represented 74% of SFX's revenues and 67%
of its assets, while Marquee and the Cellar Door acquisition collectively
represented 11% of SFX's revenues and 16% of its assets.
As you evaluate SFX's prospects, you should consider the many risks SFX
will encounter during its process of integrating these acquired businesses,
including:
o the distraction of management's attention from other business concerns;
o SFX's entry into markets where it has previously limited or no experience;
and
o potential loss of key employees or customers of the acquired businesses.
17
<PAGE>
Although SFX's management has significant experience, it may be unable to
effectively integrate the acquired businesses, Marquee and/or Cellar Door
without encountering the difficulties described above, and the combined
companies may not benefit as expected from the integration.
SFX HAS A SUBSTANTIAL AMOUNT OF DEBT, WHICH MAY HARM IT AND ITS STOCKHOLDERS
SFX has a substantial amount of debt, and the amount of its debt is likely
to substantially increase in the future. SFX's consolidated debt as of
September 30, 1998 would have been approximately $757.0 million, on a pro forma
basis giving effect to the Cellar Door acquisition, the merger, the recently
completed offering of $200.0 million of 91/8% Senior Subordinated Notes due
December 1, 2008 and the proposed equity offering.
The amount of SFX's debt could harm the holders of its Class A common
stock, by, among other things:
o making SFX more vulnerable to general adverse economic and industry
conditions;
o limiting SFX's ability to obtain money to pay for future acquisitions,
working capital, capital expenditures and other general corporate
requirements;
o dedicating more of SFX's cash flow to paying off its debt, which will reduce
the amount of cash available to pay for working capital, capital
expenditures or other general corporate needs;
o limiting SFX's flexibility in planning for, or reacting to, changes in its
business and the industry; and
o placing SFX at a competitive disadvantage to competitors that have less
debt.
SFX's ability to pay principal and interest on its debt on time, to
refinance its debt, or to pay for planned expenditures, will depend on various
factors, some of which it will not be able to control. These factors include
restrictions contained in its credit facility and the indentures relating to
its notes, which may limit SFX's ability to, among other things, borrow
additional funds. SFX may be unable to generate enough money to pay its debts
because of insufficient cash flow from operations or because it is not able to
raise additional capital funds by selling securities. SFX may also be required
to refinance a part of its debt before the debt matures. For more details about
SFX's financial resources, see "SFX Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
SFX'S CREDIT FACILITY AND INDENTURES RESTRICT ITS OPERATIONS
SFX's indentures and its credit facility restrict its and its
subsidiaries' ability to, among other things:
o sell or transfer assets;
o incur additional debt;
o repay other debt;
o pay dividends;
o make certain investments or acquisitions;
o repurchase or redeem capital stock;
18
<PAGE>
o engage in mergers or consolidations; and
o engage in certain transactions with subsidiaries and affiliates.
The indentures and the credit facility also require SFX to comply with
certain financial ratios, as discussed in "SFX Management's Discussion and
Analysis Financial Condition and Results of Operations--Liquidity and Capital
Resources."
These restrictions may interfere with SFX's ability to obtain financing or
to engage in other necessary or desirable business activities. In particular,
SFX will need to seek the consent of its lender under the credit facility to
consummate the merger.
If SFX cannot comply with the requirements in the credit facility, then
the lenders may require SFX to repay immediately all of its outstanding debt
under the credit facility. If SFX's debt payments were accelerated, SFX's
assets might not be sufficient to fully repay its debt. These lenders may also
require SFX to use all of its available cash to repay its debt or may prevent
SFX from making payments to other creditors on certain portions of its
outstanding debt.
SFX may not be able to obtain a waiver of these provisions or refinance
its debt, if needed. In such a case, SFX's business, results of operations and
financial condition would suffer.
IF SFX IS UNABLE TO COMPLETE OTHER ACQUISITIONS IN THE FUTURE, SFX'S BUSINESS
AND STOCK PRICE MAY SUFFER
SFX is currently negotiating additional acquisitions and expects to seek
additional acquisitions of live entertainment and related businesses in the
future. However, it may be unable to:
o identify and acquire additional suitable businesses;
o obtain the financing necessary to acquire the businesses; or
o obtain lenders' consents under its credit facility to acquire the
businesses.
SFX's inability to obtain financing for future acquisitions or to complete
acquisitions due to regulatory concerns could damage SFX's business, financial
condition and results of operations, and, therefore, its stock price.
Even if SFX is able to complete future acquisitions, they could result in
SFX: issuing more of its stock, which may dilute the value of existing SFX
stock; incurring a substantial amount of additional debt; and/or amortizing
expenses related to goodwill and other intangible assets. Any or all of these
actions could damage SFX's business, financial condition and results of
operations.
SFX WILL BE REQUIRED TO MAKE LARGE PAYMENTS UPON A CHANGE OF CONTROL, WHICH MAY
HARM SFX'S FINANCIAL CONDITION
SFX has obligations to make payments upon certain change of control
events. If it makes the payments, it may lose necessary operating funds. If it
cannot make the payments, it may be sued or forced into bankruptcy.
If Mr. Sillerman directly or indirectly owns less than 30% of the combined
voting power of SFX's Class A and Class B common stock, then a "Change in
Control" will occur under SFX's credit facility. This would require SFX to
repay all outstanding debt under the credit facility. Mr. Sillerman will hold
approximately 34.9% of SFX's voting power after the merger,
19
<PAGE>
the Cellar Door acquisition and the proposed equity offering. This amount will
decrease if SFX sells voting stock to third parties or issues it in
acquisitions.
Additionally, if anyone other than Mr. Sillerman becomes the beneficial
owner of over 35% of the voting power of the outstanding SFX common stock, then
a "Change in Control" will occur under SFX's indentures. This would require SFX
to offer to repurchase its outstanding notes at a premium.
SFX AND ITS MANAGEMENT MAY HAVE CONFLICTS OF INTEREST WITH MARQUEE
Messrs. Sillerman and Tytel are likely to have conflicts of interest as
officers and directors of SFX in any transaction or arrangement with Marquee
before the closing of the merger. Messrs. Sillerman and Tytel are directors,
founders and significant stockholders of Marquee. However, Messrs. Sillerman
and Tytel did not represent Marquee's interests in negotiations with SFX
relating to the merger.
Before the closing of the merger, SFX may directly compete with Marquee in
obtaining representation agreements with certain athletes and endorsement
opportunities for its clients. In addition, SFX anticipates that it may enter
into booking arrangements and other transactions and arrangements with Marquee
and Marquee's clients. SFX produces ice skating and gymnastics events that may
compete with events Marquee is involved in before the closing of the merger.
SFX MAY BE FORCED TO SELL SOME OF ITS SUBSIDIARIES, WHICH MAY PREVENT SFX FROM
REALIZING THE FULL VALUE OF THESE SUBSIDIARIES
SFX has granted rights to re-purchase some of its subsidiaries. These
rights may discourage potential bidders for the affected assets from
negotiating with SFX, and may keep SFX from realizing the full productive value
of these subsidiaries over time.
PACE. In connection with SFX's acquisition of PACE Entertainment
Corporation, Brian Becker received an option to acquire SFX's motor sports
business--or, if that business is sold, SFX's theatrical business--at its fair
market value. Mr. Becker may only exercise this option within 15 days after
February 25, 2000. Mr. Becker's exercise of this option would result in
termination of his employment agreement. Mr. Becker's exercise of this option
could damage SFX's business, financial condition and results of operations.
In addition, from February 25, 1999 to February 25, 2000, Mr. Becker will
also have a right of first refusal under certain circumstances to acquire SFX's
theatrical or motor sports line of business at a price equal to 95% of any
proposed purchase price by a third party. On a pro forma basis for SFX's 1998
acquisitions, the merger and the Cellar Door acquisition, specialized motor
sports would have accounted for approximately 5%, and theatrical would have
accounted for approximately 21%, of SFX's total net revenues for the nine
months ended September 30, 1998.
DON LAW. In connection with SFX's acquisition of Blackstone Entertainment,
LLC, also known as "Don Law," SFX granted the seller a right of first offer and
refusal. The right allows the seller to purchase, with certain exceptions, the
assets SFX acquired in the acquisition if SFX elects to sell those assets
before July 2, 2000.
BGP. SFX has agreed that it will not sell the assets of BG Presents, Inc.
before February 24, 2001, without giving the sellers the opportunity to
purchase the assets on the same terms.
OTHER ACQUISITIONS. In addition, SFX has granted similar rights of first
refusal to sellers in certain other acquisitions.
20
<PAGE>
SFX MAY HAVE LOWER REVENUES BECAUSE IT IS UNABLE TO SECURE APPROPRIATE ARTISTS,
EVENTS AND VENUES
As a participant in the live entertainment industry, SFX's ability to
generate revenues is highly sensitive to public tastes, which are
unpredictable. A change in public tastes, an increase in competition or a lack
of performer or event availability could damage SFX's business, financial
condition and results of operations. Similarly, SFX's ability to generate
revenues from live entertainment events may be limited if other competitive
forms of entertainment are available. Since SFX relies on unrelated parties to
create and perform live entertainment content, any lack of availability of
popular musical artists, touring Broadway-style shows, specialized motor sports
talent and other performers could limit SFX's ability to generate revenues.
SFX requires access to venues to generate revenues from live entertainment
events. It operates a number of its live entertainment venues under leasing or
booking agreements. SFX's long-term success will depend in part on its ability
to renew these agreements when they expire or end. SFX may be unable to renew
these agreements on acceptable terms or at all, and may be unable to obtain
favorable agreements with new venues.
SFX MAY HAVE ENVIRONMENTAL LIABILITIES THAT COULD AFFECT ITS RESULTS OF
OPERATIONS OR FINANCIAL CONDITION
SFX may be subject to significant environmental liabilities. SFX owns or
leases, or has other contractual interests in, numerous pieces of real
property, many of which SFX recently acquired. SFX's properties are subject to
environmental laws and regulations relating to the use, storage, disposal,
emission and release of hazardous and non-hazardous substances or materials.
SFX's properties may also be subject to noise level restrictions, which may
affect, among other things, the hours of operation of SFX's venues.
Additionally, certain laws and regulations could hold SFX strictly, jointly and
severally responsible for the correction of hazardous substance contamination
at its facilities or at third-party waste disposal sites, and could hold it
responsible for any personal or property damage related to the contamination.
THE DEPARTMENT OF JUSTICE INVESTIGATION MAY HARM SFX'S OPERATIONS
SFX has received a preliminary inquiry from the Department of Justice
seeking information on SFX's acquisitions of live entertainment venues and
businesses throughout the United States. The Department of Justice is
investigating whether these acquisitions might give SFX undue market power in
producing, promoting or exhibiting live entertainment events. SFX has
cooperated with the Department of Justice, and believes that its operations and
plan of acquisitions comply with applicable antitrust laws. However, if the
Department of Justice disagrees, it might file a lawsuit to force SFX to divest
itself of some of its operations. Such a lawsuit could have a material adverse
impact on SFX's business, results of operations and financial condition. For
more information concerning the Department of Justice's preliminary inquiry,
see "SFX's Business--Regulatory Matters."
BECAUSE A CHANGE OF CONTROL OF SFX WOULD BE DIFFICULT TO ACHIEVE, HOLDERS OF
SFX STOCK MAY NOT HAVE THE OPPORTUNITY TO RECEIVE A PREMIUM FOR THEIR SHARES
Holders of SFX Class A common stock could receive a premium for their
shares upon a change of control of SFX. The holders of SFX Class A common stock
may be less likely to receive a premium for their shares, however, because a
change of control would be difficult to achieve without the cooperation of
SFX's principal stockholders and its board of directors. There are several
factors that would make a change of control difficult, including:
o SFX has issued, and may issue in the future, shares of its Class B common
stock, which has 10 votes per share in most matters. The holders of these
shares will probably be able
21
<PAGE>
to prevent a change of control of SFX. The two current holders of its Class
B common stock will control approximately 38.5% of SFX's total voting power
after the merger, the Cellar Door acquisition and the proposed equity
offering. Therefore, they probably will be able to block any potential
change of control transaction that they oppose.
o SFX's certificate of incorporation allows its board of directors to issue up
to 25 million shares of preferred stock. If SFX issues shares of preferred
stock with voting rights, this issuance could dilute the voting rights of
holders of SFX common stock and could delay or prevent a change in control.
o Section 203 of the Delaware General Corporation Law prohibits SFX from
engaging in a "business combination" with an "interested stockholder" for
three years after the person became an interested stockholder, unless the
business combination is approved in a particular manner. Therefore, Section
203 could delay or prevent a change in control of SFX.
o SFX's board of directors has also adopted other programs, plans and
agreements that may make a change of control more expensive, such as
severance payments and immediate vesting of stock options upon a change of
control.
SFX'S OPERATIONS MAY SUFFER FROM YEAR 2000 COMPUTER PROBLEMS
Year 2000 issues exist when computers record dates using two digits rather
than four, and then use the dates for arithmetic operations, comparisons or
sorting. A two-digit recording may recognize a date using "00" as 1900 rather
than 2000, which could cause computer systems to perform inaccurate
computations or fail to operate. Although SFX does not anticipate being subject
to a material impact in this area, if it and the companies with which it does
business do not take adequate preventative action, then the Year 2000 problem
could damage SFX's business, financial condition and results of operations. For
more information concerning SFX's Year 2000 compliance issues, see "SFX
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Year 2000 Compliance."
22
<PAGE>
THE SPECIAL MEETING
SPECIAL MEETING
We are furnishing this proxy statement--prospectus to Marquee stockholders
in connection with the solicitation of proxies on behalf of the Marquee board
of directors for use at the special meeting. The special meeting will be held
at 10:00 a.m., local time, on , 1999 at the principal executive offices of
Marquee, 888 Seventh Avenue, 37th Floor, New York, New York.
MATTERS TO BE CONSIDERED
At the special meeting, including any adjournment or postponement thereof,
Marquee stockholders will:
o consider and vote upon a proposal to adopt the merger agreement and the
merger; and
o transact such other business that may properly come before the special
meeting.
RECOMMENDATION
The Marquee Board believes that the merger is advisable, is fair to
Marquee's stockholders and is in the best interests of Marquee and its
stockholders. The Marquee Board, with Messrs. Sillerman and Tytel abstaining,
unanimously recommends that stockholders of Marquee vote FOR adoption of the
merger agreement and the merger.
RECORD DATE; QUORUM
The Marquee Board has fixed the close of business on , 1999 as the
record date for the special meeting. Only Marquee stockholders of record on the
record date are entitled to receive notice of and to vote at the special
meeting. On the record date, [18,085,614] shares of Marquee common stock were
outstanding and held by approximately holders of record. Each outstanding
share of Marquee common stock is entitled to one vote on the matter to be
considered at the special meeting. The presence, either in person or by proxy,
of the holders of a majority of the issued and outstanding shares of Marquee
common stock entitled to vote at the special meeting is necessary to constitute
a quorum for the transaction of business at the special meeting.
SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN STOCKHOLDERS
On the record date, Marquee's directors, its executive officers and their
affiliates beneficially owned an aggregate of approximately 5,088,140 shares of
Marquee common stock, or approximately 27.1% of the shares of Marquee common
stock outstanding.
VOTES REQUIRED; EFFECT OF ABSTENTIONS AND NON-VOTES
The favorable vote of the holders of a majority of the outstanding shares
of Marquee common stock is required to adopt the merger agreement and the
merger. Any failure by a holder of Marquee common stock to vote will have the
effect of a vote against adoption of the merger agreement and the merger.
Brokers generally will not have the discretionary authority to vote shares of
Marquee common stock held in "street name" if they have not received
instructions from the beneficial owners. Broker non-votes will have the same
effect as votes cast against adoption of the merger agreement and the merger.
VOTING AND REVOCATION OF PROXIES
All shares of Marquee common stock represented at the special meeting by
properly executed proxies received before or at the special meeting, unless
such proxies shall have
23
<PAGE>
been revoked, will be voted at the special meeting, including any postponement
or adjournment thereof, in accordance with the instructions on the proxies. If
no instructions are indicated, such proxies will be voted for the adoption of
the merger agreement and the merger.
A person giving a proxy pursuant to this solicitation may revoke it at any
time before the proxy is voted at the special meeting. A proxy may be revoked
by:
o filing with the Secretary of Marquee in care of Continental Stock Transfer &
Trust Company, 2 Broadway, 19th Floor, New York, New York 10004, Attn:
Proxy Department, facsimile: (212) 509-5152, before the voting of the
proxy, either a written instrument revoking the proxy or an executed proxy
bearing a later date;
o completing a new proxy card and sending it to the address above, and the new
proxy card will automatically replace any earlier dated proxy card;
o voting in person at the special meeting; or
o assuming you instructed a broker to vote your shares, following your
broker's directions for changing those instructions.
Attendance at the special meeting will not, in itself, constitute the
revocation of a proxy. Marquee will appoint one or more inspectors, who may be
employees of Marquee, to determine among other things, the number of shares of
Marquee common stock represented at the special meeting and the validity of the
proxies submitted for vote at the special meeting. The inspectors of election
appointed for the special meeting will tabulate votes cast by proxy or in
person.
SOLICITATION OF PROXIES; EXPENSES
Proxies are being solicited by and on behalf of the Marquee Board.
Directors, officers and employees of Marquee may solicit proxies by the use of
the mails, in person or by telephone, telegram or other means of communication.
Marquee has engaged Georgeson & Company Inc. to assist Marquee in distributing
proxy materials and contacting record and beneficial owners of Marquee common
stock. Marquee has agreed to pay Georgeson & Company Inc. approximately $7,500,
plus out-of-pocket expenses, for its services to be rendered on behalf of
Marquee. Brokerage houses, nominees, fiduciaries and other custodians will be
requested to forward soliciting materials to beneficial owners and will be
reimbursed for their reasonable expenses incurred in sending proxy material to
beneficial owners. Marquee will bear its own expenses in connection with the
solicitation of proxies for the special meeting.
Marquee and SFX have agreed to pay their own expenses incurred in
connection with the registration statement on Form S-4, this proxy
statement--prospectus and the special meeting, including, without limitation,
the fees and disbursements of their respective counsel, accountants and other
representatives, except that Marquee and SFX will each pay one-half of any
filing fees and printing expenses.
IF THE MERGER IS CONSUMMATED, HOLDERS OF MARQUEE COMMON STOCK WILL RECEIVE
INSTRUCTIONS REGARDING THE SURRENDER OF THEIR CERTIFICATES REPRESENTING SHARES
OF MARQUEE STOCK. STOCKHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES UNTIL
THEY RECEIVE THESE INSTRUCTIONS.
24
<PAGE>
THE MERGER
This section of the proxy statement--prospectus describes the material
aspects of the proposed merger. The following description does not purport to
be complete and is qualified by reference to the merger agreement, which is
attached as Annex I to this proxy statement--prospectus.
BACKGROUND OF THE MERGER
From August 1996 to March 1997, Sillerman Communications Management
Corporation ("SCMC"), and since March 1997, The Sillerman Companies, Inc.
("TSC"), have performed financial consulting services for Marquee. Robert F.X.
Sillerman, one of the founders of Marquee, is the Chairman of the Board of
Marquee and is also the controlling stockholder, Chairman and Chief Executive
Officer of SCMC and TSC and the Executive Chairman of SFX. In addition, Howard
J. Tytel, one of the founders of Marquee, is a director of Marquee, the
Executive Vice President and General Counsel of SCMC and TSC and the Executive
Vice President and a director of SFX. See "Certain Relationships and Related
Transactions of Marquee."
In early April 1998, Mr. Sillerman contacted Robert M. Gutkowski, the
President and Chief Executive Officer of Marquee, regarding the possibility of
SFX acquiring Marquee. No specific details or terms of any possible transaction
were discussed. Mr. Gutkowski subsequently contacted Prudential Securities
regarding the possibility of Prudential Securities acting as financial advisor
to Marquee with respect to SFX's eventual proposal.
On April 13, 1998, Mr. Gutkowski met with advisors from Prudential
Securities and certain members of the law firm of Paul, Hastings, Janofsky &
Walker LLP to discuss procedural steps that should be taken in response to
SFX's indication of interest in acquiring Marquee. On April 22, 1998, SFX sent
a letter to Marquee stating that SFX was interested in the possibility of
acquiring Marquee in a tax free reorganization.
On April 24, 1998, the Marquee Board held a telephonic meeting at which
all Marquee Board members were present except Messrs. Sillerman and Tytel. At
the meeting, Mr. Gutkowski read a letter from SFX expressing its interest in
acquiring Marquee. The Marquee Board appointed a special committee, consisting
of Arthur Barron and Myles Schumer, both of whom are independent directors on
the Marquee Board, along with Mr. Gutkowski, to analyze and respond to the SFX
proposal and to retain independent counsel and financial advisors to assist the
Marquee special committee with its deliberations.
On April 28, 1998, the Marquee special committee retained Paul Hastings as
independent counsel. Also in late April 1998, Prudential Securities began to
act as Marquee's financial advisor in connection with the SFX proposal. Marquee
formally retained Prudential Securities pursuant to a letter agreement dated
May 22, 1998.
At a meeting on April 28, 1998, Paul Hastings outlined for the Marquee
special committee its fiduciary duties under Delaware law. The Marquee special
committee determined that Marquee should issue a press release announcing its
receipt of an indication of interest from SFX; at the same time, SFX would
issue a press release announcing its interest in acquiring Marquee. On May 1,
1998, the Marquee special committee met by telephone with Paul Hastings and
Prudential Securities to review a draft of the press release. SFX and Marquee
issued their respective press releases on May 4, 1998.
On May 5, 1998, before Marquee reached any agreement with SFX, a Marquee
stockholder instituted litigation against SFX, certain of its directors and
Marquee, alleging, among other things, that a merger between Marquee and SFX
would irreparably harm Marquee stockholders. See "--Litigation."
25
<PAGE>
On June 10, 1998, after conferring with other directors of SFX, Mr. Tytel
orally proposed to Prudential Securities that SFX might offer $6.00 per share
of Marquee common stock to Marquee's stockholders other than members of its
management, payable either entirely in SFX Class A common stock or in $4.00 of
SFX Class A common stock and $2.00 in cash. Pursuant to this proposal, SFX
might offer $3.00 per share of Marquee common stock to Marquee's management
stockholders, payable in a combination of SFX Class A common stock and cash,
plus a contingent value right that could increase the consideration received by
such management stockholders by up to $4.00 per share of Marquee common stock.
At a meeting later that day, the Marquee special committee, with the
assistance of Prudential Securities, reviewed various factors that it intended
to consider in evaluating proposals from SFX. Prudential Securities described
the various valuation methods it would utilize in valuing a combination of
Marquee and SFX and responded to questions from the Marquee special committee.
Paul Hastings then led a lengthy discussion regarding SFX's proposal and the
possibility of stockholders challenging the merger if Marquee's management
stockholders received a different price for their shares--even if lower--than
Marquee's non-management stockholders.
On June 11, 1998, the Marquee Board, other than Messrs. Sillerman and
Tytel, met with Paul Hastings and Prudential Securities. Mr. Gutkowski and
Prudential Securities reviewed the terms of the SFX proposal with those Marquee
Board members present. The Marquee Board authorized Mr. Gutkowski to meet with
Mr. Tytel to discuss SFX's proposal on June 15, 1998. A lengthy discussion
ensued regarding the problems associated with Marquee's directors and officers
receiving a different price for their shares than all other Marquee
stockholders. The Marquee Board concluded that any offer involving different
consideration paid to different groups of stockholders would require the
Marquee Board and its advisors to perform certain additional valuation methods,
certain of which might be inherently vague and complex and which might result
in one or more of such groups asserting they were treated unfairly relative to
the other group. The Marquee Board also discussed in detail the effects that
merging or not merging with SFX or another similar entity would have on
Marquee's business plan and strategy. In particular, the Marquee Board analyzed
Marquee's ability to complete acquisitions in the future without the benefit of
being part of a larger company like SFX, given Marquee's need of funds for
future acquisitions and the uncertainty of raising such funds through private
lenders or the public or private debt or equity markets.
On June 15, 1998, Mr. Gutkowski, Prudential Securities and Paul Hastings
met with Mr. Tytel, Edward Dugan and Lehman Brothers Incorporated, SFX's
independent financial advisor. Mr. Dugan is a member of the independent
committee of SFX's board of directors. Messrs. Tytel and Gutkowski discussed
Marquee's business plan and strategy at length, including Marquee's pending
acquisitions and the anticipated effect such acquisitions would have on
Marquee's projected earnings before interest, taxes, depreciation and
amortization. Messrs. Tytel and Gutkowski also discussed Marquee's ability to
fund such pending acquisitions as well as any future acquisitions. Mr.
Gutkowski expressed to Mr. Tytel the Marquee Board's preference to treat all
stockholders of Marquee similarly, including management. Having conferred with
other members of management and directors of SFX on these matters, Mr. Tytel
orally proposed offering $5.50 per share of Marquee common stock to all Marquee
stockholders, payable in shares of SFX Class A common stock. This proposal was
conditioned on the cancellation by management of shares of Marquee common stock
held in escrow since Marquee's initial public offering. See "Certain
Relationships and Related Transactions of Marquee--Escrow Agreement."
26
<PAGE>
Later that day, Mr. Gutkowski again met with Mr. Tytel and expressed
disappointment with SFX's low valuation of Marquee. Having conferred with other
directors of SFX, and having taken account of the views of Marquee's management
and the price of SFX's Class A common stock, Mr. Tytel proposed $6.00 per share
of Marquee common stock payable in SFX Class A common stock, with a cash
election for between 25% and 35% of the consideration. The proposal was also
conditioned on the cancellation of all Marquee escrow shares. Mr. Tytel's
proposal was incomplete as to certain terms.
On June 17, 1998, Mr. Gutkowski reported to the Marquee special committee,
Paul Hastings and Prudential Securities on his discussions with Mr. Tytel and
on the terms of SFX's most recent proposal. The Marquee special committee asked
Prudential Securities to analyze the most recent proposal from SFX and
suggested that either Prudential Securities or Mr. Gutkowski inform Mr. Tytel
that the Marquee special committee would not respond to SFX's latest proposal
until it reviewed the analysis of Prudential Securities.
On June 23, 1998, the Marquee special committee met with Paul Hastings and
Prudential Securities. Jan E. Chason, Marquee's chief financial officer,
reported to the Marquee special committee on adjustments to certain estimates
in Marquee's business plan. A discussion ensued regarding SFX's most recent
proposal given such adjustments. Prudential Securities advised the Marquee
special committee that it was not in a position to deliver a fairness opinion
until SFX had completed the terms of its proposal, and it was agreed that
Prudential Securities would contact Mr. Tytel and request full details of the
SFX proposal.
Between June 26 and July 1, 1998, Mr. Tytel conferred with various other
directors of SFX and presented various proposals to the Marquee special
committee, Paul Hastings and Prudential Securities, and negotiations occurred
between the parties regarding the terms of such proposals. On July 1, 1998, Mr.
Tytel provided a written proposal for the payment of $6.00 per share of Marquee
common stock to all Marquee stockholders, with the consideration to be paid
entirely in SFX Class A common stock. The exchange ratio for determining the
number of shares of SFX Class A common stock that each Marquee stockholder
would receive would be based on specified measuring periods and would be
subject to certain adjustments, such that each Marquee stockholder would
receive SFX Class A common stock valued at a minimum of $6.00 per share of
Marquee common stock and up to a maximum of $6.30 per share of Marquee common
stock. The July 1, 1998 proposal, like the June 15, 1998 proposal, was
conditioned on the cancellation of all Marquee escrow shares.
On July 2, 1998, the Marquee special committee met with Prudential
Securities and Paul Hastings to discuss SFX's July 1, 1998 proposal, and a
lengthy discussion followed regarding the same. Paul Hastings advised the
Marquee special committee that it should not make a final recommendation to the
Marquee Board until the merger agreement was negotiated. Subsequently, the
Marquee Board, other than Messrs. Sillerman and Tytel, met by telephone with
Prudential Securities and Paul Hastings to discuss SFX's July 1, 1998 proposal.
On July 7, 1998, Baker & McKenzie, counsel to SFX, delivered an initial
draft of the merger agreement to Paul Hastings. Paul Hastings and Baker &
McKenzie negotiated the terms and conditions of the merger agreement during the
two following weeks.
Between July 1, 1998 and July 10, 1998, Mr. Tytel had various discussions
with officers and directors of SFX regarding the possible terms of a merger
with Marquee. On July 10, 1998, Mr. Tytel circulated revised terms of the SFX
proposal, adjusting the measuring periods
27
<PAGE>
for the exchange ratio and the price of SFX Class A common stock at which SFX
could terminate the transaction to reflect the significant appreciation in the
SFX Class A common stock price after the July 1, 1998 SFX proposal.
On July 13, 1998, Mr. Gutkowski met with Mr. Tytel to discuss the revised
proposal. Having conferred with other directors of SFX, Mr. Tytel agreed to
revise the July 10, 1998 proposal to allow Marquee stockholders to receive in
excess of $6.00 per share and up to $6.30 per share if the price of SFX Class A
common stock preceding the closing of the merger was greater than $57.50 per
share.
On July 20, 1998, the Marquee Board, other than Messrs. Sillerman and
Tytel, met with Paul Hastings and Prudential Securities to evaluate SFX's
revised proposal. Paul Hastings reviewed in detail with the Marquee Board the
terms of the proposed merger and the negotiations with respect to the merger
agreement that took place during the preceding two weeks. Paul Hastings
indicated that there were certain specific open items for the Marquee Board to
consider, including Marquee's completion of certain transactions as a condition
precedent in the merger agreement to SFX's obligation to close the transaction.
A lengthy discussion ensued regarding these conditions. Prudential Securities
then reviewed with the Marquee Board its evaluation of the fairness of the
exchange ratio from a financial point of view to the Marquee stockholders,
other than Messrs. Sillerman and Tytel, and presented a publicly traded
companies analysis, a selected transactions analysis and a discounted cash flow
analysis. Prudential Securities then delivered an oral opinion to the effect
that the exchange ratio described in the merger agreement was fair, from a
financial point of view, to the Marquee stockholders, other than Messrs.
Sillerman and Tytel, based on its valuation analysis. The Marquee Board agreed
that Marquee's financial and legal advisors should contact SFX's advisors and
propose making certain modifications to the above-described conditions
precedent in the merger agreement. Paul Hastings then advised the Marquee Board
that it would request that the consulting agreement with TSC be terminated,
effective upon consummation of the merger.
On July 22, 1998, the Marquee Board, other than Messrs. Sillerman and
Tytel, met with Paul Hastings and Prudential Securities. Paul Hastings reported
on the status of merger agreement negotiations. Prudential Securities restated
and reaffirmed the opinion it gave on July 20, 1998, to the effect that the
exchange ratio described in the merger agreement was fair, from a financial
point of view, to the Marquee stockholders other than Messrs. Sillerman and
Tytel. The Marquee special committee then unanimously recommended to the
Marquee Board that the merger and merger agreement were advisable, fair to and
in the best interests of the Marquee stockholders. The Marquee Board members in
attendance then unanimously declared the merger agreement advisable and voted
to approve the terms and conditions of the merger agreement, the merger and all
related transactions.
The merger agreement was executed on July 23, 1998, and the merger was
publicly announced on the same day. The exchange ratio was to be determined as
follows:
<TABLE>
<S> <C> <C> <C>
o If the SFX stock price was no greater than $57.50, then the $ 6.00
exchange ratio would equal:
SFX stock price
o If the SFX stock price was more than $57.50 but no greater .09
0.12 -
than $60.00, then the exchange ratio would equal:
SFX stock price
o If the SFX stock price was more than $60.00, then the exchange $ 6.30
ratio would equal:
SFX stock price
</TABLE>
28
<PAGE>
On September 21, 1998, the parties amended the merger agreement, extending
the date for filing this proxy statement--prospectus with the SEC to October 6,
1998. This was done to provide SFX and Marquee management and their respective
independent accountants additional time to compile the requisite financial
information required to be included in this proxy statement--prospectus.
Between September 21, 1998 and October 5, 1998, at SFX management's
request, Marquee's management provided SFX's management with revisions to
Marquee's 1998 business plan reflecting Marquee's operating results for the
quarter ended June 30, 1998 and changes in anticipated operating results for
the remainder of fiscal 1998.
During a telephone conversation on October 2, 1998 with representatives of
Paul Hastings and Prudential Securities, Mr. Tytel indicated SFX's possible
interest in restructuring the merger.
On October 5, 1998, Mr. Gutkowski, Mr. Chason, Paul Hastings and
Prudential Securities met with Mr. Tytel and Thomas P. Benson, SFX's chief
financial officer, to review Marquee's historical and projected operating
results. Because of those results and the then current trading prices of SFX
Class A common stock, Mr. Tytel, on behalf of SFX, indicated SFX's desire to
restructure the terms of the merger.
On October 6, 1998, the Marquee Board, other than Messrs. Sillerman and
Tytel, met with Paul Hastings and Prudential Securities to review the status of
the merger in light of the October 5, 1998 discussions described above. Paul
Hastings reviewed in detail with the Marquee Board the parties' respective
rights and obligations under the merger agreement. A detailed discussion
followed regarding Marquee's options in light of SFX's possible desire to
restructure the transaction. The Marquee Board members present unanimously
agreed that, given the changes in Marquee's recent and projected operating
results, then current trading prices of SFX Class A common stock, the parties'
interpretations of their respective rights and obligations under the merger
agreement and SFX's desire to restructure the terms of the merger, Mr.
Gutkowski and Marquee's financial and legal advisors should commence
negotiations with SFX regarding a possible restructuring of the merger, and the
deadline in the merger agreement for filing this proxy statement--prospectus
should be extended to permit such negotiations.
Accordingly, on October 6, 1998, the parties entered into a second
amendment to the merger agreement that extended the date for filing this proxy
statement--prospectus with the SEC to October 16, 1998.
On October 7, 1998, the parties began preliminary discussions regarding a
possible restructuring of the merger. On October 8, 1998, Marquee and SFX
issued a joint press release announcing the commencement of such discussions
and the second amendment to the merger agreement.
Also on October 8, 1998, the Marquee Board, other than Messrs. Sillerman
and Tytel, met with Paul Hastings and Prudential Securities to review the
status of the negotiations with SFX. Prudential Securities reviewed with the
Marquee Board the proposal which SFX presented earlier that day. SFX had
proposed fixing the exchange ratio at 0.10 and granting Marquee stockholders a
contingent value right based on Marquee's 1999 earnings before interest, taxes,
depreciation and amortization. The proposal also provided for an elimination of
SFX's right to terminate the merger agreement in the event SFX's Class A common
stock traded below $32.00 per share for twenty consecutive days and for a
reduction in the
29
<PAGE>
break-up and termination fees. Following discussion, the Marquee Board members
present unanimously agreed that Mr. Gutkowski and Marquee's advisors would
continue to negotiate the terms of the proposal with SFX and its advisors.
Mr. Tytel, after conferring with the SFX independent committee, agreed,
during the course of a meeting with Prudential Securities on October 9, 1998,
to increase the exchange ratio to 0.1111. Later that day, the Marquee Board,
other than Messrs. Sillerman and Tytel, met with Paul Hastings and Prudential
Securities. Prudential Securities reviewed SFX's most recent proposal in detail
with the Marquee Board and Marquee's options with respect thereto. The Marquee
Board members present unanimously agreed that Mr. Gutkowski and Marquee's
advisors should continue to negotiate the terms of the proposal with SFX.
Marquee and its advisors had numerous discussions between October 9 and
October 15 with Mr. Tytel and Baker & McKenzie regarding the possible terms of
a restructured transaction. Following several proposals and counterproposals,
Mr. Tytel, on behalf of SFX, and after conferring with the SFX independent
committee, indicated that, if the SFX stock price were greater than $42.75 per
share, then the exchange ratio would be adjusted to limit Marquee stockholders'
consideration to $4.75 per share of Marquee common stock. The negotiations also
resulted in an agreement to reduce the termination and break-up fees by fifty
percent and in a proposal that SFX would agree that Marquee's historical
performance for the six month period ended June 30, 1998 was satisfactory for
purposes of the merger agreement. Concurrent with such discussions, Paul
Hastings and Baker & McKenzie negotiated several drafts of amendment no. 3 to
the merger agreement.
On October 16, 1998, the Marquee Board, other than Messrs. Sillerman and
Tytel, met with Paul Hastings and Prudential Securities to evaluate SFX's most
recent proposal. Prudential Securities reviewed in detail with the Marquee
Board the terms of SFX's proposal as of October 15, 1998, and presented a
valuation analysis to the Marquee Board taking into account the revised terms
of the proposed merger. Prudential Securities then delivered its opinion that
the exchange ratio, as amended by amendment no. 3, was fair, from a financial
point of view, to the Marquee stockholders, other than Messrs. Sillerman and
Tytel. The Marquee special committee then unanimously reaffirmed its
recommendation to the Marquee Board that the merger and merger agreement, as
amended, were advisable, fair to and in the best interests of the Marquee
stockholders. The Marquee Board members present then unanimously voted to
approve the merger, the terms and conditions of the merger agreement, as
amended, and the transactions that it contemplates and determined that the
merger agreement, as amended, was advisable, fair to and in the best interest
of the Marquee stockholders.
On October 16, 1998, the parties entered into amendment no. 3, reflecting
the revised terms of the merger, and issued a press release with respect
thereto. Pursuant to amendment no. 3, the exchange ratio was to be determined
as follows:
<TABLE>
<S> <C> <C>
o If the SFX stock price was $42.75 or less, then the exchange
0.1111
ratio would equal:
o If the SFX stock price was greater than $42.75, then the $ 4.75
exchange ratio would equal:
SFX stock price
</TABLE>
In connection with the litigation alleging that SFX's proposed acquisition
of Marquee would be unfair to Marquee's public stockholders, SFX continued
discussions with plaintiffs' counsel regarding plaintiffs' concerns. In January
1999, after considering plaintiffs' concerns and the current trading prices of
SFX Class A common stock, Mr. Tytel, after conferring
30
<PAGE>
with its board of directors, proposed to revise the exchange ratio to allow
Marquee stockholders to benefit from the potential increase in the SFX stock
price. Under the new proposal, Marquee stockholders would receive the same
amount of consideration as provided for in amendment no. 3 when the SFX stock
price was at or below $60.00. However, for every dollar--or portion of a
dollar--that the SFX stock price exceeded $60.00 up to $66.00, the Marquee
stockholders would receive an additional $0.10--or proportional part of such
amount--worth of SFX stock. If the SFX stock price were greater than $66.00 per
share, then the exchange ratio would be adjusted to provide Marquee
stockholders with consideration of $5.35 per share of Marquee common stock.
Additionally, SFX agreed to provide Marquee, upon mutually acceptable terms,
financing, not to exceed $5.0 million, for a specified future acquisition.
Concurrent with such discussions with plaintiffs' counsel, Paul Hastings and
Baker & McKenzie negotiated the terms of amendment no. 4 to the merger
agreement to reflect the new proposal.
On January 24, 1999, the Marquee Board, other than Messrs. Sillerman and
Tytel, met telephonically with Paul Hastings and Prudential Securities to
discuss the new proposal revising the exchange ratio, settlement of the pending
shareholder litigation and the proposed $5.0 million acquisition financing to
be provided by SFX. Prudential Securities reviewed with the Marquee Board the
terms of SFX's proposal, and presented a valuation analysis to the Marquee
Board taking into account the revised terms of the proposed merger. Prudential
Securities then delivered its oral opinion, subsequently confirmed in writing,
that the exchange ratio, as amended by amendment no. 4, was fair, from a
financial point of view, to the Marquee stockholders, other than Messrs.
Sillerman and Tytel. The Marquee Board members present then unanimously voted
to approve the merger, the terms and conditions of the merger agreement, as
amended, and the transactions that it contemplates and determined that the
merger agreement, as amended, was advisable, fair to and in the best interests
of the Marquee stockholders.
On January 24, 1999, the parties entered into amendment no. 4, reflecting
the revised terms of the merger, and on January 25, 1999, the parties issued a
press release with respect thereto.
MARQUEE'S REASONS FOR THE MERGER
The Marquee Board and the Marquee special committee believe that the
merger will enable the Marquee stockholders to become, on a tax free basis,
stockholders in a significantly larger company that will be better positioned
to compete effectively in the sports and entertainment marketing, talent
representation and television production industry, and that the merger will
provide Marquee greater access to capital. Accordingly, at a meeting held on
January 24, 1999, the Marquee Board, other than Messrs. Sillerman and Tytel,
and the Marquee special committee unanimously determined that the merger and
the merger agreement, as amended by amendment no. 4, is advisable, fair to and
in the best interests of Marquee and its stockholders and approved and adopted
the merger agreement. The Marquee Board, other than Messrs. Sillerman and
Tytel, and the Marquee special committee unanimously recommend that Marquee
stockholders vote FOR adoption of the merger agreement and the merger.
In reaching their conclusions that Marquee should enter into the merger
agreement as amended by amendment nos. 1 through 4 and that they would
recommend adoption by the Marquee stockholders of the amended merger agreement
and the merger, the Marquee special committee and Marquee Board considered a
number of factors, including the following factors, each of which supported the
Marquee Board's decision:
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<PAGE>
o the opportunity to become part of a larger company with greater ability to
access larger pools of funds that might be used to acquire other companies
in the future;
o Marquee's and SFX's respective businesses, management, competitive position
and prospects, along with current conditions and trends in the markets in
which they operate, which in Marquee Board's view supports a determination
that certain of the Marquee's and SFX's businesses can be integrated and
will complement each other well;
o the risk, created by changes in the financial markets and the trading prices
of SFX Class A common stock from July 23, 1998 through the date of
amendment no. 3, that the price of SFX Class A common stock would fall
below $32.00 per share for twenty consecutive trading days, which would
permit SFX to terminate the merger agreement and the amendment to the
merger agreement to reduce this risk by eliminating SFX's right to
terminate based on SFX's stock price, and to make other changes which
Marquee's Board believes are fair and in the best interest of Marquee's
stockholders;
o changes in Marquee's historical and projected results of operations as of
July 23, 1998 and subsequent thereto, which projected operating results, in
Marquee Board's view, may make it more difficult for Marquee to secure
access to capital to fund future acquisitions;
o current market conditions and historical market prices, volatility and
trading information with respect to Marquee common stock and SFX Class A
common stock, which, with respect to the trading prices of Marquee common
stock, in the Marquee Board's view, supported a determination that such
trading prices may not reflect the stock's inherent value;
o the financial condition and results of operations of Marquee and SFX before
and after giving effect to the merger, which, in the Marquee Board's view,
supported a determination that the consideration to be received by Marquee
stockholders is fair to Marquee and its stockholders;
o the oral opinion of Prudential Securities rendered at the January 24, 1999
meeting of the Marquee Board, and subsequently confirmed in writing, that,
as of the date of such opinion, the exchange ratio was fair, from a
financial point of view, to the holders of the Marquee common stock, other
than Messrs. Sillerman and Tytel, and the valuation analyses utilized by
Prudential Securities in forming its opinion including a comparative
transactions analysis, a contribution analysis and a discounted cash flow
analysis;
o the opportunity for Marquee stockholders to continue to share in the
potential for long-term gains from their investment in Marquee through the
ownership of SFX Class A common stock following the merger;
o the fact that Marquee stockholders will receive SFX Class A common stock in
exchange for their Marquee common stock, which the Marquee Board believes
will provide some flexibility to the Marquee stockholders by allowing them
to choose whether to retain their SFX Class A common stock after the merger
or to liquidate their investments, insofar as the Marquee Board believes
that a liquid market exists for SFX Class A common stock;
o the fact that the merger agreement requires the merger to be submitted to
Marquee stockholders for adoption, which allows for an informed vote of the
Marquee stockholders on the merits of the transaction without requiring a
tender of shares or other potentially coercive transaction structures, and
the fact that the merger agreement provides that it may be terminated if it
is not adopted by Marquee's stockholders;
32
<PAGE>
o the fact that the merger will afford Marquee stockholders the opportunity to
receive shares of SFX Class A common stock in a tax-free transaction;
o the ability of SFX to consummate the transactions contemplated by the merger
agreement on a timely basis and the likelihood that the conditions to
closing set forth in the merger agreement will be fulfilled; and
o the terms of the merger agreement, including the parties' mutual
representations, warranties and covenants and the conditions to their
respective obligations.
The Marquee Board was aware that certain members of Marquee management and
the Marquee Board may be deemed to have interests in the merger that are in
addition to their interests as Marquee stockholders generally, and considered
these interests in approving the merger. Such interests did not weigh either in
favor of or against approving the merger. See "--Interests of Marquee's
Management and Directors in the Merger."
This discussion of the information and factors considered by the Marquee
Board is not intended to be exhaustive. Although all of the above factors
support the Marquee Board's determination, because of the wide variety of
factors to be considered, the Marquee Board did not assign relative weights to
the factors discussed above or determine that any factor was of particular
importance. Rather, the Marquee Board viewed its positions and recommendation
as being based upon all of the information presented.
The per share price of Marquee common stock was $21/4 on the date of
execution of amendment no. 3 and has increased to $43/16 as of January 22,
1999. The consideration to be received by Marquee's stockholders under the
merger agreement, however, does not increase based on the trading prices of
Marquee's common stock or changes in Marquee's operating results prior to the
effective time of the merger. Accordingly, the Marquee Board has not
reconsidered its reasons for approving the merger agreement and the merger in
light of the recent increase in Marquee's stock price and Marquee's most recent
financial results.
OPINION OF MARQUEE'S FINANCIAL ADVISOR
On January 24, 1999, Prudential Securities delivered its oral opinion,
subsequently confirmed in writing, to the Marquee Board to the effect that, as
of such date, the exchange ratio was fair, from a financial point of view, to
the holders of Marquee common stock other than Messrs. Sillerman and Tytel.
Prudential Securities presented the financial analysis underlying its opinion
at a telephonic meeting of the Marquee Board on January 24, 1999. In performing
the financial analysis which underlies its opinion, Prudential Securities
assumed a SFX stock price of $55.25 per share, the closing price for the SFX
Class A common stock on January 22, 1999.
In requesting the Prudential Securities opinion, the Marquee Board did not
give any special instructions to Prudential Securities or impose any limitation
upon the scope of the investigation that Prudential Securities deemed necessary
to enable it to deliver the Prudential Securities opinion. A copy of the
Prudential Securities opinion, which sets forth the assumptions made, matters
considered and limits on the review undertaken, is attached to this proxy
statement--prospectus as Annex II and is incorporated herein by reference. The
summary of the Prudential Securities opinion set forth below is qualified in
its entirety by reference to the full text of the Prudential Securities
opinion. Marquee stockholders are urged to read the Prudential Securities
opinion in its entirety.
THE PRUDENTIAL SECURITIES OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE
EXCHANGE RATIO TO THE HOLDERS OF MARQUEE COMMON STOCK, OTHER THAN MESSRS.
SILLERMAN AND TYTEL, FROM A
33
<PAGE>
FINANCIAL POINT OF VIEW. IT DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE MEETING OR AS TO ANY
OTHER ACTION SUCH STOCKHOLDER SHOULD TAKE REGARDING THE MERGER.
In conducting its analysis and arriving at the Prudential Securities
opinion dated January 24, 1999, Prudential Securities reviewed such information
and considered such financial data and other factors as Prudential Securities
deemed relevant under the circumstances, including the following:
o the merger agreement dated July 23, 1998, as amended through October 16,
1998, and a draft of amendment no. 4 dated January 20, 1999;
o certain publicly-available historical financial and operating data
concerning Marquee, including:
(1) the Annual Reports to Stockholders and Annual Reports on Form 10-KSB
of Marquee for the fiscal years ended December 31, 1996 and 1997;
(2) Marquee's Quarterly Reports on Form 10-Q for the quarters ended March
31, June 30, 1998 and September 30, 1998; and
(3) Marquee's Prospectus, dated October 7, 1997, relating to the sale of
7,500,000 shares of Marquee common stock;
o certain publicly-available historical financial and operating data
concerning SFX, including:
(1) SFX's Annual Report on Form 10-K for the fiscal year ended December
31, 1997;
(2) SFX's Quarterly Report on Form 10-Q for the quarters ended March 31,
June 30, 1998 and September 30, 1998;
(3) SFX's Prospectus, dated May 20, 1998, relating to the sale of
7,000,000 shares of SFX Class A common stock and SFX's Prospectus,
dated June 30, 1998, relating to the sale of 3,740,039 shares of SFX
Class A common stock; and
(4) SFX's Current Report on Form 8-K dated November 23, 1998;
o certain information relating to Marquee, including financial forecasts
prepared by the management of Marquee;
o certain information relating to Marquee's acquisition of Alphabet City
Industries, Inc., Alphabet City Sports Records, Inc., Cambridge Holding
Corporation, Park Associates Limited, Tollin/Robbins Productions and Tony
Stephens Associates Limited, including selected financial data and certain
financial forecasts prepared by the management of Marquee;
o certain information relating to SFX, including financial forecasts prepared
by the management of SFX;
o the financial terms of certain recent transactions Prudential Securities
deemed relevant to its inquiry;
o the historical stock prices and trading volumes of Marquee common stock and
SFX Class A common stock; and
o such other financial studies, analyses and investigations that Prudential
Securities deemed appropriate.
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Prudential Securities assumed, with Marquee's consent, that the draft of
amendment no. 4 which Prudential Securities reviewed would conform in all
material respects to the executed version.
Prudential Securities discussed with the senior management of Marquee and
SFX: the prospects for their respective businesses; their estimates of such
businesses' future financial performance; the financial impact of the merger on
the respective companies; and such other matters Prudential Securities deemed
relevant.
In connection with its review and analysis and in the preparation of the
Prudential Securities opinion, Prudential Securities relied upon the accuracy
and completeness of the financial and other information publicly available or
provided to it by Marquee and SFX and has not undertaken any independent
verification of such information or any independent valuation or appraisal of
any of the assets or liabilities of Marquee or SFX. With respect to certain
financial forecasts Marquee management provided to Prudential Securities for
Marquee and the companies acquired in Marquee's 1998 acquisitions, Prudential
Securities assumed that such information, and the assumptions and bases
therefor, represented Marquee management's best then available estimate as to
the future financial performance of Marquee and Marquee's 1998 acquisitions.
With respect to such estimates of future financial performance of certain of
Marquee's 1998 acquisitions, Marquee management relied on the information and
estimates of the former owners of such companies. Prudential Securities also
assumed that information SFX management provided regarding certain financial
forecasts for SFX, and the assumptions and bases therefor, represented SFX
management's best then available estimate of the future performance of SFX. For
purposes of its opinion, Prudential Securities assumed that the merger
qualifies as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). Further, the Prudential
Securities opinion was based on economic, financial and market conditions as
they existed on the date thereof and can only be evaluated as of the date of
the Prudential Securities opinion, and Prudential Securities assumes no
responsibility to update or revise the Prudential Securities opinion based upon
events or circumstances occurring after such date.
In connection with Prudential Securities' advisory assignment, Prudential
Securities was not authorized by Marquee or the Marquee Board to solicit, nor
did Prudential Securities solicit, indications of interest from third parties
for the acquisition of all or part of Marquee. The Prudential Securities
opinion does not address, nor should it be construed to address, the relative
merits of the merger or any alternative business strategies that may be
available to Marquee. In addition, the Prudential Securities opinion does not
in any manner address the price at which SFX Class A common stock will trade
following the consummation of the merger.
The Prudential Securities opinion, including Prudential Securities'
presentation of such opinion to the Marquee Board, was one of the many factors
that the Marquee Board took into consideration in making its determination to
recommend adoption of the merger agreement. Consequently, Prudential
Securities's analyses described below should not be viewed as determinative of
the opinion of the Marquee Board with respect to the exchange ratio. The
exchange ratio was determined through arm's length negotiations between Marquee
and SFX and was approved by the Marquee Board.
In arriving at the Prudential Securities opinion, Prudential Securities
performed a variety of financial analyses, including those summarized herein.
The summary set forth below of the analyses orally presented to the Marquee
Board at the January 24, 1999 telephonic meeting does not purport to be a
complete description of the analyses performed.
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The preparation of a fairness opinion is a complex process that involves
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of these methods to the particular
circumstance. Therefore, such an opinion is not necessarily susceptible to
partial analysis or summary description. Prudential Securities believes that
its analyses must be considered as a whole and that selecting portions thereof
or portions of the factors considered by it, without considering all analyses
and factors, could create an incomplete view of the evaluation process
underlying the Prudential Securities opinion. Prudential Securities made
numerous assumptions with respect to industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of Marquee and SFX. Any estimates contained in Prudential
Securities' analyses are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. Additionally, estimates of the values of businesses and
securities do not purport to be appraisals or necessarily reflect the prices at
which businesses or securities may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. Subject to the
foregoing, the following is a summary of the material financial analyses orally
presented by Prudential Securities at the telephonic meeting of the Marquee
Board on January 24, 1999, and subsequently confirmed in writing.
CONTRIBUTION ANALYSIS. Prudential Securities examined Marquee's and SFX's
relative contributions to projected 1998 and 1999 revenue, earnings before
interest, taxes, depreciation and amortization -- for purposes of this section
titled "Opinion of Marquee's Financial Advisor" only, "EBITDA" -- and net
income to the combined entity and compared this to the percentage of
post-merger SFX Class A common stock that the respective current Marquee
stockholders and SFX stockholders would hold. In performing such analysis,
Prudential Securities relied upon projected stand-alone operating data provided
by Marquee management and SFX management. Existing Marquee stockholders were
assumed to hold 4.6% and SFX stockholders were assumed to hold 95.4%, of the
post-merger shares of SFX Class A common stock on a diluted basis. For 1998,
Marquee contributed 5.9% and SFX contributed 94.1%, to the pro forma revenue of
the combined entity, and Marquee contributed 7.8% and SFX contributed 92.2% to
the pro forma EBITDA of the combined entity. An analysis of net income for this
period is not meaningful because SFX is projected to have negative net income
in 1998. For 1999, Marquee contributed 6.0% to the pro forma revenue of the
combined entity, 7.7% to the pro forma EBITDA of the combined entity and 1.9%
to the pro forma net income of the combined entity. For 1999, SFX contributed
94.0% to the pro forma revenue of the combined entity, 92.3% to the pro forma
EBITDA of the combined entity and 98.1% to the pro forma net income of the
combined entity.
Prudential Securities also examined Marquee's and SFX's relative
contributions of cash and cash equivalents, indebtedness and total equity as
reported on a pro forma basis at November 23, 1998, pro forma for a private
placement of $200.0 million in aggregate principal amount of its 91/8% Senior
Subordinated Notes due 2008 and the Cellar Door acquisition, for SFX and at
September 30, 1999 for Marquee. Marquee contributed 6.3% to the pro forma cash
and equivalents of the combined entity, 4.2% to the pro forma indebtedness of
the combined entity and 8.1% to the pro forma total equity of the combined
entity. SFX contributed 93.7% to the pro forma cash and equivalents of the
combined entity, 95.8% to the pro forma indebtedness of the combined entity and
91.9% to the pro forma total equity of the combined entity. This analysis
supported Prudential Securities' opinion to the extent that the proportional
holdings of Marquee and SFX stockholders in the combined entity corresponded to
the range of the relative contributions of Marquee and SFX to the combined
entity, as measured by the financial information summarized above.
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COMPARABLE TRANSACTIONS ANALYSIS. Prudential Securities also analyzed the
consideration paid in several recent merger and acquisition transactions which
Prudential Securities deemed to be reasonably similar to the merger, and
considered the multiple of the acquired entity's unlevered purchase price --
defined as diluted shares outstanding multiplied by current stock price plus
long term indebtedness less cash, or "UPP" -- to its latest twelve months, or
"LTM" revenues, LTM EBITDA and LTM earnings before interest and taxes, or
"EBIT", based upon publicly-available information for such transactions. The
transactions considered were the combinations of:
o Magicworks Entertainment Incorporated and SFX;
o FAME and SFX;
o Ticketmaster Group Inc. and USA Networks Inc.;
o PACE Entertainment Corporation and SFX;
o Katz Media Group, Inc. and a private investor group;
o Bozell Jacobs Kenyon & Echardt and True North Communications Inc.;
o Simon Marketing, Inc. and CYRK, Inc.;
o Ogden Professional Services and a private investor group; and
o Ketchum Communications Holdings Inc. and Omnicom Group Inc.
These comparable transactions were found to imply for each acquired entity
an UPP within a range of 0.5x to 2.5x LTM revenues, 7.2x to 18.1x LTM EBITDA
and 10.4x to 27.6x LTM EBIT. Applying such multiples to Marquee's LTM revenues,
LTM EBITDA and LTM EBIT, after giving pro forma effect to Marquee's 1998
acquisitions and based on the SFX stock price per share of $55.25 on January
22, 1999, resulted in an implied range for the exchange ratio of 0.0392 to
0.2190.
None of the acquired entities used in the above analysis for comparative
purposes is, of course, identical to Marquee. Accordingly, a complete analysis
of the results of the foregoing calculations cannot be limited to a
quantitative review of such results and involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the acquired entities and other factors that could affect the consideration
paid for each of the acquired entities as well as that of Marquee.
DISCOUNTED CASH FLOW ANALYSIS. Prudential Securities also considered the
results of a discounted cash flow analysis of Marquee after giving effect to
Marquee's 1998 acquisitions. Prudential Securities calculated the net present
value of Marquee's projected four-year stream of unlevered free cash flows and
projected 2002 terminal value, based on the financial projections provided to
Prudential Securities by Marquee. Prudential Securities applied discount rates
ranging from 14.0% to 18.0% and terminal value multiples ranging from 6.0x to
8.0x. This analysis resulted in an implied range for an exchange ratio of
0.0550 to 0.0973, based on the SFX stock price per share of $55.25, if
determined on January 22, 1999.
The following chart sets forth, in tabular form, the implied ranges for
the exchange ratio derived from the financial analyses described above:
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<TABLE>
<CAPTION>
DISCOUNTED
COMPARABLE CASH FLOW
CONTRIBUTION ANALYSIS TRANSACTIONS ANALYSIS ANALYSIS
----------------------- ----------------------- -----------------
<S> <C> <C> <C>
Implied Range for Exchange Ratio
-- assuming a SFX stock price per
share of $55.25 ................. (1) 0.0392 to 0.2190 0.0550 to 0.0973
</TABLE>
- ----------
(1) For purposes of its contribution analysis, Prudential Securities assumed
an exchange ratio of 0.0860 based upon the SFX stock price per share of
$55.25, the closing price for the SFX Class A common stock on January 22,
1999.
Marquee selected Prudential Securities to provide a fairness opinion
because it is a nationally recognized investment banking firm engaged in the
valuation of businesses and their securities in connection with merger and
acquisition transactions, because of its familiarity with Marquee and for other
purposes and because it has substantial experience in transactions similar to
the merger. Pursuant to an engagement letter with Prudential Securities,
Marquee has paid Prudential Securities a retainer of $75,000 on July 28, 1998
and an additional $500,000 in connection with the delivery of prior Prudential
Securities opinions. An additional fee of $425,000 will be payable upon the
consummation of the merger. In addition, the engagement letter with Prudential
Securities provides that Marquee will reimburse Prudential Securities for its
out-of-pocket expenses and will indemnify Prudential Securities and certain
related persons against certain liabilities, including liabilities under
securities laws, arising out of the merger or its engagement. In the past,
Prudential Securities has provided financing services to Marquee and SFX and
has received customary fees for such services. In particular, Prudential
Securities served as an underwriter in Marquee's offering of 8,000,000 shares
of common stock and served as an underwriter for SFX's offering of 7,000,000
shares of Class A common stock. In addition, Prudential Securities may serve as
an underwriter in connection with SFX's proposed public offering of Class A
common stock. Prudential Securities also provides equity research coverage
regarding Marquee. In the ordinary course of business, Prudential Securities
may actively trade shares of Marquee common stock and SFX Class A common stock
for its own account and for the accounts of customers and, accordingly, may at
any time hold a long or short position in such securities.
SFX'S REASONS FOR THE MERGER
At its meeting held on January 23, 1999, the SFX independent committee,
comprised of Messrs. Edward F. Dugan, James O'Grady and Paul Kramer, by
unanimous vote, reaffirmed their determination that the terms of the merger
agreement, as amended, and the merger, are advisable, fair to and in the best
interests of SFX and its stockholders and approved the merger agreement, as
amended, and the merger, and recommended them for approval to SFX's board of
directors.
In addition, the SFX Board, by unanimous vote, with Messrs. Sillerman and
Tytel abstaining, reaffirmed their determination that the terms of the merger
agreement, as amended, and the merger, are advisable, fair to and in the best
interests of SFX and its stockholders and approved the merger agreement, as
amended, and the merger.
The SFX Board based its decision that the merger agreement is advisable to
its stockholders, and its decision to approve the merger agreement and the
merger, upon a number of factors. The SFX Board considered the following
material factors that supported its decision to approve the merger:
o Marquee's and SFX's respective businesses, management and competitive
positions;
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o current industry, economic and market conditions and trends, including
market prices and trading information with respect to Marquee common stock,
and SFX Class A common stock;
o the financial condition, results of operations, prospects and businesses of
Marquee and SFX;
o the financial and business prospects for the combined business, including
general information relating to possible synergies, cost reductions and
operating efficiencies and consolidation, supported the SFX Board's view
that Marquee's business world provide a complimentary fit with SFX's
business;
o the terms of the merger agreement, including the parties' mutual
representations, warranties and covenants and conditions to their
respective obligations; and
o the opinion of Lehman Brothers rendered to SFX, dated January 24, 1999,
that, as of the date of such opinion, from a financial point of view, the
exchange ratio to be paid by SFX in the merger was fair to SFX.
After analyzing and discussing the above factors, the SFX Board determined
that a merger with Marquee would be consistent with its operating strategy of
pursuing complementary acquisition opportunities and that SFX's stockholders
would benefit from such a business combination. After considering prevailing
industry and economic conditions and trends, the SFX Board believed that the
acquisition of Marquee would further support and strengthen SFX's position in
the live entertainment business. Additionally, the SFX Board believed that SFX
would be able to improve its financial and business prospects by exploiting
synergies between, and incorporating the best business practices of, Marquee.
The SFX Board also concluded that the terms of the merger agreement were fair
to SFX and its stockholders. In the SFX Board's view, the financial condition,
results of operations and prospects of Marquee and SFX, along with the opinion
from Lehman Brothers, supported a determination that the consideration SFX
would pay to Marquee stockholders in the merger is fair to SFX. Because of
these favorable factors, each of which supported its determination, the SFX
Board concluded that the merger is advisable, fair to and in the best interests
of SFX and its stockholders.
This discussion of the information and factors considered by the SFX Board
is not intended to be exhaustive. Because of the wide variety of factors to be
considered, the SFX Board did not assign relative weights to the factors
discussed above or determine that any factor was of particular importance.
Rather, the SFX Board viewed its positions and recommendation as being based
upon all of the information presented.
ACCOUNTING TREATMENT
SFX will account for the merger under the purchase method of accounting,
in accordance with generally accepted accounting principles. Under the purchase
method of accounting, SFX will allocate the purchase price of Marquee,
including direct costs of the merger, to the assets acquired and liabilities
assumed based upon their estimated relative fair values, with the excess
purchase consideration allocated to goodwill. SFX amortizes goodwill using the
straight-line method over 15 years.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a description of the material U.S. federal
income tax consequences of the merger, and does not purport to be a complete
analysis or description of all potential tax effects of the merger. The
discussion only applies to U.S. Holders, as defined
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below, that hold Marquee common stock as a capital asset within the meaning of
Section 1221 of the Code and does not address all potential tax consequences
that may be relevant to particular Marquee stockholders or to Marquee
stockholders subject to special treatment under the Code, including, without
limitation, foreign persons or entities, insurance companies, financial
institutions, dealers in securities, tax-exempt organizations, persons who hold
shares of stock as part of a "straddle" or a "conversion transaction" for U.S.
federal income tax purposes, and individuals who received shares of common
stock pursuant to the exercise of employee stock options or otherwise as
compensation.
A "U.S. Holder" means a holder of Marquee common stock who is an
individual citizen or resident of the U.S., a corporation created or organized
in or under the laws of the U.S., any political subdivision thereof or the
District of Columbia or a partnership, trust or estate treated, for U.S.
federal income tax purposes, as a domestic partnership, trust or estate.
No information is provided herein with respect to the tax consequences, if
any, of the merger under applicable foreign, state, local and other tax laws.
The following discussion is based on the provisions of the Code, applicable
Treasury Regulations promulgated thereunder, Internal Revenue Service rulings,
judicial decisions and other administrative pronouncements, all in effect as of
the date hereof. There can be no assurance that future legislative,
administrative or judicial changes or interpretations will not affect the
accuracy of the statements or conclusions set forth herein. Any such future
change or interpretation could apply retroactively and could affect the
accuracy of the following discussion.
EACH U.S. HOLDER IS STRONGLY ADVISED TO CONSULT HIS OR HER TAX ADVISORS AS
TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER, INCLUDING THE
PARTICULAR FACTS AND CIRCUMSTANCES THAT MAY BE UNIQUE TO SUCH U.S. HOLDER, AND
AS TO ANY ESTATE, GIFT, STATE, LOCAL OR NON-U.S. TAX CONSEQUENCES ARISING OUT
OF THE MERGER.
SFX and Marquee have received an opinion from Baker & McKenzie in form and
substance satisfactory to SFX and Marquee that, on the basis of certain
representations and assumptions: the merger will be treated for U.S. federal
income tax purposes as a reorganization qualifying under the provisions of
Section 368(a) of the Code; SFX, SFX's acquisition subsidiary and Marquee will
each be a party to that reorganization within the meaning of Section 368(b) of
the Code; and neither the stockholders of Marquee nor Marquee shall recognize
any gain or loss or dividend income for U.S. federal income tax purposes as a
result of the merger, other than, in the case of Marquee stockholders, to the
extent Marquee stockholders receive cash in lieu of a fractional share or are
deemed to receive any other consideration as a result of the merger. The
obligation of both SFX and Marquee to consummate the merger is conditioned upon
the receipt of an updated opinion at the closing of the merger.
A U.S. Holder who receives SFX Class A common stock in exchange for
Marquee common stock will not recognize gain or loss upon such exchange, except
with respect to cash received in lieu of a fractional share of SFX Class A
common stock or other consideration. Accordingly, the aggregate tax basis of
the SFX Class A common stock received by a U.S. Holder will be the same as the
aggregate tax basis of the Marquee common stock surrendered in exchange
therefor pursuant to the merger, adjusted to take account of fractional
interests or other consideration, and the holding period of the SFX Class A
common stock will include the holding period of the Marquee common stock
surrendered in exchange therefor pursuant to the merger.
A U.S. Holder who receives cash in lieu of a fractional share of SFX Class
A common stock will be treated as having received such fractional interest
pursuant to the merger and
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as having sold it for cash. Such U.S. Holders will recognize gain or loss equal
to the difference, if any, between the cash received with respect to the
fractional interest and the ratable portion of the tax basis of the Marquee
common stock surrendered that is allocated to such fractional interest. In the
case of an individual U.S. Holder, any gain will be subject to U.S. federal
income tax at a maximum rate of 20% if such U.S. Holder's holding period in the
Marquee common stock is more than 12 months at the effective time of the
merger.
The tax opinion is not binding on the Internal Revenue Service or any
court and does not preclude the Internal Revenue Service or a court from
reaching a contrary conclusion. Moreover, no rulings have been or will be
sought from the Internal Revenue Service concerning the tax consequences of the
merger. If the merger is not treated as a reorganization under Section 368 of
the Code, a U.S. Holder would recognize gain or loss equal to the difference
between the aggregate fair market value of the SFX Class A common stock
received and the aggregate tax basis of the Marquee common stock surrendered in
exchange therefor.
REGULATORY MATTERS
Under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended
(the "HSR Act"), and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice and specified waiting period
requirements have been satisfied. Marquee and SFX made the required filings,
and the applicable waiting period under the HSR Act relating to the merger has
expired. However, the FTC and the Antitrust Division will still have the
authority to challenge the merger on antitrust grounds before or after the
merger is completed. Each state in which Marquee or SFX has operations may also
challenge the merger under state or federal antitrust laws. See "SFX's
Business--Regulatory Matters."
APPRAISAL RIGHTS
Marquee stockholders do not have any dissenters' rights of appraisal under
the General Corporation Law of the State of Delaware with respect to the
merger.
FEDERAL SECURITIES LAWS CONSEQUENCES; RESALE RESTRICTIONS
All shares of SFX Class A common stock issued pursuant to the merger will
be freely transferable unless they are held by "affiliates" of Marquee. The
term "affiliates" is defined under the Securities Act of 1933, as amended, and
generally includes individuals or entities that control, are controlled by, or
are under common control with, Marquee. Affiliates may resell their shares only
in transactions permitted by Rule 145 -- or, for affiliates of SFX, Rule 144 --
under the Securities Act, under an effective registration statement, or as
otherwise permitted under the Securities Act.
The merger agreement requires that SFX receive from each of Marquee's
affiliates a written agreement that such persons will not offer or sell or
otherwise dispose of any of the shares of SFX Class A common stock issued to
them in the merger in violation of the Securities Act or the rules and
regulations of the SEC.
INTERESTS OF MARQUEE'S MANAGEMENT AND DIRECTORS IN THE MERGER
Stockholders should be aware that certain members of Marquee's management
and the Marquee Board have certain interests in the merger that differ from,
and are in addition to, the interests of the stockholders of Marquee generally.
These interests may present them with potential conflicts of interest. Such
interests relate to, among other things, provisions in
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the merger agreement regarding the treatment of outstanding Marquee options,
warrants and stock appreciation rights and the performance and provision of
obligations and benefits under existing severance agreements and compensation
and benefit plans. These individuals will receive in the merger an aggregate of
approximately 293,507 shares of SFX Class A common stock, and options, warrants
and stock appreciation rights to purchase approximately 98,255 shares of SFX
Class A common stock, assuming an exchange ratio of 0.0833. The Marquee Board
was aware of these interests and considered them, among other matters, in
adopting the merger agreement.
Robert F.X. Sillerman, the Executive Chairman of SFX and a significant
stockholder of SFX, beneficially owns approximately 6.1% of the Marquee common
stock, where he serves as the Chairman of the Board of Directors. Howard J.
Tytel, the Executive Vice President and a director of SFX, beneficially owns
approximately 1.1% of the Marquee common stock, and is one of Marquee's
directors. Messrs. Sillerman and Tytel abstained from voting on the merger as
directors. Together, Messrs. Sillerman and Tytel beneficially own 39.1% of the
combined voting power of SFX, and will own approximately 34.9% of the combined
voting power of SFX after the completion of the merger, the Cellar Door
acquisition and the proposed equity offering. See "Risk Factors--SFX and its
management may have conflicts of interest with Marquee," "SFX Principal
Stockholders" and "Marquee Principal Stockholders."
The merger agreement provides that, at the effective time of the merger,
SFX will automatically assume each outstanding option to purchase Marquee
common stock, warrant to purchase Marquee common stock and cash-only stock
appreciation right issued by Marquee. As of , 1999, there were
outstanding options and warrants to purchase an aggregate of 2,478,347 shares
of Marquee common stock and stock appreciation rights related to 45,000 shares.
Marquee's directors and officers held options and warrants to purchase an
aggregate of 1,134,533 shares of Marquee common stock and stock appreciation
rights related to 45,000 shares as of , 1999. After the merger is
completed, the holders of Marquee options, warrants and stock appreciation
rights will have options, warrants and stock appreciation rights exercisable
for that number of whole shares of SFX Class A common stock equal to the number
of shares of Marquee common stock covered by the option, warrant or stock
appreciation right immediately before the effective time, multiplied by the
exchange ratio. See "The Merger Agreement--Stock Options" and "--Warrants."
Assuming an SFX stock price of $57.00, the exchange ratio would be 0.0833 and
the options, warrants and stock appreciation rights held by the Marquee
directors and officers would be exercisable for an aggregate of approximately
98,255 shares of SFX Class A common stock.
In October, 1998, after entering into the merger agreement, Marquee
granted an aggregate of 149,844 options to purchase its common stock, of which
111,278 were to the following officers and directors of Marquee:
o options to purchase 26,479 shares to Mr. Sillerman;
o options to purchase 18,691 shares to Mr. Gutkowski;
o options to purchase 14,018 shares to each of Messrs. Kaminsky, Letis and
Trager;
o options to purchase 10,902 shares to Mr. Oppenheim;
o options to purchase 4,672 shares to Mr. Tytel;
o options to purchase 3,115 shares to each of Messrs. Allard and Dell; and
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o options to purchase 2,259 shares to Mr. Chason.
See "Marquee Management--Management Compensation." These options will convert
in the merger into options to purchase SFX Class A common stock.
In connection with Marquee's initial public offering, Messrs. Gutkowski,
Kaminsky, Oppenheim, Letis and Trager and TSC deposited an aggregate of
1,275,000 shares of Marquee common stock into escrow. To facilitate the
consummation of the merger, each of these members of Marquee's management and
TSC waived their rights to the Marquee escrow shares. The management waivers
become effective at the effective time of the merger, and TSC's waiver was
effective immediately. See "Certain Relationships and Related Transactions of
Marquee--Escrow Agreement."
In connection with the merger, TSC has agreed to terminate its consulting
agreement with Marquee for no consideration, effective upon the consummation of
the merger. See "Certain Relationships and Related Transactions of
Marquee--Consulting Agreement."
In connection with the merger, Messrs. Gutkowski, Kaminsky, Letis,
Oppenheim, Trager, Dell and Allard, among others, entered into agreements with
Marquee to amend their employment agreements, to be effective as of the
effective time of the merger. Among other things, these amendments will remove
their rights to receive options to purchase shares of Marquee common stock, and
grant them the right to receive options to purchase a certain number of shares
of SFX Class A common stock. These amendments will also modify certain of these
individuals' non-compete clauses.
After the effective time of the merger, the merger agreement requires the
surviving corporation to indemnify, to the fullest extent permitted by Delaware
law, each person who was or becomes an officer or director of Marquee or any of
its subsidiaries before the effective time. The indemnification will be against
all losses, expenses, claims, damages, liabilities and amounts paid in
connection with any threatened or actual claim, action, suit, proceeding or
investigation based on the fact that the indemnified party is or was an officer
or director of Marquee or any of its subsidiaries, and which pertains to any
matter existing or arising out of actions or omissions occurring at or before
the effective time. SFX has unconditionally guaranteed the surviving
corporation's indemnity obligation. The surviving corporation is required to
maintain in effect, for a period of six years after the effective time,
officers' and directors' liability insurance currently maintained by Marquee,
covering the officers and directors currently covered thereby. However, the
surviving corporation is not required to pay annual premiums in excess of 200%
of Marquee's current annual premiums.
In connection with the merger, the Marquee special committee evaluated the
terms of the merger. Two members of the Marquee special committee, Messrs.
Barron and Schumer, each received a one-time fee of $35,000.
LITIGATION
On May 5, 1998, Herbert Behrens, a Marquee stockholder, filed a class
action complaint in Chancery Court in the State of Delaware, New Castle County,
CA #16355NC, against SFX, certain of its directors and Marquee. The complaint
alleged that SFX proposed an acquisition of Marquee and that the proposed
acquisition would be unfair to Marquee's public stockholders. The complaint
sought an order enjoining the proposed transaction, or, in the alternative,
awarding damages.
On July 22, 1998, the parties to the litigation entered into a Memorandum
of Understanding, pursuant to which the parties reached an agreement providing
for a settlement of the action. Pursuant to the settlement, SFX acknowledged
that the legal action
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<PAGE>
was a significant factor in SFX improving the terms of its offer to acquire
Marquee. The settlement also provided for the defendants to pay plaintiffs'
counsel an aggregate of $310,000, including all fees and expenses, as approved
by the court. The settlement was conditioned on the closing of the merger,
completion of confirmatory discovery and approval of the court.
On October 16, 1998, SFX and Marquee entered into amendment no. 3 to the
merger agreement. In doing so, they took into consideration the concerns and
interests of the plaintiffs in the litigation, but they did not amend the
Memorandum of Understanding or revise the settlement at that time.
On January 24, 1999, SFX and Marquee entered into amendment no. 4 to the
merger agreement. At or about the same time, the parties to the lawsuit entered
into an amended Memorandum of Understanding which modified the terms of the
settlement. In addition to the terms and conditions in the Memorandum of
Understanding, in the revised settlement, the defendants acknowledged that the
pending lawsuit was the sole factor in SFX's decision to improve the terms of
its offer to acquire Marquee as reflected in amendment no. 4.
The revised settlement also provides that the defendants will pay
plaintiffs' attorneys' fees and expenses, as approved by the Court, in an
amount not to exceed $385,000. The revised settlement is conditioned upon
consummation of the merger, completion of any necessary discovery by the
plaintiffs and approval of the Delaware Court. There can be no assurance,
however, that the revised settlement will be approved by the Court as proposed,
or at all. Pursuant to the revised settlement, the defendants deny that they
have acted improperly in any way or breached any fiduciary duty.
44
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
The following table lists, for the SFX Class A common stock,
o the high and low closing bid prices reported on the over-the-counter market
from February 18, 1998, which was the first trading day for the common
stock on a when-issued basis through April 20, 1998; and
o the high and low closing sales prices reported by the Nasdaq National Market
after April 20, 1998.
The table also lists, for the Marquee common stock,
o the high and low closing bid prices reported by the Nasdaq SmallCap Market
through September 10, 1997; and
o the high and low closing sales prices reported by the American Stock
Exchange after September 10, 1997.
<TABLE>
<CAPTION>
SFX CLASS A COMMON
STOCK MARQUEE COMMON STOCK
---------------------- --------------------
HIGH LOW HIGH LOW
--------- ---------- --------- --------
<S> <C> <C> <C> <C>
1997:
First Quarter ..................... -- -- $ 71/4 $ 6
Second Quarter .................... -- -- 63/8 51/2
Third Quarter ..................... -- -- 71/8 41/2
Fourth Quarter .................... -- -- 615/16 31/8
1998:
First Quarter, from February 18,
1998 for SFX ..................... $253/4 $ 181/2 $ 43/4 $ 33/8
Second Quarter .................... 46 24 61/4 39/16
Third Quarter ..................... 55 2615/16 61/4 23/8
Fourth Quarter .................... 547/8 225/8 41/2 13/8
1999:
First Quarter, through February ,
1999 ............................. $ [ ] $ [ ] $ [ ] $ [ ]
</TABLE>
If the SFX stock price during the measuring period is $42.75 or less, then
each share of Marquee common stock will convert into 0.1111 shares of SFX Class
A common stock. However, if the SFX stock price is more than $42.75, then you
will receive $4.75 to $5.35 worth of SFX stock for each share of Marquee stock.
The specific market value of the shares of SFX Class A common stock you will
receive in the merger will depend on the market price of the SFX Class A common
stock during the 15 day trading period ending 5 days before the merger. See
"The Merger Agreement--The Exchange Ratio." We urge you to check current stock
prices before you decide how to vote.
Neither SFX nor Marquee has ever paid cash dividends on its stock. As of
January 22, 1999, there were 212 record holders of SFX Class A common stock and
206 record holders of Marquee common stock.
45
<PAGE>
THE MERGER AGREEMENT
The following is a summary of the material provisions of the merger
agreement, a copy of which is attached as Annex I to this proxy
statement--prospectus and incorporated herein by reference. This summary is not
a complete description of the terms and conditions of the merger agreement and
is qualified in its entirety by reference to the full text of the merger
agreement.
THE MERGER
If the Marquee stockholders adopt the merger agreement and the merger, and
if the other conditions to the merger are satisfied or waived, then, at the
effective time, SFX's acquisition subsidiary will merge with and into Marquee,
with Marquee continuing as the surviving corporation and a wholly-owned
subsidiary of SFX. The time at which the merger becomes effective in accordance
with Delaware law is referred to as the "effective time."
Upon closing of the merger, pursuant to the merger agreement, each issued
and outstanding share of Marquee common stock will convert into the right to
receive a fraction of a share of SFX Class A common stock equal to the exchange
ratio. The consideration to be received is more fully described in "--The
Exchange Ratio."
Promptly after the effective time, transmittal forms will be mailed to
each holder of record of shares of Marquee common stock to be used in
forwarding his or her certificates evidencing such shares for surrender and
exchange for certificates evidencing the shares of SFX Class A common stock to
which he or she has become entitled and, if applicable, cash in lieu of a
fractional share of SFX Class A common stock. After receipt of such transmittal
form, each holder of Marquee certificates should surrender the certificates to
Chase Mellon Shareholder Services LLC, which is acting as exchange agent, and
each holder will receive in exchange certificates representing the whole number
of shares of SFX Class A common stock to which he or she is entitled and any
cash which may be payable in lieu of a fractional share of SFX Class A common
stock. Such transmittal forms will be accompanied by instructions specifying
other details of the exchange.
STOCKHOLDERS SHOULD NOT SEND IN THEIR MARQUEE CERTIFICATES UNTIL THEY RECEIVE A
TRANSMITTAL FORM.
After the effective time, each Marquee certificate, until properly
surrendered and exchanged, will, for all purposes, represent only the right to
receive the number of shares of SFX Class A common stock which the holder of
the certificate is entitled to receive and the right to receive any cash
payment in lieu of a fractional share of SFX Class A common stock. The holder
of an unexchanged Marquee certificate will not be entitled to receive dividends
or other distributions payable by SFX, if any, until the certificate is
surrendered, at which time such dividends and distributions, together with any
cash payment in lieu of a fractional share of SFX Class A common stock, will be
paid to the holder without interest.
THE EXCHANGE RATIO
The exchange ratio -- the number of shares of SFX Class A common stock to
which each share of Marquee will be entitled in the merger -- will be
determined as follows:
o if the SFX stock price -- the average of the last reported sale for the
fifteen consecutive trading days ending on the fifth trading day before the
effective time of the merger -- is $42.75 or less, then the exchange ratio
will equal 0.1111; and
o if the SFX stock price is greater than $42.75 but less than or equal to
$60.00, then the exchange ratio will equal the quotient obtained by
dividing $4.75 by the SFX stock price.
46
<PAGE>
o if the SFX stock price is greater than $60.00 but less than or equal to
$66.00, then the exchange ratio will equal the difference between 0.1000
less the quotient obtained by dividing 1.25 by the SFX stock price.
o if the SFX stock price is greater than $66.00, then the exchange ratio will
equal the quotient obtained by dividing $5.35 by the SFX stock price.
All arithmetic calculations will be made to the closest ten-thousandth.
SFX will not issue any certificates representing fractional shares of SFX Class
A common stock in the merger.
Based upon the shares of SFX and Marquee outstanding on January 22, 1999,
and assuming that the SFX stock price was $57.00, resulting in an exchange
ratio of 0.0833:
o the Marquee stockholders would receive approximately 1,433,003 shares of SFX
Class A common stock for their shares of Marquee common stock and up to
204,405 shares upon the exercise of stock options and warrants received in
connection with the merger, representing approximately 5.3% of the total
number of shares of SFX Class A common stock and approximately 3.2% of the
combined voting power of the shares of SFX common stock after the merger,
the Cellar Door acquisition and the proposed equity offering; and
o the Marquee security holders, other than Messrs. Sillerman and Tytel, would
receive approximately 1,351,626 shares of SFX Class A common stock in the
merger, representing approximately 2.6% of the combined voting power of the
shares of SFX common stock after the merger, the Cellar Door acquisition
and the proposed equity offering.
STOCK OPTIONS
At the effective time, SFX will automatically assume each outstanding
option to purchase Marquee common stock. The holders of Marquee options will
continue to have, and be subject to, the same terms and conditions set forth in
the stock option plans and agreements pursuant to which their Marquee options
were issued, except that:
o each option will be exercisable for that number of whole shares of SFX Class
A common stock equal to the number of shares of Marquee common stock
covered by the option immediately before the effective time, multiplied by
the exchange ratio, rounded up to the nearest whole number of shares; and
o the per share exercise price for the shares of SFX Class A common stock
issuable upon the exercise of each option will be the quotient determined
by dividing the exercise price per share of Marquee common stock specified
for the option under the applicable stock option plan or agreement in
effect immediately before the effective time, by the exchange ratio,
rounding the resulting exercise price down to the nearest whole cent.
At the effective time, SFX has agreed to reserve for issuance the number of
shares of SFX Class A common stock that will become issuable upon the exercise
of the options. SFX will not be required to issue fractional shares of its
Class A common stock upon the exercise of any Marquee option.
WARRANTS
At the effective time, SFX will automatically assume each outstanding
warrant to purchase Marquee common stock. The holders of Marquee warrants will
continue to have, and be subject to, the same terms and conditions set forth in
their warrants, except that:
o each warrant will be exercisable for that number of shares of SFX Class A
common
47
<PAGE>
stock equal to the number of shares of Marquee common stock covered by the
warrant immediately before the effective time, multiplied by the exchange
ratio, rounded up to the nearest whole number of shares; and
o the per share exercise price for the shares of SFX Class A common stock
issuable upon the exercise of each warrant will be the quotient determined
by dividing the exercise price per share of Marquee common stock specified
for the warrant in effect immediately before the effective time, by the
exchange ratio, rounding the resulting exercise price down to the nearest
whole cent.
At the effective time, SFX has agreed to reserve for issuance the number
of shares of its Class A common stock that will become issuable upon the
exercise of the warrants. SFX will not be required to issue fractional shares
of SFX Class A common stock upon the exercise of any Marquee warrant.
STOCK APPRECIATION RIGHTS
At the effective time, SFX will automatically assume each outstanding
cash-only stock appreciation right ("SAR") issued by Marquee. The holders of
SARs will continue to have, and be subject to, the same terms and conditions
set forth in the agreements pursuant to which their SARs were issued, except
that:
o each SAR will be exercisable for cash representing that number of whole
shares of SFX Class A common stock equal to the number of shares of Marquee
common stock covered by the SAR immediately before the effective time,
multiplied by the exchange ratio, rounded up to the nearest whole number of
shares; and
o the per share strike price for the cash representing shares of SFX Class A
common stock issuable upon the exercise of each SAR will be the quotient
determined by dividing the strike price per share of Marquee common stock
specified for the SAR under the applicable agreement immediately before the
effective time, by the exchange ratio, rounding the resulting strike price
down to the nearest whole cent.
The holders of the SARs will be entitled to receive only cash upon exercise of
the SARs.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties by
Marquee, SFX and the acquisition sub. These include representations and
warranties by Marquee with respect to, among other things:
o organization, good standing and corporate power;
o authority and noncontravention;
o consents and approvals;
o capital structure;
o financial statements;
o absence of certain changes or events;
o real property and other assets;
o documents filed with the SEC;
o intellectual property;
o material contracts;
o litigation;
o compliance with laws;
o environmental laws;
o taxes;
48
<PAGE>
o benefit plans;
o labor matters;
o tax and accounting matters;
o insurance;
o brokers' fees; and
o the opinion of Marquee's financial advisor.
SFX and the acquisition sub have also made certain representations and
warranties with respect to, among other things:
o organization, good standing and corporate power;
o authority and noncontravention;
o capital structure;
o documents filed with the SEC;
o absence of certain changes or events;
o litigation;
o compliance with laws;
o benefit plans;
o brokers' fees; and
o tax and accounting matters.
No representations and warranties made by Marquee, SFX or the acquisition
sub will survive beyond the effective time.
COVENANTS
Marquee has agreed that, until the completion of the merger, except as
contemplated in the merger agreement or with the consent of SFX, it will, among
other things:
o conduct its operations in the ordinary course of business consistent with
past practice;
o use its reasonable efforts to preserve substantially intact its business
organization and to keep available the services of its employees;
o preserve its current relationships with its clients, sponsors, suppliers and
other persons with which it has significant business relations;
o not commit or incur any capital expenditure in excess of $50,000;
o not enter into, modify, amend or terminate any material contract;
o subject to certain exceptions, not incur or guarantee any indebtedness; and
o except as required by law, not modify, amend or terminate certain
acquisition contracts or waive, release or assign any material rights or
claims thereunder.
SFX has agreed that, until the completion of the merger, except as
contemplated in the merger agreement or with the consent of Marquee, it will
conduct its operations in the ordinary course of business consistent with past
practice.
NON-SOLICITATION
The merger agreement prohibits Marquee and its subsidiaries from:
o initiating, soliciting or encouraging, or taking any other action to
facilitate, any inquiries or the making of any proposal that constitutes,
or may reasonably be expected to lead to, any Takeover Proposal, as defined
below;
o entering into discussions or negotiating with any person or entity in
furtherance of such inquiries to obtain a Takeover Proposal;
49
<PAGE>
o entering into an agreement with respect to any Takeover Proposal or agreeing
to or endorsing any Takeover Proposal; or
o authorizing or permitting any of the officers, directors or employees of
Marquee or any Marquee subsidiary or any investment banker, financial
advisor, attorney, accountant or other representative retained by Marquee
or any Marquee subsidiary to take any such action.
The merger agreement requires Marquee to advise SFX of any such inquiry or
proposal. However, the merger agreement does not prohibit the Marquee Board or
any Marquee subsidiary or their representatives from:
o furnishing information to, facilitating or entering into discussions or
negotiations with any person or entity in connection with an unsolicited
bona fide Takeover Proposal that involves consideration to Marquee's
stockholders with a value that the Marquee Board reasonably believes, after
consultation with Prudential Securities, is superior to the consideration
provided for in the merger, if:
(1) the Marquee Board, after consultation with independent legal counsel,
determines in good faith that such action is required for the Marquee
Board to comply with its fiduciary duties to stockholders imposed by
applicable law; and
(2) before furnishing such information to, or entering into discussions
or negotiations with, such person or entity, Marquee promptly provides
written notice to SFX of Marquee's intention to furnish such
information to, or begin such discussions or negotiations with, such
person or entity, and obtains from such person or entity a customary
confidentiality agreement; or
o complying with Rule 14e-2 under the Securities Exchange Act of 1934, as
amended, with regard to a Takeover Proposal.
"Takeover Proposal" means any of the following involving Marquee or any Marquee
subsidiary:
o any merger, consolidation, share exchange, business combination, or other
similar transaction, other than the transactions contemplated by the merger
agreement;
o any sale, lease, exchange, mortgage, pledge, transfer or other disposition
of 25% or more of the assets of Marquee and its subsidiaries, taken as a
whole, in a single transaction or series of transactions;
o any tender offer or exchange offer for 25% or more of any outstanding class
of capital stock of Marquee or the filing of a registration statement under
the Securities Act in connection therewith;
o the acquisition by any person of beneficial ownership or the right to
acquire beneficial ownership of, or the formation of any group which
beneficially owns, or has the right to acquire beneficial ownership of, 25%
or more of the then outstanding shares of any class of capital stock of
Marquee; or
o any public announcement of a proposal, plan or intention to do any of the
foregoing.
CONDITIONS
The closing of the merger agreement is subject to the satisfaction or
waiver of several conditions, including:
o the stockholders of Marquee must adopt the merger agreement;
50
<PAGE>
o there must be no order, injunction, or other legal restraint or prohibition
enjoining or preventing the closing of the merger;
o the registration statement must be declared effective, and no stop order
suspending the effectiveness of the registration statement may be in
effect;
o SFX and Marquee must have received from Nasdaq evidence that the shares of
SFX stock to be issued in the merger will be listed on the Nasdaq National
Market immediately following the effective time;
o SFX and Marquee must have received a tax opinion of Baker & McKenzie; and
o SFX and Marquee must have obtained or made all third party or governmental
consents, authorizations, orders, approvals or filings required in
connection with the merger agreement, subject to certain exceptions. The
required consents include the consent of SFX's lenders.
The obligations of SFX and the acquisition sub to complete the merger are
subject to the satisfaction or waiver of further conditions, including, among
others:
o Marquee must have performed or complied in all material respects with all
agreements and covenants required by the merger agreement to be performed
by it on or before the effective time;
o the representations and warranties of Marquee set forth in the merger
agreement must be true and correct, subject to certain exceptions;
o since July 23, 1998, Marquee must not have suffered a material adverse
effect;
o SFX must receive a signed affiliate agreement from each affiliate of Marquee
and any other person who may be deemed to have become an affiliate of
Marquee after July 23, 1998 and at or before the effective time; and
o each release for Marquee escrow shares, the settlement of the class action
litigation related to the merger and the employment agreement amendments
entered into by certain members of Marquee management must remain in full
force and effect.
Marquee's obligations to complete the merger are subject to the
satisfaction or waiver of the following additional conditions:
o SFX and the acquisition sub must have performed or complied in all material
respects with all agreements and covenants required by the merger agreement
to be performed by them on or before the effective time;
o the representations and warranties of SFX and the acquisition sub set forth
in the merger agreement must be true and correct, subject to certain
exceptions; and
o since July 23, 1998, SFX must not have suffered a material adverse effect.
TERMINATION; FEES AND EXPENSES
The merger agreement may be terminated, and the merger and related
transactions may be abandoned at any time before the effective time, as
follows:
(1) by mutual written consent of SFX and Marquee;
(2) by either SFX or Marquee, if
(a) the effective time does not occur by April 30, 1999, subject to
certain exceptions;
(b) a law or court order permanently prohibits the merger, subject
to certain exceptions;
51
<PAGE>
(c) the stockholders of Marquee fail to adopt the merger agreement,
the merger and the transactions contemplated thereby at a duly
convened meeting;
(3) by SFX, if
(a) the Marquee special committee or the Marquee Board fails to
recommend, withdraws, or materially modifies or materially
changes, its recommendation of the merger agreement or the merger
in a manner adverse to SFX or decides to do any of the foregoing;
(b) the Marquee special committee or the Marquee Board recommends to
the stockholders of Marquee a Takeover Proposal or fails to
recommend against accepting a Takeover Proposal, or takes no
position with respect thereto, or decides to do any of the
foregoing;
(c) any person not affiliated with SFX acquires beneficial ownership
or the right to acquire beneficial ownership of, or any group is
formed that beneficially owns, or has the right to acquire
beneficial ownership of, more than 25% of the then outstanding
shares of any class of capital stock of Marquee;
(d) Marquee breaches any representation, warranty, covenant or
agreement, set forth in the merger agreement, or if any
representation or warranty of Marquee becomes untrue, subject to
certain exceptions; or
(e) Lehman Brothers revokes its written fairness opinion under
certain circumstances;
(4) by Marquee, if
(a) Marquee accepts a Takeover Proposal;
(b) SFX breaches any representation, warranty, covenant or
agreement, set forth in the merger agreement, or if any
representation or warranty of SFX becomes untrue, subject to
certain exceptions; or
(c) Prudential Securities revokes its written fairness opinion under
certain circumstances;
Marquee has agreed to pay to SFX a termination fee of $900,000, and
certain expenses not to exceed $500,000, if:
o the merger agreement terminates pursuant to clause (3)(a), (3)(b), (3)(c) or
(4)(a) above, unless a termination occurs pursuant to clause (3)(a) due to
the occurrence of certain events described in clauses (3)(d) or (3)(e)
above with respect to Marquee's right to terminate; or
o the merger agreement terminates pursuant to clause (2)(a) or (2)(c) above,
and in either event a Takeover Proposal has been made before such
termination and definitive documentation with respect to such Takeover
Proposal is entered into within 12 months of such termination.
If the merger agreement is terminated under clause (2)(c) above, but the
$900,000 fee and expenses are not due, then Marquee will be required to pay SFX
a termination fee of $500,000. If SFX is required to file suit to seek the
termination fee or expenses, and it ultimately succeeds on the merits, then it
will be entitled to all expenses, including attorneys' fees, that it incurs in
enforcing its rights under the merger agreement.
52
<PAGE>
SFX UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
We are providing the following pro forma financial information to aid you
in your analysis of the financial aspects of the merger. We derived this
information from the audited and unaudited financial statements of our company
and the other companies which we have acquired or intend to acquire.
The SFX Unaudited Pro Forma Condensed Combined Balance Sheet at September
30, 1998 is presented as if SFX had completed the new note offering, the
merger, the Cellar Door acquisition and the proposed equity offering as of
September 30, 1998.
The SFX Unaudited Pro Forma Condensed Combined Statements of Operations
for the year ended December 31, 1997 and the nine months ended September 30,
1998 are presented as if SFX had completed SFX's 1997 acquisitions, SFX's 1998
acquisitions, the new note offering, the merger, the Cellar Door acquisition
and the proposed equity offering as of January 1, 1997.
In addition, the SFX Unaudited Pro Forma Condensed Combined Financial
Statements do not reflect certain purchase price adjustments and future
contingent payments, which may be payable pursuant to the various acquisition
agreements.
In our opinion, all adjustments necessary to fairly present this pro forma
information have been made. The SFX Unaudited Pro Forma Condensed Combined
Financial Statements are based upon, and should be read in conjunction with,
the historical financial statements of SFX and certain of the businesses
previously acquired by SFX and the related notes to such financial statements
contained elsewhere in this document. The pro forma information is based upon
tentative allocations of purchase price and does not purport to be indicative
of the results that would have been reported had such events actually occurred
on the date specified, nor is it indicative of SFX's future results. Purchase
accounting is based upon preliminary asset valuations, which are subject to
change. Final asset valuations are not expected to differ materially from the
preliminary valuations. In addition, the operations data include adjustments to
operating expenses to reflect anticipated savings that SFX management believes
it will be able to achieve through the implementation of its operating
strategy. However, there can be no assurance that SFX will be able to achieve
such savings.
The SFX Unaudited Pro Forma Condensed Combined Financial Statements and
notes thereto contain forward-looking statements that involve risks and
uncertainties, including those described in "Risk Factors" or elsewhere herein.
Therefore, the actual results of SFX may differ materially from those discussed
herein. See "Risk Factors." SFX 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.
53
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFX
ENTERTAINMENT
(ACTUAL)
---------------
<S> <C>
Assets:
Current assets ........................................ $ 165,727
Property and equipment, net ........................... 275,000
Intangible assets, net ................................ 904,929
Other assets .......................................... 45,892
----------
Total Assets .......................................... $1,391,548
==========
Liabilities and Stockholders' Equity:
Current liabilities ................................... $ 166,540
Deferred taxes ........................................ 60,601
Senior credit facility ................................ 346,000
Senior subordinated notes ............................. 350,000
Other long-term debt .................................. 23,122
Capital lease obligations ............................. 12,922
Deferred purchase consideration ....................... 10,430
Other liabilities ..................................... 5,354
Minority interest ..................................... 3,868
Temporary equity--stock subject to redemption ......... 16,500
Stockholders' equity .................................. 396,211
----------
Total Liabilities & Stockholders' Equity .............. $1,391,548
==========
<CAPTION>
THE MERGER, THE CELLAR DOOR ACQUISITION AND THE NEW NOTE OFFERING
I
-----------------------------------------------------------------
PRO FORMA
FOR THE MERGER,
THE CELLAR DOOR
CELLAR PRO FORMA ACQUISITION AND
DOOR MARQUEE ADJUSTMENTS THE NEW NOTE
A B C OFFERING
------------- ------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Assets:
Current assets ........................................ $ (62,405) $ (17,275) $ 110,640(a) $ 196,687
Property and equipment, net ........................... 34,986 2,895 -- 312,881
Intangible assets, net ................................ 65,635 110,543 7,500 (b) 1,088,607
Other assets .......................................... 2,088 5,814 (366)(d) 53,428
--------- --------- ---------- ----------
Total Assets .......................................... $ 40,304 $ 101,977 $ 117,774 $1,651,603
========= ========= ========== ==========
Liabilities and Stockholders' Equity:
Current liabilities ................................... $ 11,729 $ 11,451 $ (14,208)(c) $ 175,512
Deferred taxes ........................................ -- -- -- 60,601
Senior credit facility ................................ -- -- (67,652)(c) 278,348
Senior subordinated notes ............................. -- -- 200,000 (a) 550,000
Other long-term debt .................................. -- -- -- 23,122
Capital lease obligations ............................. -- -- -- 12,922
Deferred purchase consideration ....................... 6,788 3,777 -- 20,995
Other liabilities ..................................... 1,787 1,615 -- 8,756
Minority interest ..................................... -- -- (366)(d) 3,502
Temporary equity--stock subject to redemption ......... -- 3,420 -- 19,920
Stockholders' equity .................................. 20,000 81,714 -- 497,925
--------- --------- ---------- ----------
Total Liabilities & Stockholders' Equity .............. $ 40,304 $ 101,977 $ 117,774 $1,651,603
========= ========= ========== ==========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM PREVIOUS PAGE)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE MERGER,
THE CELLAR DOOR
ACQUISITION,
PROPOSED THE NEW NOTE
EQUITY OFFERING AND
OFFERING THE PROPOSED
II EQUITY OFFERING
------------- ----------------
<S> <C> <C>
Assets:
Current assets ........................................ $ 88,032 $ 284,719
Property and equipment, net ........................... -- 312,881
Intangible assets, net ................................ -- 1,088,607
Other assets .......................................... -- 53,428
----------- ----------
Total Assets .......................................... $ 88,032 $1,739,635
=========== ==========
Liabilities and Stockholders' Equity:
Current liabilities ................................... $ -- $ 175,512
Deferred taxes ........................................ -- 60,601
Senior credit facility ................................ (128,348) 150,000
Senior subordinated notes ............................. -- 550,000
Other long-term debt .................................. -- 23,122
Capital lease obligations ............................. -- 12,922
Deferred purchase consideration ....................... -- 20,995
Other liabilities ..................................... -- 8,756
Minority interest ..................................... -- 3,502
Temporary equity--stock subject to redemption ......... -- 19,920
Stockholders' equity .................................. 216,380 714,305
----------- ----------
Total Liabilities & Stockholders' Equity .............. $ 88,032 $1,739,635
=========== ==========
</TABLE>
54
<PAGE>
I. THE MERGER, THE CELLAR DOOR ACQUISITION AND THE NEW NOTE OFFERING
A. CELLAR DOOR
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998 (IN THOUSANDS)
--------------------------------------------------
PRO FORMA CELLAR DOOR
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------------- ------------
<S> <C> <C> <C>
Assets:
Current assets ................................... $ 9,095 $ (71,500)(a) $ (62,405)
Property and equipment, net ...................... 34,986 -- 34,986
Intangible assets, net ........................... 256 58,591 (b) 65,635
6,788 (c)
Other assets ..................................... 4,420 (2,332)(d) 2,088
------- ---------- ---------
Total Assets ..................................... $48,757 $ (8,453) $ 40,304
======= ========== =========
Liabilities & Stockholders' Equity:
Current liabilities .............................. $16,130 $ (4,401)(d) $ 11,729
Long-term debt ................................... 23,500 (23,500)(a) --
Deferred Purchase Consideration .................. -- 6,788 (c) 6,788
Other Liabilities ................................ 1,787 -- 1,787
Stockholders' equity ............................. 7,340 (7,340)(e) 20,000
20,000 (a)
----------
Total Liabilities & Stockholders' Equity ......... $48,757 $ (8,453) $ 40,304
======= ========== =========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) To reflect the Cellar Door acquisition for $71,500,000 in cash
including the repayment of $23,500,000 of Cellar Door's debt and
$1,500,000 of fees and expenses, and the issuance of $20,000,000 of
SFX Class A common stock or 350,877 shares, assuming that the shares
are issued at the current market price of $57.00 per share.
(b) To reflect the excess of the purchase price paid over the fair value
of net tangible assets acquired of $58,591,000.
(c) To reflect the issuance of an $8,500,000 promissory note to certain
sellers with a present value of $6,788,000.
(d) To reflect the elimination of related parties' notes.
(e) To reflect the elimination of Cellar Door's historical stockholders'
equity.
55
<PAGE>
B. MARQUEE
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998 (IN THOUSANDS)
--------------------------------------------------------
PRO FORMA MARQUEE
AS REPORTED(A) ADJUSTMENTS ACQUISITION(A)
---------------- ------------------- ---------------
<S> <C> <C> <C>
Assets:
Current assets .......................................... $21,825 $ (39,100)(a) $ (17,275)
Property and equipment, net ............................. 2,895 -- 2,895
Intangible assets, net .................................. 59,648 50,895 (b) 110,543
Other assets ............................................ 5,814 -- 5,814
Total Assets ............................................ $90,182 $ 11,795 $ 101,977
======= ========== =========
Liabilities & Stockholders Equity:
Current liabilities ..................................... $11,451 $ -- $ 11,451
Long-term debt .......................................... 33,140 (33,140)(a) --
Deferred purchase consideration ......................... 3,777 -- 3,777
Other liabilities ....................................... 1,615 -- 1,615
Temporary equity -- stock subject to redemption ......... 3,420 -- 3,420
Stockholders' equity .................................... 36,779 (36,779)(c) 81,714
81,714 (a)
----------
Total Liabilities & Stockholders' Equity ................ $90,182 $ 11,795 $ 101,977
======= ========== =========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) To reflect the issuance of 1,433,003 shares of SFX Class A common
stock valued at approximately $81,714,000, and the repayment of
$33,140,000 of Marquee's debt and $6,000,000 in cash for related
fees and expenses. The number of shares and the value of the stock
to be issued is based on a $57.00 price per share and an exchange
ratio of .0833.
(b) To reflect the excess of the purchase price paid over the fair value
of net tangible assets acquired of $50,895,000. If the price of
SFX's common stock is $42.75 or less, the goodwill arising from the
merger may decrease by approximately $28,200,000.
(c) To reflect the elimination of Marquee's historical stockholders'
equity.
C. PRO FORMA ADJUSTMENTS:
(a) Represents the application of the net proceeds of the new notes
offering to repay substantially all of the revolving portion of the
SFX credit facility, and borrowings under such facility to finance
the purchase price of the merger and the Cellar Door acquisition of
$110,640,000, including the repayment of Marquee's debt and related
fees and expenses.
(b) To record debt issuance costs related to the new notes offering.
(c) Reflects the payment of the $14,208,000 tax indemnification
liability on December 31, 1998 and a $67,652,000 net paydown of
existing borrowings under the credit agreement.
(d) Reflects the elimination of PACE's minority interest due to the
Cellar Door acquisition.
II. PROPOSED EQUITY OFFERING
Represents the estimated net proceeds from the proposed offering of
4,000,000 shares of Class A common stock based on an offering price of $57.00
per share, the repayment of amounts outstanding under the SFX credit facility
of $128,348,000 and additional cash for general corporate purposes of
$88,032,000.
56
<PAGE>
SFX ENTERTAINMENT, INC.
SUMMARY OF COMPLETED AND PENDING ACQUISITIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CASH
CONSIDERATION
DATE AND VALUE OF NUMBER OF
COMPANY/ACTIVITY ACQUIRED ASSUMED DEBT STOCK ISSUED SHARES ISSUED(1)
- --------------------- -------------------- --------------- -------------- ------------------
<S> <C> <C> <C> <C>
Delsener/Slater January 2, 1997 $ 26,815 $ -- --
Meadows March 1, 1997 16,354 7,500 247
Sunshine June 1, 1997 57,489 4,000 152
Westbury January 8, 1998 8,835 1,000 75
BGP February 24, 1998 72,827 7,500 563
PACE and Pavilion February 25, 1998 220,683 20,000 1,500
Contemporary February 27, 1998 82,702 18,700 1,403
Network February 27, 1998 56,784 10,000 750
Concert/Southern March 4, 1998 16,908 -- --
USA Motor Sports March 25, 1998 4,000 -- --
Avalon May 14, 1998 26,840 -- --
Oakdale June 3, 1998 11,900 -- --
FAME June 4, 1998 82,241 35,960 1,000
Don Law July 2, 1998 92,195 -- --
Magicworks September 11, 1998 115,740 -- --
Other Acquisitions Third quarter 1998 115,386 10,000 300
Debt issuance costs -- -- --
Cellar Door First Quarter 1999 76,788 20,000 351
Marquee First Quarter 1999 33,140 81,714 1,434
Working Capital -- -- --
---------- -------- -----
Subtotal 1,117,627 216,374 7,775
Equity Offering First Quarter 1999 --
----------
Total $1,117,627 $216,374 7,775
========== ======== =====
<CAPTION>
RELATED DEBT, PRO FORMA INTEREST EXPENSE
CAPITAL LEASES ----------------------------------
AND DEFERRED
PURCHASE
CONSIDERATION YEAR ENDED
SOURCE OF AT SEPTEMBER 30, INTEREST DECEMBER 31, NINE MONTHS ENDED,
COMPANY/ACTIVITY FUNDS(2) 1998 RATE 1997 SEPTEMBER 30, 1998
- --------------------- ------------------------------------- ------------------ ------------ -------------- -------------------
<S> <C> <C> <C> <C> <C>
Delsener/Slater Capital contribution $ 2,204 10.000% $ 220 $ 165
Meadows Capital contribution 14,366 8.31% 1,194 895
Sunshine Capital contribution 1,306 8.58% 112 84
Westbury Old notes 8,835 9.125% 806 605
BGP Old notes 72,827 9.125% 6,645 4,984
PACE and Pavilion Old notes 220,683 9.125% 20,137 15,103
Contemporary Old notes and credit facility 82,702 8.71% 7,203 5,403
Network Credit facility 56,784 8.15% 4,628 3,471
Concert/Southern Credit facility 16,908 8.15% 1,378 1,034
USA Motor Sports Credit facility 4,000 8.15% 326 245
Avalon Credit facility 26,840 8.15% 2,188 1,641
Oakdale Equity offering -- -- -- --
FAME Equity offering -- -- -- --
Don Law Equity offering -- -- -- --
Magicworks Credit facility 115,740 8.84% 10,237 7,678
Other Acquisitions Equity offering and credit facility 100,376 8.15% 8,182 6,136
Debt issuance costs 18,903 8.15% 1,541 1,156
Cellar Door Credit facility 78,288 9.125% 7,144 5,358
Marquee Credit facility 42,917 9.125% 3,916 2,937
Working Capital Credit facility 21,708 9.125% 1,981 1,486
----------- ---------- --------
Subtotal 885,387 77,838 58,378
Equity Offering (128,348) (10,113) (7,584)
----------- ---------- --------
Total $ 757,039 $ 67,725 $ 50,794
=========== ========== ========
</TABLE>
- -------
(1) The number of shares issued was based upon the market price either agreed
upon by SFX and the sellers before SFX's stock was publicly traded or at
the price over a reasonable period of time before and after the
announcement of the transaction.
(2) Assumes that the tax indemnification payments of $93.7 million paid as of
September 30, 1998 were funded with the proceeds from SFX's public
offering of 8,050,000 shares of Class A common stock on May 27, 1998.
57
<PAGE>
SFX ENTERTAINMENT, INC.
SUMMARY OF DEPRECIATION AND AMORTIZATION EXPENSE
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA AMORTIZATION EXPENSE
----------------------------------
GOODWILL AND PROPERTY AND YEAR ENDED NINE MONTHS ENDED
OTHER INTANGIBLE AMORTIZATION EQUIPMENT, DEPRECIATION DECEMBER 31, SEPTEMBER 30,
ASSETS, GROSS PERIOD GROSS PERIOD 1997 1998
------------------ -------------- -------------- -------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Delsener/Slater $ 23,627 15 years $ 21,682 5-20 years $ 1,575 $ 1,181
Meadows 3,243 15 years 26,370 5-39 years 216 162
Sunshine 37,619 15 years 28,991 5-40 years 2,508 1,881
Westbury 11,512 15 years 500 7 years 767 576
BGP 51,441 15 years 37,431 7-30 years 3,429 2,572
PACE and Pavilion 182,423 2-15 years 94,515 7-30 years 13,028 9,771
Contemporary 68,692 15 years 25,651 7-30 years 4,579 3,435
Network 62,055 15 years 3,798 7-20 years 4,137 3,103
Concert/Southern 16,227 15 years 709 7 years 1,082 811
USA Motor Sports 2,759 15 years -- 184 138
Avalon 27,418 15 years 4,268 7-30 years 1,828 1,371
Oakdale 12,536 15 years 268 7 years 836 627
FAME 120,138 15 years 297 7 years 8,021 6,016
Don Law 64,049 15 years 27,571 7-30 years 4,270 3,202
Magicworks 110,350 15 years 2,068 7 years 7,357 5,518
Other Acquisitions 120,668 10-15 years 2,958 7-30 years 9,614 7,210
Corporate 10,067 3-10 years 3,989(1)
Debt issuance costs 18,903 10 years -- 1,890 1,418
Cellar Door 65,635 15 years 34,986 7-30 years 4,376 3,282
Marquee 110,543 15 years 2,895 7 years 7,369 5,527
Debt issuance costs 7,500 15 years -- 7 years 500 375
---------- -------- ------- -----------
Total $1,117,338 $325,025 $77,567 $ 62,165
========== ======== ======= ===========
<CAPTION>
PRO FORMA
DEPRECIATION AND AMORTIZATION
PRO FORMA DEPRECIATION EXPENSE EXPENSE
---------------------------------- ---------------------------------
YEAR ENDED NINE MONTHS ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1998 1997 1998
-------------- ------------------- -------------- ------------------
<S> <C> <C> <C> <C>
Delsener/Slater $ 1,417 $ 1,063 $ 2,992 $ 2,244
Meadows 624 468 840 630
Sunshine 1,008 756 3,516 2,637
Westbury 71 53 839 629
BGP 1,357 1,018 4,786 3,590
PACE and Pavilion 2,685 1,957 15,713 11,728
Contemporary 1,402 1,051 5,981 4,486
Network 332 249 4,469 3,352
Concert/Southern 101 76 1,183 887
USA Motor Sports -- -- 184 138
Avalon 610 457 2,438 1,828
Oakdale 38 29 874 656
FAME 42 32 8,064 6,048
Don Law 1,137 853 5,407 4,055
Magicworks 295 221 7,652 5,739
Other Acquisitions 283 212 9,897 7,422
Corporate 941 1,716 941 5,705
Debt issuance costs -- -- 1,890 1,418
Cellar Door 1,219 914 5,595 4,196
Marquee 414 311 7,783 5,838
Debt issuance costs -- -- 500 375
------- ------- ------- -------
Total $13,978 $11,436 $91,545 $73,601
======= ======= ======= =======
</TABLE>
- -------
(1) Represents the $2,725,000 write-off of the Triathlon asset and $1,264,000
of integration costs.
58
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
SFX FOR THE SFX 1997
ENTERTAINMENT SFX 1997 SFX 1998 ACQUISITIONS
(ACTUAL) ACQUISITIONS ACQUISITIONS AND THE SFX 1998
I II III ACQUISITIONS
--------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
Revenue ....................................... $96,144 $14,243 $ 773,514 $ 883,901
Operating expenses ............................ 83,417 13,293 690,806 787,516
Depreciation & amortization ................... 5,431 3,802 68,434 77,667
--
Corporate expenses, net of Triathlon fees ..... 2,206 -- 5,794 8,000
Non-cash compensation and other non-cash
charges ...................................... -- -- -- --
------- ------- --------- ---------
Operating income (loss) ....................... 5,090 (2,852) 8,480 10,718
Interest expense .............................. 1,590 742 61,742 64,074
Equity (income) loss from investments ......... (509) -- (5,354) (5,863)
Other income expenses ......................... (295) (1) (2,640) (2,936)
------- ---------- --------- ---------
Income (loss) before
income tax expense ........................... 4,304 (3,593) (45,268) (44,557)
Income tax expense (benefit) .................. 490 -- 4,367 4,857
------- --------- --------- ---------
Net income (loss) ............................. $ 3,814 $(3,593) $ (49,635) (49,414)
========= =========
Accretion on put option ....................... -- (3,300)
------- ---------
Net income (loss) applicable to common
shares ....................................... $ 3,814 $ (52,714)
======= =========
Net income (loss) per common share ............ $ .26 $ (1.76)
======= =========
Weighted average common shares
outstanding (1) (2) .......................... 14,445 30,450
======= =========
<CAPTION>
THE MERGER, THE CELLAR DOOR ACQUISITION
AND THE NEW NOTE OFFERING
IV
--------------------------------------- PRO FORMA
FOR THE SFX
1997 ACQUISITIONS,
THE SFX 1998
ACQUISITIONS,
THE NEW NOTE
OFFERING, PROPOSED
PRO FORMA THE MERGER AND EQUITY
CELLAR DOOR MARQUEE ADJUSTMENTS THE CELLAR DOOR OFFERING
A B C ACQUISITION V
------------- ----------- ------------- -------------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue ....................................... $63,966 $ 53,324 $ -- $1,001,191 $ --
Operating expenses ............................ 58,165 46,478 -- 892,159 --
Depreciation & amortization ................... 5,595 7,783 500 91,545 --
Corporate expenses, net of Triathlon fees ..... -- -- -- 8,000 --
Non-cash compensation and other non-cash
charges ...................................... -- 1,367 -- 1,367 --
------- -------- --------- ---------- ----------
Operating income (loss) ....................... 206 (2,304) (500) 8,120 --
Interest expense .............................. -- -- 13,764 77,838 (10,113)
Equity (income) loss from investments ......... (601) -- 975 (5,489) --
Other income expenses ......................... (369) -- (975) (4,280) --
------- -------- --------- ---------- ----------
Income (loss) before
income tax expense ........................... 1,176 (2,304) (14,264) (59,949) 10,113
Income tax expense (benefit) .................. 5 53 -- 4,915 --
------- -------- --------- ---------- ----------
Net income (loss) ............................. $ 1,171 $ (2,357) $ (14,264) (64,864) $ 10,113
======= ========= ==========
Accretion on put option ....................... (301) (3,601)
-------- ----------
Net income (loss) applicable to common
shares ....................................... $ (2,658) $ (68,465)
======== ==========
Net income (loss) per common share ............ $ (2.16)
==========
Weighted average common shares
outstanding (1) (2) .......................... 32,234
==========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM PREVIOUS PAGE)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE SFX
1997 ACQUISITIONS,
THE SFX 1998
ACQUISITIONS,
THE NEW NOTE
OFFERING,
THE MERGER,
THE CELLAR DOOR
ACQUISITION
AND THE
PROPOSED
EQUITY OFFERING
-------------------
<S> <C>
Revenue ....................................... $1,001,191
Operating expenses ............................ 892,159
Depreciation & amortization ................... 91,545
Corporate expenses, net of Triathlon fees ..... 8,000
Non-cash compensation and other non-cash
charges ...................................... 1,367
----------
Operating income (loss) ....................... 8,120
Interest expense .............................. 67,725
Equity (income) loss from investments ......... (5,489)
Other income expenses ......................... (4,280)
----------
Income (loss) before
income tax expense ........................... (49,836)
Income tax expense (benefit) .................. 4,915
----------
Net income (loss) ............................. (54,751)
Accretion on put option ....................... (3,601)
Net income (loss) applicable to common
shares ....................................... $ (58,352)
==========
Net income (loss) per common share ............ $ (1.63)
==========
Weighted average common shares
outstanding (1) (2) .......................... 36,234
==========
</TABLE>
See footnotes on following page.
59
<PAGE>
- ----------
(1) Includes 500,000 shares of SFX Class A common stock issued to the PACE
sellers in connection with the fifth year put options and 45,416 shares
of SFX Class A common stock related to the ProServ Put Options issued by
Marquee--such shares are not included in calculating the net loss per
common share.
(2) Reconciliation of historical weighted average shares outstanding to pro
forma weighted average shares.
<TABLE>
<CAPTION>
CLASS A & B WEIGHTED
ISSUANCE OF COMMON SHARES DATE ISSUED SHARES OUTSTANDING AVERAGE SHARES
- ----------------------------------------------------- ------------- -------------------- ---------------
<S> <C> <C> <C>
Class A common shares issued to SFX Broadcasting,
Inc. shareholders' in the spin-off (a) ............. 1/1/97 12,864 12,864
Class B common shares issued to SFX Broadcasting,
Inc. shareholders' in the spin-off (a) ............. 1/1/97 1,047 1,047
Class A common shares issued in the Meadows
acquisition ........................................ 2/28/97 247 208
Class A common shares issued to employees ........... 4/15/97 400 286
Class A common shares issued in the Sunshine
acquisition ........................................ 6/1/97 68 40
------ ------
Subtotal ............................................ 1/1/98 14,626 14,445
======
Class A common shares issued for the Westbury,
PACE, BGP, Contemporary, Concert Southern and
Network acquisitions ............................... 4/27/98 4,291
Class A common shares issued to employees in
connection with the spin-off ....................... 4/27/98 1,533
Class B common shares issued to employees in
connection with the spin-off ....................... 4/27/98 650
Class A common shares issued in the Equity Offering 5/5/98 8,050
Class A common shares issued in the FAME
acquisition ........................................ 6/4/98 1,000
Class A common shares issued for the other
acquisitions ....................................... 7/10/98 300
------
Pro forma weighted average common shares
outstanding before pending acquisitions and proposed
equity offering .................................... 30,450
Class A common shares expected to be issued in the
Cellar Door acquisition ............................ 351
Class A common shares expected to be issued for the
Marquee merger ..................................... 1,433
------
Pro forma weighted average common shares
outstanding before this offering ................... 32,234
Class A common shares expected to be issued in this
offering ........................................... 4,000
------
Pro forma weighted average common shares
outstanding ........................................ 36,234
======
</TABLE>
- ----------
(a) Shares are assumed to be outstanding at the beginning of the period
since SFX was a wholly owned subsidiary of SFX Broadcasting, Inc. at
the time.
60
<PAGE>
I. SFX'S ACTUAL OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997
EBITDA for the year ended December 31, 1997 was $10,521,000 and
$99,665,000 for SFX 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
believes that the entertainment industry accepts EBITDA as a generally
recognized measure of performance and that analysts who report publicly on the
performance of entertainment companies use EBITDA. Nevertheless, you should not
consider this measure in isolation or as a substitute for operating income, net
income, net cash provided by operating activities or any other measure for
determining SFX's operating performance or liquidity which is calculated in
accordance with GAAP. EBITDA, as we calculate it, may not be comparable to
calculations of similarly titled measures presented by other companies. Cash
flows from operating, investing and financing activities for SFX for the year
ended December 31, 1997 were $1,005,000, ($73,296,000) and $78,270,000,
respectively.
We believe there are adjustments that could affect EBITDA, but we have not
reflected them herein. If we had made such adjustments, Adjusted EBITDA on a
pro forma basis would have been approximately $116,875,000 for the year ended
December 31, 1997. The adjustments include the elimination of non-cash
compensation and other non-cash charges of $1,367,000, the expected cost
savings in connection with SFX's 1998 acquisitions, the merger and the Cellar
Door acquisition associated with the elimination of duplicative staffing and
general and administrative expenses of $10,354,000, and equity income from
investments of $5,489,000. While management believes that such cost savings are
achievable, SFX's ability to fully achieve such cost savings is subject to
numerous factors, certain of which may be beyond SFX's control. See "Risk
Factors."
II. SFX 1997 ACQUISITIONS
SFX acquired Delsener/Slater, Meadows and Sunshine Promotions on January
2, 1997, March 20, 1997 and June 24, 1997, respectively. These adjustments
represent the historical operating results of Meadows and Sunshine Promotions
prior to their respective acquisitions by SFX. The following represents the
historical operating results of these companies prior to their acquisition by
SFX.
<TABLE>
<CAPTION>
PRO FORMA
DELSENER/ FOR THE SFX
SUNSHINE MEADOWS SLATER PRO FORMA 1997
ACQUISITION ACQUISITION ACQUISITION(A) ADJUSTMENTS ACQUISITIONS
------------- ------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue ............................... $11,692 $ 601 $1,950 $ -- $14,243
Operating expenses .................... 11,605 631 1,057 -- 13,293
Depreciation & amortization ........... 836 321 245 2,400 (b) 3,802
------- ----- ------ -------- -------
Operating income (loss) ............... (749) (351) 648 (2,400) (2,852)
Interest expense ...................... -- 171 -- 571 (c) 742
Other (income) expenses ............... -- (1) -- -- (1)
------- -------- ------ -------- ----------
Income (loss) before income tax expense (749) (521) 648 (2,971) (3,593)
Income tax expense (benefit) .......... -- -- -- -- --
------- ------- ------ -------- ---------
Net income (loss) ..................... $ (749) $(521) $ 648 $ (2,971) $(3,593)
======= ======= ====== ======== =========
</TABLE>
- ----------
(a) Delsener/Slater acquired Westbury Music Fair and Irving Plaza on
January 8, 1998 and November 19, 1997, respectively. Delsener/Slater
results includes the historical operating results of Westbury and
Irving Plaza prior to their acquisitions.
(b) Reflects the increase in depreciation and amortization resulting
from the preliminary purchase accounting treatment of the
acquisitions. SFX amortizes goodwill and other intangibles over
periods ranging from 2-15 years.
(c) Reflects the incremental interest expense associated with additional
borrowing related to SFX's 1997 acquisitions.
61
<PAGE>
III. SFX 1998 ACQUISITIONS
SFX acquired PACE, including USA Motor Sports, and Pavilion on February
25, 1998; Contemporary on February 27, 1998; BG Presents, Inc. ("BGP") on
February 24, 1998; Album Network, Inc., SJS Entertainment Corporation and the
Network 40 (collectively "Network") on February 27, 1998; and Concert/Southern
on March 4, 1998. In May 1998, SFX acquired Irvine Meadows Amphitheater, New
Avalon, Inc, TBA Media, Inc. and West Coast Amphitheater (collectively
"Avalon"). In June 1998, SFX acquired FAME and Oakdale. In July 1998, SFX
acquired Don Law, and in September 1998, SFX acquired Magicworks. In addition,
in the third quarter of 1998, SFX acquired seven other companies herein defined
as the Other Acquisitions. The following represents the historical operating
results of these companies prior to their acquisition by SFX.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-------------------------------------------------------------------------------------
PACE
AND CONCERTS
PAVILION CONTEMPORARY BGP NETWORK SOUTHERN FAME
ACQUISITIONS ACQUISITION ACQUISITION ACQUISITION ACQUISITION ACQUISITION
A B C D E F
-------------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue ..................... $284,360 $103,300 $105,553 $28,322 $14,797 $10,881
Operating expenses .......... 261,163 91,220 96,630 19,577 12,520 3,457
Depreciation &
amortization ............... 7,053 1,320 1,027 351 79 115
Corporate expenses .......... -- -- -- -- -- --
Other expenses .............. -- -- -- -- -- --
-------- -------- -------- ------- ------- -------
Operating income (loss) ..... 16,144 10,760 7,896 8,394 2,198 7,309
Interest expense ............ 6,772 266 917 195 -- 79
Equity (income) loss from
investments ................ (7,399) -- -- -- 48 --
Other (income) expenses...... 1,290 (357) (270) (78) (60) (143)
Income (loss) before
income tax expense ......... 15,481 10,851 7,249 8,277 2,210 7,373
Income tax expense
(benefit) .................. 3,569 -- 1,687 127 -- 700
Net income (loss) ........... $ 11,912 $ 10,851 $ 5,562 $ 8,150 $ 2,210 $ 6,673
======== ======== ======== ======= ======= =======
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-------------------------------------------------------------------------------------------
AVALON OAKDALE DON LAW MAGICWORKS OTHER PRO FORMA
ACQUISITION ACQUISITION ACQUISITION ACQUISITION ACQUISITIONS ADJUSTMENTS
G H I J K L
------------- ------------- ------------- ------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue ..................... $27,265 $16,435 $50,588 $38,963 $ 93,050 --
Operating expenses .......... 23,706 14,720 43,741 36,455 87,617 --
Depreciation &
amortization ............... 410 51 2,033 634 430 54,931 (a)
Corporate expenses .......... -- -- -- -- -- 5,794 (b)
Other expenses .............. -- -- -- -- -- --
------- ------- ------- ------- -------- ------
Operating income (loss) ..... 3,149 1,664 4,814 1,874 5,003 (60,725)
Interest expense ............ 94 1,508 1,072 686 254 49,899 (c)
Equity (income) loss from
investments ................ -- -- -- (541) (1,561) 862 (d)
1,581 (e)
1,656 (f)
Other (income) expenses...... -- (79) (329) (135) 39 (862)(d)
(1,656)(f)
-------
Income (loss) before
income tax expense ......... 3,055 235 4,071 1,864 6,271 (112,205)
Income tax expense
(benefit) .................. 949 -- -- 747 22 (2,834))(g)
(600)(h)
--------
Net income (loss) ........... $ 2,106 $ 235 $ 4,071 $ 1,117 $ 6,249 $ (108,771)
======= ======= ======= ======= ======== ===========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM PREVIOUS PAGE)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
(IN THOUSANDS)
--------------
PRO FORMA
FOR THE SFX
1998
ACQUISITIONS
-------------
<S> <C>
Revenue ..................... $ 773,514
Operating expenses .......... 690,806
Depreciation &
amortization ............... 68,434
Corporate expenses .......... 5,794
Other expenses .............. --
---------
Operating income (loss) ..... 8,480
Interest expense ............ 61,742
Equity (income) loss from
investments ................ (5,354)
Other (income) expenses...... (2,640)
Income (loss) before
income tax expense ......... (45,268)
Income tax expense
(benefit) .................. 4,367
Net income (loss) ........... $ (49,635)
=========
</TABLE>
62
<PAGE>
A. PACE AND PAVILION ACQUISITIONS
Reflects the PACE acquisition, the separate acquisition of two partners'
interest in the Pavilion partnership that owns certain amphitheaters operated
by PACE and the acquisition of USA Motor Sports by PACE in March 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-------------------------------------------------------------------------------
PACE AND
PACE PAVILION USA MOTOR PRO FORMA PAVILION
AS REPORTED AS REPORTED SPORTS ADJUSTMENTS ACQUISITIONS
------------- ------------- ----------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue ........................ $176,168 $ 98,632 $8,560 $ 1,000(a) $284,360
Operating expenses ............. 170,169 83,258 8,306 (570)(b) 261,163
Depreciation & amortization..... 1,985 4,045 23 1,000 (a) 7,053
Other expenses ................. 1,139 -- -- (1,139)(c) --
-------- -------- ------ --------- --------
Operating income ............... 2,875 11,329 231 1,709 16,144
Interest expense ............... 2,384 4,388 -- 6,772
Equity (income) loss from
investments ................... (8,134) (1,831) -- 2,566 (d) (7,399)
Other (income) expenses ........ 53 1,304 (67) -- 1,290
-------- -------- ------ --------- --------
Income before income tax
expense ....................... 8,572 7,468 298 (857) 15,481
Income tax expense ............. 3,569 -- -- -- 3,569
-------- -------- ------ --------- --------
Net income ..................... $ 5,003 $ 7,468 $ 298 $ (857) $ 11,912
======== ======== ====== ========= ========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) To reflect non-cash revenue and related amortization expense
resulting from SFX granting Blockbuster naming rights to three
venues for two years for no future consideration as part of its
agreement to acquire Blockbuster's indirect 331/3% interest in
Pavilion. SFX recorded deferred revenue and an offsetting intangible
asset at the time of the PACE acquisition relating to the naming
rights.
(b) Reflects the elimination of $570,000 of certain officers' salaries
and bonuses which will not be paid under SFX's new employment
contracts. The amount of the pro forma adjustment to eliminate
salaries and bonuses is based on SFX's agreements with the affected
employees that a bonus will not be paid unless there is a
significant improvement in the results of the PACE acquisition.
Accordingly, no such bonus is reflected in the pro forma statement
of operations because, if PACE's results were similar to those in
these pro forma statements of operations, SFX would not be
contractually obligated to pay a bonus.
(c) Reflects the elimination of non-recurring restricted stock
compensation to PACE executives, as SFX does not maintain a
restricted stock compensation plan and the new employment agreements
with the PACE executives do not provide for such compensation.
(d) To eliminate PACE's income from its 331/3% equity investment in
Pavilion.
63
<PAGE>
B. CONTEMPORARY ACQUISITION
Reflects the Contemporary acquisition and the separate acquisition of the
remaining 50% interest in Riverport Amphitheater Partners, a partnership that
owns an amphitheater in St. Louis, Missouri that is operated by Contemporary.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-------------------------------------------------------------------
CONTEMPORARY RIVERPORT PRO FORMA CONTEMPORARY
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITION
-------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Revenue ......................................... $ 89,053 $14,247 $ -- $103,300
Operating expenses .............................. 90,820 11,630 (11,230)(a) 91,220
Depreciation & amortization ..................... 541 779 -- 1,320
--------- ------- ---------- --------
Operating income (loss) ......................... (2,308) 1,838 11,230 10,760
Interest expense ................................ 192 74 -- 266
Equity (income) from investments ................ (1,002) -- 1,002 (b) --
Other (income) expenses ......................... (117) (240) -- (357)
--------- ------- ---------- --------
Income (loss) before income tax expense ......... (1,381) 2,004 10,228 10,851
Income tax expense (benefit) .................... -- -- -- --
--------- ------- ---------- --------
Net income (loss) ............................... $ (1,381) $ 2,004 $ 10,228 $ 10,851
========= ======= ========== ========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses
and other consulting expenses which will not be paid under SFX's new
employment and other contracts. The amount of the pro forma
adjustment to eliminate salaries and bonuses is based on SFX's
agreements with the affected employees that a bonus will not be paid
unless there is a significant improvement in the results of
Contemporary. Accordingly, no such bonus is reflected in the pro
forma statement of operations because, if Contemporary's results
were similar to those in these pro forma statements of operations,
SFX would not be contractually obligated to pay a bonus.
(b) Reflects the elimination of Contemporary's equity income in
Riverport Amphitheater Partners. Contemporary has acquired its
partners' 50% interest in this venture.
64
<PAGE>
C. BGP ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
------------------------------------------------
AS REPORTED PRO FORMA BGP
(A) ADJUSTMENTS ACQUISITION
------------- ----------------- ------------
<S> <C> <C> <C>
Revenue ......................................... $105,553 $ -- $105,553
Operating expenses .............................. 99,958 (3,328)(b) 96,630
Depreciation & amortization ..................... 1,027 -- 1,027
-------- --------- --------
Operating income ................................ 4,568 3,328 7,896
Interest expense ................................ 917 -- 917
Other (income) expenses ......................... (270) -- (270)
-------- --------- --------
Income (loss) before income tax expense ......... 3,921 3,328 7,249
Income tax expense .............................. 1,687 -- 1,687
-------- --------- --------
Net income ...................................... $ 2,234 $ 3,328 $ 5,562
======== ========= ========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects BGP's operating results for the twelve months ended January
31, 1998.
(b) Reflects the elimination of certain officers' salaries and bonuses
and other consulting expenses which will not be paid under SFX's new
employment and other contracts. The amount of the pro forma
adjustment to eliminate salaries and bonuses is based on SFX's
agreements with the affected employees that a bonus will not be paid
unless there is a significant improvement in the results of BGP.
Accordingly, no such bonus is reflected in the pro forma statement
of operations because, if BGP's results were similar to those in
these pro forma statements of operations, SFX would not be
contractually obligated to pay a bonus.
D. NETWORK ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
------------------------------------------------
PRO FORMA NETWORK
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ----------------- ------------
<S> <C> <C> <C>
Revenue ......................................... $28,322 $ -- $28,322
Operating expenses .............................. 26,903 (7,326)(a) 19,577
Depreciation & amortization ..................... 351 351
------- -------
Operating income (loss) ......................... 1,068 7,326 8,394
Interest expense, net ........................... 195 -- 195
Other (income) expenses ......................... (78) -- (78)
------- --------- -------
Income (loss) before income tax expense ......... 951 7,326 8,277
Income tax expense .............................. 127 -- 127
------- --------- -------
Net income ...................................... $ 824 $ 7,326 $ 8,150
======= ========= =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENT:
(a) Reflects the elimination of certain officers' salaries and bonuses
which will not be paid under SFX's new employment contracts. The
amount of the pro forma adjustment to eliminate salaries and bonuses
is based on SFX's agreements with the affected employees that a
bonus will not be paid unless there is a significant improvement in
the results of the Network acquisition. Accordingly, no such bonus
is reflected in the pro forma statement of operations because, if
Network's results were similar to those in these pro forma
statements of operations, SFX would not be contractually obligated
to pay a bonus.
65
<PAGE>
E. CONCERT/SOUTHERN ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
----------------------------------------------
CONCERT/
PRO FORMA SOUTHERN
AS REPORTED ADJUSTMENTS ACQUISITION
------------- --------------- ------------
<S> <C> <C> <C>
Revenue ....................................... $14,797 $ -- $14,797
Operating expenses ............................ 12,949 (429)(a) 12,520
Depreciation & amortization ................... 79 -- 79
------- ------- -------
Operating income .............................. 1,769 429 2,198
Other (income) expenses ....................... (60) -- (60)
Equity (income) loss from investments ......... 80 (32)(b) 48
------- ------- -------
Income before income tax expense .............. 1,749 461 2,210
------- ------- -------
Net income .................................... $ 1,749 $ 461 $ 2,210
======= ======= =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses
which will not be paid under SFX's new employment contracts. The
amount of the pro forma adjustment to eliminate salaries and bonuses
is based on SFX's agreements with the affected employees that a
bonus will not be paid unless there is a significant improvement in
the results of Concert/Southern. Accordingly, no such bonus is
reflected in the pro forma statement of operations because, if
Concert/Southern's results were similar to those in these pro forma
statements of operations, SFX would not be contractually obligated
to pay a bonus.
(b) Reflects the elimination of equity loss of a non-entertainment
affiliated entity which was not acquired by SFX.
F. FAME ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-------------------------------------------------
PRO FORMA FAME
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------------ ------------
<S> <C> <C> <C>
Revenue ......................................... $ 10,881 $ -- $10,881
Operating expenses .............................. 13,002 (10,595)(a) 3,457
1,050 (b)
Depreciation & amortization ..................... 115 -- 115
-------- ---------- -------
Operating income (loss) ......................... (2,236) 9,545 7,309
Interest expense ................................ 79 -- 79
Other (income) expenses ......................... (143) -- (143)
-------- ---------- -------
Income (loss) before income tax expense ......... (2,172) 9,545 7,373
Income tax expense (benefit) .................... -- 700 (c) 700
-------- ---------- -------
Net income (loss) ............................... $ (2,172) $ 8,845 $ 6,673
======== ========== =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' distributions of
earnings which will not be paid under SFX's new employment
contracts. The FAME acquisition agreement provides for payments by
SFX to the FAME sellers of additional amounts up to an aggregate of
$15.0 million in equal annual installments over 5 years contingent
on the achievement of certain financial targets and for additional
payments by SFX if FAME's financial performance exceeds the target
by certain amounts. The financial targets were not met during the
pro forma period, therefore such additional payments are not
included in these pro forma financial statements. Had such targets
been met, or exceeded, the additional payments would have been
rewarded as additional consideration in the acquisition of FAME. If
FAME should meet the targets in the future, SFX will record the
payments as additional purchase price.
(b) Reflects salaries and officers' life insurance premiums to be paid
by SFX.
(c) Reflects an adjustment to the provision for state and local income
taxes.
66
<PAGE>
G. AVALON ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
---------------------------------------------------
PRO FORMA AVALON
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ----------------- ------------
<S> <C> <C> <C>
Revenue ............................. $27,265 $ -- $27,265
Operating expenses .................. 24,404 (698)(a) 23,706
Depreciation & amortization ......... 410 -- 410
Corporate expenses .................. -- -- --
------- --------- -------
Operating income (loss) ............. 2,451 698 3,149
Interest expense .................... 94 -- 94
Other expenses ...................... 1,581 (1,581)(b) --
------- --------- -------
Income (loss) before income tax
expense ............................ 776 2,279 3,055
Income tax expense .................. 249 700 (c) 949
------- --------- -------
Net income .......................... $ 527 $ 1,579 $ 2,106
======= ========= =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' bonuses and wages not
expected to be paid under SFX's new employment contracts for Avalon.
The amount of the pro forma adjustment to eliminate salaries and
bonuses is based on SFX's agreements with the affected employees
that a bonus will not be paid unless there is a significant
improvement in the results of Avalon. Accordingly, no such bonus is
reflected in the pro forma statement of operations because, if
Avalon's results were similar to those in these pro forma statements
of operations, SFX would not be contractually obligated to pay a
bonus.
(b) To reclassify PACE's equity income in Avalon following the Avalon
acquisition.
(c) Reflects an adjustment to the provision for state and local income
taxes.
H. OAKDALE ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-----------------------------------------------
PRO FORMA OAKDALE
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------- ------------
<S> <C> <C> <C>
Revenue .................................. $16,435 -- $16,435
Operating expenses ....................... 14,720 -- 14,720
Depreciation & amortization .............. 51 -- 51
------- -- -------
Operating income (loss) .................. 1,664 -- 1,664
Interest expense ......................... 1,508 -- 1,508
Other (income) expenses .................. (79) -- (79)
------- -- -------
Income before income tax expense ......... 235 -- 235
------- -- -------
Net income ............................... $ 235 -- $ 235
======= == =======
</TABLE>
67
<PAGE>
I. DON LAW ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
------------------------------------------------
PRO FORMA DON LAW
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ----------------- ------------
<S> <C> <C> <C>
Revenue .................................. $50,588 $ $50,588
Operating expenses ....................... 44,401 (610) (a) 43,741
(50) (b)
Depreciation & amortization .............. 2,033 -- 2,033
------- -------- -------
Operating income ......................... 4,154 660 4,814
Interest expense ......................... 1,072 -- 1,072
Other (income) expenses .................. (329) -- (329)
------- -------- -------
Income before income tax expense ......... 3,411 660 4,071
Net income ............................... $ 3,411 $ 660 $ 4,071
======= ======== =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects adjustment to eliminate payments made to employees
associated with membership interest.
(b) Reflects the elimination of certain officer's bonuses and wages not
expected to be paid under SFX's new employment contracts. The amount
of the pro forma adjustment to eliminate salaries and bonuses is
based on SFX's agreements with the affected employees that a bonus
will not be paid unless there is a significant improvement in the
results of Don Law. Accordingly, no such bonus is reflected in the
pro forma statement of operations as should Don Law's results be at
a similar level to that in these pro forma statements of operations
no bonus would be paid, and SFX would not be contractually obligated
to pay a bonus.
J. MAGICWORKS ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
--------------------------------------------
PRO FORMA MAGICWORKS
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------- ------------
<S> <C> <C> <C>
Revenue ....................................... $38,963 $-- $38,963
Operating expenses ............................ 36,455 -- 36,455
Depreciation & amortization ................... 634 -- 634
------- --- -------
Operating income (loss) ....................... 1,874 -- 1,874
Interest expenses ............................. 686 -- 686
Equity (income) loss from investments ......... (541) -- (541)
Other (income) expenses ....................... (135) -- (135)
------- --- -------
Income before income tax expense .............. 1,864 -- 1,864
Income tax expense ............................ 747 -- 747
------- --- -------
Net income .................................... $ 1,117 $-- $ 1,117
======= === =======
</TABLE>
68
<PAGE>
K. OTHER ACQUISITIONS
Reflects the historical combined operating results of the seven businesses
acquired by SFX in the third quarter of 1998. In the aggregate, such
acquisitions are not material to SFX's financial position or results of
operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
------------------------------------------------
PRO FORMA OTHER
HISTORICAL ADJUSTMENTS ACQUISITIONS
------------ ----------------- -------------
<S> <C> <C> <C>
Revenue ......................................... $ 93,050 $ -- $ 93,050
Operating expenses .............................. 89,240 (1,623)(a) 87,617
Depreciation & amortization ..................... 430 430
-------- --------
Operating income ................................ 3,380 1,623 5,003
Interest expense ................................ 254 254
Equity (income) loss from investments ........... (1,561) -- (1,561)
Other (income) expenses ......................... 39 -- 39
-------- --------- --------
Income (loss) before income tax expense ......... 4,648 1,623 6,271
Income tax expense .............................. 22 -- 22
-------- --------- --------
Net income ...................................... $ 4,626 $ 1,623 $ 6,249
======== ========= ========
</TABLE>
- ----------
PRO FORMA ADJUSTMENT:
(a) Reflects the elimination of consulting fees.
L. PRO FORMA ADJUSTMENTS
(a) Reflects the increase in depreciation and amortization resulting
from the preliminary purchase accounting treatment of the
acquisitions. SFX amortizes goodwill and other intangibles over
periods ranging from 2-15 years.
(b) To record incremental corporate overhead charges associated with
headquarters personnel and general and administrative expenses that
management estimates will be necessary as a result of the SFX's
acquisitions.
(c) Reflects the incremental interest expense associated with additional
borrowing related to SFX's 1998 acquisitions.
(d) To reclassify Delsener/Slater's equity income in the PNC Bank Arts
Center venue following the acquisition of Pavilion, which owns the
other 50% equity interest in the venue.
(e) To reclassify PACE's equity income in Avalon following the Avalon
acquisition.
(f) To reflect the elimination of PACE's equity income in Magicworks.
(g) Represents an adjustment to the provision for state and local income
taxes. The calculation treats all companies acquired as "C"
Corporations and reflects the impact of non-deductible goodwill and
tax savings related to the pro forma adjustments.
(h) To reflect the federal tax benefit for interest expense.
69
<PAGE>
IV. THE MERGER, THE CELLAR DOOR ACQUISITION AND THE NEW NOTE OFFERING
A. CELLAR DOOR
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
------------------------------------------------
PRO FORMA CELLAR DOOR
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ----------------- ------------
<S> <C> <C> <C>
Revenue ......................................... $63,966 $ -- $63,966
Operating expenses .............................. 61,225 (3,060)(a) 58,165
Depreciation & amortization ..................... 1,613 3,982 (b) 5,595
------- --------- -------
Operating income (loss) ......................... 1,128 (922) 206
Interest expense ................................ 2,398 (2,398)(c) --
Equity income from investments .................. (601) -- (601)
Other income .................................... (369) -- (369)
------- --------- -------
Income (loss) before income tax expense ......... (300) 1,476 1,176
Income tax expense .............................. 5 -- 5
------- --------- -------
Net income (loss) ............................... $ (305) $ 1,476 $ 1,171
======= ========= =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain management fees and certain
officers' salaries, bonuses and other compensation which will not be
paid under SFX's new employment agreements and other contracts.
(b) Reflects the increase of $3,982,000 in depreciation and amortization
resulting from the preliminary purchase accounting treatment of
Cellar Door. SFX amortizes goodwill over 15 years.
(c) Reflects the elimination of $2,398,000 of historical interest
expense.
70
<PAGE>
B. MARQUEE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-------------------------------------------------
MARQUEE PRO FORMA MARQUEE
PRO FORMA (A) ADJUSTMENTS MERGER
--------------- ---------------- ------------
<S> <C> <C> <C>
Revenue ......................................... $ 53,324 $ -- $ 53,324
Operating expenses .............................. 46,478 46,478
Depreciation and amortization ................... 4,561 3,222 (b) 7,783
Non-cash charges and financing expense .......... 1,367 -- 1,367
-------- --------- --------
Operating income (loss) ......................... 918 (3,222) (2,304)
Interest expense ................................ 3,323 (3,323)(c) --
-------- --------- --------
Income (loss) before income tax expense ......... (2,405) 101 (2,304)
Income tax expense .............................. 53 -- 53
-------- --------- --------
Net income (loss) ............................... $ (2,458) $ 101 $ (2,357)
Accretion on put option ......................... (301) (301)
-------- --------
Net loss applicable to common share ............. $ (2,759) $ (2,658)
======== ========
</TABLE>
PRO FORMA ADJUSTMENTS:
(a) Represents the pro forma results for Marquee. See "Marquee Unaudited
Pro Forma Condensed Combined Financial Statements" beginning on page
78.
(b) Reflects the increase of $3,222,000 in depreciation and amortization
resulting from the preliminary purchase accounting treatment of
Marquee. SFX amortizes goodwill over 15 years.
(c) Reflects the elimination of $3,323,000 of historical interest
expense.
C. PRO FORMA ADJUSTMENT
Reflects the incremental depreciation and amortization expense, SFX's
incremental interest expense related to the merger and the Cellar Door
acquisition and the elimination of Cellar Door's equity income in certain
PACE companies. See pages 57 and 58 for details of the adjustments. Also,
reflects no tax benefit on pro forma adjustments given SFX's loss
position.
V. PROPOSED EQUITY OFFERING
Reflects a reduction in interest expense of $10,113,000 due to repayment
of outstanding borrowings under the revolving portion of SFX's credit facility
in connection with the proposed equity offering.
71
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SFX
ENTERTAINMENT
(ACTUAL) SFX 1998 ACQUISTIONS PRO FORMA FOR
I II THE SFX 1998 ACQUISITIONS
--------------- ---------------------- ---------------------------
<S> <C> <C> <C>
Revenue ........................... $ 680,376 $244,718 $ 925,094
Operating expenses ................ 602,538 209,376 811,914
Depreciation & amortization,
including integration costs ...... 40,381 22,811 63,192
Corporate expenses, net of
Triathlon fees ................... 5,839 161 6,000
Noncash compensation and other
non cash charges ................. 32,895 -- 32,895
--------- -------- ---------
Operating income (loss) ........... (1,277) 12,370 11,093
Interest expense .................. 31,709 16,346 48,055
Equity (income) loss from
investments ...................... (3,964) (1,270) (5,234)
Other (income) expenses ........... (2,152) 2,822 670
--------- -------- ---------
Income (loss) before income tax
expense .......................... (26,870) (5,528) (32,398)
Income tax expense (benefit) ...... 3,333 280 3,613
--------- -------- ---------
Net income (loss) ................. (30,203) $ (5,808) (36,011)
========
Accretion on put option ........... (1,925) (2,475)
--------- ---------
Net loss applicable to common
shares ........................... $ (32,128) $ (38,486)
========= =========
Net loss per common share ......... $ (1.38) $ (1.29)
========= =========
Weighted average common
shares outstanding (1) (2) ....... 23,262 30,450
========= =========
<PAGE>
<CAPTION>
PRO FORMA FOR
THE SFX 1998
PRO FORMA ACQUISITIONS,
THE MERGER, THE CELLAR DOOR ACQUISITION FOR THE SFX 1998 THE NEW NOTE
AND THE NEW NOTE OFFERING ACQUISITIONS, OFFERING,
III THE NEW NOTE OFFERING, THE MERGER,
--------------------------------------- THE MERGER PROPOSED THE CELLAR DOOR
PRO FORMA AND THE CELLAR EQUITY ACQUISITION
CELLAR DOOR MARQUEE ADJUSTMENTS DOOR OFFERING AND THE PROPOSED
A B C ACQUISITION IV EQUITY OFFERING
------------- ----------- ------------- ------------------------ ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Revenue ........................... $63,206 $48,848 $1,037,148 $ -- $1,037,148
Operating expenses ................ 57,390 41,427 910,731 -- 910,731
Depreciation & amortization,
including integration costs ...... 4,196 5,838 $ 375 73,601 -- 73,601
Corporate expenses, net of
Triathlon fees ................... -- 6,000 -- 6,000
Noncash compensation and other
non cash charges ................. 367 33,262 -- 33,262
------- ---------- --------- ----------
Operating income (loss) ........... 1,620 1,216 (375) 13,554 -- 13,554
Interest expense .................. -- -- 10,323 58,378 (7,584) 50,794
Equity (income) loss from
investments ...................... (645) -- (89) (5,968) -- (5,968)
Other (income) expenses ........... (89) -- 89 670 -- 670
------- ------- --------- ---------- --------- ----------
Income (loss) before income tax
expense .......................... 2,354 1,216 (10,698) (39,526) 7,584 (31,942)
Income tax expense (benefit) ...... 4 1,000 4,617 -- 4,617
------- ------- ---------- --------- ----------
Net income (loss) ................. $ 2,350 $ 216 $ (10,698) (44,143) $ 7,584 (36,559)
======= ======= ========= =========
Accretion on put option ........... (236) (2,711) (2,711)
------- ---------- ----------
Net loss applicable to common
shares ........................... $ (20) $ (46,854) $ (39,270)
======= ========== ==========
Net loss per common share ......... $ (1.48) $ (1.10)
========== ==========
Weighted average common
shares outstanding (1) (2) ....... 32,234 36,234
========== ==========
</TABLE>
See footnotes on following page.
72
<PAGE>
- ----------
(1) Includes 500,000 shares of SFX Class A common stock issued to the PACE
sellers in connection with the fifth year put option and 45,416 shares of
SFX Class A common stock related to the ProServ Put Options issued by
Marquee. Such shares are not included in calculating the net loss per
common share.
(2) Reconciliation of historical weighted average shares outstanding to
proforma weighted average shares.
<TABLE>
<CAPTION>
CLASS A & B
DATE SHARES WEIGHTED AVERAGE
ISSUANCE OF COMMON SHARES ISSUED OUTSTANDING SHARES
- ------------------------------------------------------ ---------- ------------- -----------------
<S> <C> <C> <C>
Class A common shares outstanding .................... 1/1/98 13,579 13,579
Class B common shares outstanding .................... 1/1/98 1,047 1,047
Class A common shares issued for Westbury, PACE,
BGP, Contemporary, Concert Southern and
Network acquisitions ................................ 4/27/98 4,291 2,460
Class A common shares issued to employees in
connection with the spin-off ........................ 4/27/98 1,533 882
Class B common shares issued to employees in
connection with the spin-off ........................ 4/27/98 650 374
Class A common shares issued in the Equity
Offering ............................................ 5/5/98 8,050 4,394
Class A common shares issued in the FAME
acquisition ......................................... 6/4/98 1,000 436
Class A common shares issued for the other
acquisitions ........................................ 7/10/98 300 91
------ ------
Subtotal ............................................. 30,450 23,262
======
Class A common shares expected to be issued in the
Cellar Door acquisition ............................. 351
Class A common shares expected to be issued for the
Marquee merger ...................................... 1,433
------
Pro forma weighted average common shares
outstanding before proposed equity offering ......... 32,234
Class A common shares expected to be issued in the
proposed equity offering ............................ 4,000
------
Pro forma weighted average common shares
outstanding ......................................... 36,234
======
</TABLE>
NOTES TO PRO FORMA STATEMENTS:
I. Represents SFX's actual operating results for the nine months ended
September 30, 1998.
EDITDA for the nine months ended September 30, 1998 was $39,104,000 and
$87,155,000 for SFX 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, we believe that the entertainment industry accepts EBITDA as a
generally recognized measure of performance and that analysts who report
publicly on the performance of entertainment companies use EBITDA.
Nevertheless, you should not consider this measure in isolation or as a
substitute for operating income, net income, net cash provided by operating
activities or
73
<PAGE>
any other measure for determining SFX's operating performance or liquidity
that is calculated in accordance with GAAP. EBITDA, as we calculate it, may
not be comparable to calculations of similarly titled measures presented by
other companies. Cash flows from operating, investing and financing
activities for SFX for the nine months ended September 30, 1998 were
$22,307,000, ($852,240,000) and $889,543,000, respectively.
We believe there are other adjustments that could affect EBITDA, but we
have not reflected them herein. If we had made such adjustments, Adjusted
EBITDA on a pro forma basis would have been approximately $131,154,000 for
the nine months ended September 30, 1998. The adjustments include the
elimination of non-cash compensation and other non-cash charges of
$33,262,000, the expected cost savings in connection with SFX's 1997
acquisitions, SFX's 1998 acquisitions, the merger and the Cellar Door
acquisition associated with the elimination of duplicative staffing and
general and administrative expenses of $4,769,000, and equity income from
investments of $5,968,000. While management believes that such cost saving
are achievable, SFX's ability to fully achieve such cost savings is subject
to numerous factors, certain of which may be beyond SFX's control.
74
<PAGE>
II. SFX 1998 ACQUISITIONS
SFX acquired PACE, including USA Motor Sports, and Pavilion, Contemporary,
BGP, Network and Concert/Southern on February 25, 1998, February 27, 1998,
February 24, 1998, February 27, 1998 and March 4, 1998, respectively. In May
1998, SFX acquired Avalon. In June 1998, SFX acquired FAME and Oakdale. In July
1998, SFX acquired Don Law, and in September 1998 SFX acquired Magicworks. In
addition, in the third quarter of 1998 SFX acquired seven other companies
herein defined as the Other Acquisitions. The following represents the
historical operating results of these companies prior to their acquisition by
SFX.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
-------------------------------------------------------------------------------------
PACE & CONCERT/
PAVILION COMTEMPORARY BGP NETWORK SOUTHERN FAME
ACQUISITIONS ACQUISITION ACQUISITION ACQUISITION ACQUISITION ACQUISITION
-------------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue ....................... $ 86,206 $7,882 $ 16,075 $4,154 $ 524 $2,144
Operating expenses ............ 85,650 8,255 16,801 3,949 638 2,037
Depreciation &
amortization ................. 1,049 254 213 51 9 27
Corporate expenses ............ -- -- -- -- -- --
-------- ------ -------- ------ ------ ------
Operating income (loss) ....... (493) (627) (939) 154 (123) 80
Interest expense .............. 1,148 -- 165 37 -- 42
Equity (income) loss from
investments .................. 549 -- -- -- 20 --
Other (income) expenses ....... (176) (122) 67 (14) -- (26)
Income (loss) before
income tax expense ........... (2,014) (505) (1,171) 131 (143) 64
Income tax expense
(benefit) .................... (475) -- -- 3 -- --
-------- ------ -------- ------ ------ ------
Net income (loss) ............. $ (1,539) $ (505) $ (1,171) $ 128 $ (143) $ 64
======== ====== ======== ====== ====== ======
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
------------------------------------------------------------------------------------------
PRO FORMA
AVALON OAKDALE DON LAW MAGICWORKS OTHER ADJUSTMENTS
ACQUISITION ACQUISITION ACQUISITION ACQUISITION ACQUISITIONS A
------------- ------------- ------------- ------------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue ....................... $ 2,269 $5,982 $20,566 $54,547 $44,369 $ --
Operating expenses ............ 3,805 5,322 17,035 52,362 26,444 (13,185)(a)
263 (b)
Depreciation &
amortization ................. 220 28 2,661 -- 191 18,108 (c)
Corporate expenses ............ -- -- -- -- -- 161 (d)
-------- ------ ------- ------- ------- -----------
Operating income (loss) ....... (1,756) 632 870 2,185 17,734 (5,347)
Interest expense .............. 404 14,550 (e)
Equity (income) loss from
investments .................. (370) -- -- (235) (958) (276)(f)
Other (income) expenses ....... -- -- (166) -- 240 370 (g)
2,373 (h)
276 (f)
-----------
Income (loss) before
income tax expense ........... (1,386) 632 1,036 2,420 18,048 (22,640)
Income tax expense
(benefit) .................... -- -- -- 950 -- (198)(i)
-------- ------ ------- ------- ------- -----------
Net income (loss) ............. $ (1,386) $ 632 $ 1,036 $ 1,470 $18,048 $ (22,442)
======== ====== ======= ======= ======= ===========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM PREVIOUS PAGE)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
1998
(IN THOUSANDS)
--------------
PRO FORMA
FOR THE SFX
1998
ACQUISITIONS
-------------
<S> <C>
Revenue ....................... $244,718
Operating expenses ............ 209,376
Depreciation &
amortization ................. 22,811
Corporate expenses ............ 161
--------
Operating income (loss) ....... 12,370
Interest expense .............. 16,346
Equity (income) loss from
investments .................. (1,270)
Other (income) expenses ....... 2,822
Income (loss) before
income tax expense ........... (5,528)
Income tax expense
(benefit) .................... 280
--------
Net income (loss) ............. $ (5,808)
========
</TABLE>
- -------
A. PRO FORMA ADJUSTMENTS:
(a) To reflect the elimination of $10,723,000 of PACE's non-cash stock
and other non-recurring compensation, $1,173,000 and $1,289,000 of
Network's and FAME's excess compensation, respectively.
(b) Reflects salaries and officers' life insurance premiums to be paid
by SFX.
(c) Reflects the increase of $18,108,000 in depreciation and
amortization resulting from the preliminary purchase accounting
treatment of SFX's 1998 acquisitions. SFX amortizes goodwill and
other intangibles over periods ranging for 2-15 years.
(d) To record incremental corporate overhead, personnel and
administrative expenses that management estimates will be necessary
as a result of SFX's acquisitions.
(e) Reflects the incremental interest expense associated with additional
borrowing related to SFX's 1998 acquisitions.
(f) Reflects the elimination of PACE's equity income in certain
Magicworks tours.
(g) To reclassify $370,000 of PACE's equity income in Avalon following
the Avalon acquisition.
(h) Reflects the elimination of interest income earned from investing
borrowings used to fund acquisitions.
(i) Represents an adjustment to the provision for state and local income
taxes and a Federal tax benefit for interest expense at Magicworks.
The calculation treats all companies to be acquired as "C"
Corporations and reflects the impact of non-deductible goodwill.
75
<PAGE>
III. THE MERGER, THE CELLAR DOOR ACQUISITION AND THE NEW NOTE OFFERING
A. CELLAR DOOR
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 (IN
THOUSANDS)
--------------------------------------------
PRO FORMA CELLAR DOOR
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ----------------- ------------
<S> <C> <C> <C>
Revenue ..................................... $63,206 $ -- $63,206
Operating (income) expenses ................. 58,020 (630)(a) 57,390
Depreciation & amortization ................. 1,272 2,924 (b) 4,196
------- --------- -------
Operating income (loss) ..................... 3,914 (2,294) 1,620
Interest (income) expense ................... 1,610 (1,610)(c) --
Equity (income) loss from investments ....... (645) -- (645)
Other income ................................ (89) -- (89)
------- --------- -------
Income (loss) before income tax expense ..... 3,038 (684) 2,354
Income tax expense .......................... 4 -- 4
------- --------- -------
Net income (loss) ........................... $ 3,034 $ (684) $ 2,350
======= ========= =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain management fees which will not
be paid under SFX's new agreements.
(b) Reflects the increase of $2,924,000 in depreciation and amortization
resulting from the preliminary purchase accounting treatment of
Cellar Door. SFX amortizes goodwill over 15 years.
(c) Reflects the elimination of $1,610,000 of historical interest
expense.
76
<PAGE>
B. MARQUEE
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 (IN
THOUSANDS)
-------------------------------------------------
MARQUEE PRO FORMA MARQUEE
PRO FORMA(A) ADJUSTMENTS MERGER
-------------- ------------------- ----------
<S> <C> <C> <C>
Revenue ..................... $48,848 $ -- $48,848
Operating expenses .......... 41,427 41,427
Depreciation &
amortization ............... 3,569 2,269 (b) 5,838
Corporate expenses .......... -- -- --
Non cash compensation
and other non cash
charges .................... 367 -- 367
------- ---------- -------
Operating income (loss) 3,485 (2,269) 1,216
Interest expense ............ 2,359 (2,359))(c) --
Equity (income) loss
from investment ............ -- -- --
Other (income)
expenses ................... -- -- --
------- ---------- -------
Income/(loss) before
income tax expense ......... 1,126 90 1,216
Income tax expense
(benefit) .................. 1,000 -- 1,000
------- ---------- -------
Net income .................. $ 126 $ 90 $ 216
Accretion on put
option ..................... (236) (236)
------- -------
Net loss applicable to
common shares .............. $ (110) $ (20)
======= =======
</TABLE>
PRO FORMA ADJUSTMENTS:
(a) Reflects the pro forma results of Marquee. See "Marquee Unaudited
Pro Forma Condensed Combined Financial Statements" beginning on Page
78.
(b) Reflects the increase of 2,269,000 in depreciation and amortization
resulting from the preliminary purchase accounting treatment of
Marquee. SFX amortizes goodwill over 15 years.
(c) Reflects the elimination of $2,359,000 of historical interest
expense.
C. PRO FORMA ADJUSTMENTS
To reflect the elimination of Cellar Door's equity income in certain PACE
businesses. Reflects the incremental amortization expense associated with
the fees and expenses incurred in connection with the merger and the Cellar
Door acquisition and SFX's incremental interest expense. Reflects no tax
benefit on pro forma adjustments given SFX's loss position.
IV. PROPOSED EQUITY OFFERING
Reflects a reduction in interest expense of $7,584,000 due to repayment of
outstanding borrowings under the revolving portion of the SFX credit facility
with the estimated net proceeds of the proposed equity offering.
77
<PAGE>
MARQUEE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Marquee Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 1997 gives effect to the following transactions
and adjustments as if they had occurred as of January 1, 1997:
the completion of Marquee's 1997 acquisitions:
o ProServ, Inc. and ProServ Television, Inc. (collectively, "Proserv");
and
o QBQ Entertainment, Inc ("QBQ");
the completion of Marquee's 1998 acquisitions:
o Alphabet City Industries, Inc. and Alphabet City Sports Records, Inc.
(collectively, "Alphabet City");
o Cambridge Holding Corporation;
o Park Associates Limited ("PAL");
o Tony Stephens Associates Limited; and
o Halcyon Days Production, Inc., Robbins Entertainment Group, Inc. and
Tollin Robbins Management, LLC (collectively "Tollin/Robbins"); and
the application of the net proceeds from the Marquee credit agreement with
BankBoston, N.A.
The following Marquee unaudited Pro Forma Condensed Combined Statement of
Operations for the nine months ended September 30, 1998 gives effect to the
following transactions and adjustments as if they had occurred on January 1,
1998: Marquee's 1998 acquisitions and the related impact of compensation
arrangements with the former officers/stockholders, and the Marquee credit
agreement.
The Marquee Unaudited Pro Forma Condensed Combined Financial Statements
are based upon, and should be read in conjunction with, the historical
financial statements of Marquee and certain of the businesses previously
acquired by Marquee and the related notes to such financial statements
contained elsewhere in this document. Marquee's 1997 acquisitions and Marquee's
1998 acquisitions have been reflected in the Marquee Unaudited Pro Forma
Condensed Combined Financial Statements using the purchase method of
accounting. In the opinion of Marquee's management, all adjustments necessary
to fairly present this pro forma information have been made. The pro forma
information 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 Marquee's future results. The unaudited pro forma statements
of operations data include adjustments to operating expenses to reflect
contractually required reductions in personnel, officers' salaries and employee
benefits.
The Marquee Unaudited Pro Forma Condensed Combined Financial Statements
and notes thereto contain forward-looking statements that involve risks and
uncertainties. The actual results of Marquee may differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, risks and uncertainties relating to the
revenues of the businesses owned and acquired, the integration of the
businesses acquired and management of growth and the ability of Marquee to
achieve strong savings. Marquee 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.
78
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARQUEE
MARQUEE 1997 PRO FORMA
AS REPORTED ACQUISITIONS(1) ADJUSTMENTS
------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues ..................... $ 21,268 $13,685 $ --
Operating expenses ........... 14,459 9,375 (680)(2)
General and
administrative expenses 6,316 3,678 (1,003)(2)
Loss on abandonment of
lease ....................... 466 -- --
Deferred compensation
and other non-cash
expenses .................... 145 110 (110)(2)
Depreciation &
amortization ................ 371 105 953 (3)
-------- ------- ----------
Income (loss) from
operations .................. (489) 417 840
Interest expense (income),
net ......................... 22 120 (120)(4)
Financing expense ............ 756 -- --
Income (loss) before
income taxes ................ (1,267) 297 960
Income taxes ................. 45 45 --
-------- ------- ----------
Net income (loss) ............ (1,312) 252 960
Accretion of obligation
related to the put option
issued in connection
with the ProServ
acquisition ................. 59 -- 242 (5)
-------- ------- ----------
Net income (loss)
applicable to common
stockholders ................ $ (1,371) $ 252 $ 718
======== ======= ==========
Net loss per share
applicable to common
stockholders -- basic ....... $ (0.15)
========
Weighted average common
stock outstanding ........... 9,377
========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM PREVIOUS PAGE)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
MARQUEE
1997
ACQUISITIONS,
MARQUEE
PRO FORMA 1998
FOR THE ACQUISITIONS
MARQUEE MARQUEE AND THE
1997 1998 PRO FORMA MARQUEE
ACQUISITIONS ACQUISITIONS(6) ADJUSTMENTS CREDIT AGREEMENT
-------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues ..................... $34,953 $18,371 $ -- $ 53,324
Operating expenses ........... 23,154 13,795 (2,566)(7) 34,383
General and
administrative expenses 8,991 3,179 (75) (7) 12,095
Loss on abandonment of
lease ....................... 466 -- -- 466
Deferred compensation
and other non-cash
expenses .................... 145 -- -- 145
Depreciation &
amortization ................ 1,429 132 3,000 (8) 4,561
------- ------- ---------- --------
Income (loss) from
operations .................. 768 1,265 (359) 1,674
Interest expense (income),
net ......................... 22 (32) 233 (9) 3,323
3,100 (10)
Financing expense ............ 756 -- -- 756
Income (loss) before
income taxes ................ (10) 1,297 (3,692) (2,405)
Income taxes ................. 90 287 (324)(11) 53
------- ------- ---------- --------
Net income (loss) ............ (100) 1,010 (3,368) (2,458)
Accretion of obligation
related to the put option
issued in connection
with the ProServ
acquisition ................. 301 -- -- 301
------- ------- ---------- --------
Net income (loss)
applicable to common
stockholders ................ $ (401) $ 1,010 $ (3,368) $ (2,759)
======= ======= ========== ========
Net loss per share
applicable to common
stockholders -- basic ....... $ (.03) $ (0.16)
======= ========
Weighted average common
stock outstanding ........... 16,559 17,108
======= ========
</TABLE>
79
<PAGE>
1997 PRO FORMA ADJUSTMENTS FOR STATEMENT OF OPERATIONS
(1) Marquee acquired ProServ and QBQ in October 1997 and included the results
of their operations only from the acquisition date in its consolidated
results of operations for the year ended December 31, 1997. Therefore, for
pro forma purposes, the results of operations of Marquee's 1997
acquisitions for the period prior to the acquisition date are presented
separately and are as follows:
<TABLE>
<CAPTION>
PROSERV QBQ COMBINED
----------- --------- ---------
<S> <C> <C> <C>
Revenues ................................................... $11,987 $1,698 $13,685
Operating expenses ......................................... 8,926 449 9,375
General and administrative expenses ........................ 3,240 438 3,678
------- ------ -------
(179) 811 632
Deferred compensation and other non-cash expenses .......... 110 -- 110
Depreciation and amortization .............................. 105 -- 105
------- ------ -------
Income (loss) from operations .............................. (394) 811 417
Interest expense (income), net ............................. 152 (32) 120
------- ------ -------
Income (loss) before income taxes .......................... (546) 843 297
Income taxes ............................................... 45 -- 45
------- ------ -------
Net income (loss) .......................................... $ (591) $ 843 $ 252
======= ====== =======
</TABLE>
(2) To reduce expenses to reflect contractually agreed to reductions in
personnel, officers' salaries, employee benefits and other costs in
connection with Marquee's 1997 acquisitions for the period prior to the
acquisitions.
(3) To reflect full year amortization of intangibles arising from Marquee's
1997 acquisitions.
(4) To reduce ProServ interest expense to reflect the reduction in debt as a
result of the acquisition.
(5) To reflect full year expense related to the accretion of the put option.
(6) The Marquee 1998 Acquisitions column includes the historical results of
operations for 1997 as follows:
<TABLE>
<CAPTION>
ALPHABET CITY CAMBRIDGE PAL TOLLIN/ROBBINS TONY STEPHENS COMBINED
--------------- ----------- ------------ ---------------- --------------- -----------
NOTE (A) NOTE (A)
<S> <C> <C> <C> <C> <C> <C>
Revenues ........................... $2,976 $1,319 $4,889 $5,073 $4,114 $18,371
Operating expenses ................. 2,216 768 3,775 3,648 3,388 13,795
General and administrative
expenses ......................... 653 571 813 846 296 3,179
------ ------ ------ ------ ------ -------
107 (20) 301 579 430 1,397
Depreciation and amortization ...... 4 9 23 75 21 132
------ ------ ------ ------ ------ -------
Income (loss) from operations ...... 103 (29) 278 504 409 1,265
Interest expense (income), net ..... -- (12) (8) -- (12) (32)
------ ------ -------- ------ ------ -------
Income (loss) before income
taxes ............................ 103 (17) 286 504 421 1,297
Income taxes ....................... 23 -- 74 80 110 287
------ ------ ------- ------ ------ -------
Net income (loss) .................. $ 80 $ (17) $ 212 $ 424 $ 311 $ 1,010
====== ====== ======= ====== ====== =======
</TABLE>
- ----------
Note (a)--Translated from British Pounds at the average exchange rate for the
year.
80
<PAGE>
(7) To adjust expenses to reflect compensation agreements entered into in
connection with Marquee's 1998 acquisitions.
(8) To record the amortization of the intangibles arising from Marquee's 1998
acquisitions over 10-15 years.
(9) To record imputed interest expense, at interest rates ranging from 8.4% to
10.5%, on the obligations to certain sellers in connection with
Marquee's 1998 acquisitions -- $800,000 of imputed interest to be
amortized over 4 to 5 years.
(10) To reflect interest expense, at interest rates ranging from 8.4% to 10.5%,
total borrowings of $33.1 million, including the amortization of deferred
financing costs -- approximately $750,000 amortized over 3 years --
associated with the Marquee credit agreement used to finance Marquee's
1998 acquisitions.
(11) To record the impact of Marquee's 1998 acquisitions pro forma adjustments,
net of the benefit of consolidated net operating loss carryforwards.
81
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
MARQUEE
1997
ACQUISITIONS,
MARQUEE
1998
ACQUISITIONS
MARQUEE AND THE
MARQUEE 1998 PRO FORMA MARQUEE
AS REPORTED ACQUISITIONS(1) ADJUSTMENTS CREDIT AGREEMENT
------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues .................................... $ 35,470 $13,378 $ -- $48,848
Operating expenses .......................... 23,726 8,544 (1,493)(2) 30,777
General and administrative expenses ......... 8,239 2,826 (251)(2) 10,650
(164)(3)
Deferred compensation and other
non-cash expenses .......................... 367 -- -- 367
Depreciation & amortization ................. 1,463 66 2,040 (4) 3,569
-------- ------- --------- -------
Income (loss) from operations ............... 1,675 1,942 (132) 3,485
Interest expense (income), net .............. 120 (17) 176 (5) 2,359
-- 2,080 (6)
------- ---------
Income (loss) before income taxes ........... 1,555 1,959 (2,388) 1,126
Income taxes ................................ 541 161 298 (7) 1,000
-------- ------- --------- -------
Net Income (loss) ........................... 1,014 1,798 (2,686) 126
Accretion of obligation related to the
put option issued in connection with
the ProServ acquisition .................... 236 -- -- 236
-------- ------- --------- -------
Net income (loss) applicable to common
stockholders ............................... $ 778 $ 1,798 $ (2,686) $ (110)
======== ======= ========= =======
Net income (loss) per share applicable
to common stockholders--basic and
dilutive ................................... $ 0.05 $ (0.01)
======== =======
Weighted average common stock
outstanding ................................ 16,801 17,124
======== =======
</TABLE>
82
<PAGE>
1998 PRO FORMA ADJUSTMENTS FOR STATEMENT OF OPERATIONS
(1) Marquee acquired Alphabet City, Cambridge, PAL, Tollin/Robbins, and Tony
Stephens during 1998 and included the results of their operations only
from the acquisition date in its consolidated results of operations for
the nine months ended September 30, 1998. Therefore, for pro forma
purposes, the results of operations of Marquee's 1998 acquisitions for
the period prior to the acquisition date are presented separately and are
as follows:
<TABLE>
<CAPTION>
ALPHABET TOLLIN/ TONY
CITY CAMBRIDGE PAL ROBBINS STEPHENS COMBINED
---------- ----------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues ........................... $1,476 $691 $2,576 $5,509 $3,126 $13,378
Operating expenses ................. 1,186 303 1,966 2,424 2,665 8,544
General and administrative
expenses .......................... 346 156 906 1,259 159 2,826
------ ---- ------ ------ ------ -------
(56) 232 (296) 1,826 302 2,008
Depreciation and amortization ...... 4 2 -- 50 10 66
------ ---- ------ ------ ------ -------
Income (loss) from operations ...... (60) 230 (296) 1,776 292 1,942
Interest expense (income), net ..... (1) (8) (8) (17)
------ -------- -------- -------
Income (loss) before income
taxes ............................. (60) 231 (288) 1,776 300 1,959
Income taxes ....................... 20 85 (30) 86 161
------ ----- ------- ------- -------
Net income (loss) .................. $ (80) $146 $(258) $1,776 $ 214 $ 1,798
====== ===== ======= ====== ======= =======
</TABLE>
- ----------
(2) To adjust expenses to reflect compensation agreements entered into in
connection with Marquee's 1998 acquisitions.
(3) To reduce expenses for loss on transfer of property to former owners of
PAL and other nonrecurring costs.
(4) To record the amortization of the excess of the purchase price over the
net assets acquired associated with Marquee's 1998 acquisitions over
10-15 years.
(5) To record imputed interest expense, at interest rates ranging from 8.4%
to 10.5%, on the obligations to certain sellers in connection with
Marquee's 1998 acquisitions -- $800,000 of imputed interest to be
amortized over 4 to 5 years.
(6) To reflect interest expense at interest rate ranging from 8.4% to 10.5%,
total borrowings of $33.1 million, including the amortization of deferred
financing costs -- approximately $750,000 amortized over 3 years --
associated with the Marquee credit agreement used to finance Marquee's
1998 acquisitions.
(7) To record the impact of Marquee's 1998 acquisitions Pro Forma
Adjustments, net of the benefit of consolidated net operating loss
carryforwards.
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SFX 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 should be read in conjunction with the consolidated financial
statements and related notes thereto included in this proxy
statement--prospectus. The following discussion contains certain
forward-looking statements that involve risks and uncertainties. SFX's actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to the differences are discussed in "Risk Factors" and
elsewhere in this proxy statement-- prospectus. SFX 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.
SFX'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 and in third-party venues. In connection with all
of its live entertainment events, SFX seeks to maximize related revenue
streams, including the sale of corporate sponsorships, the sale of concessions
and the merchandising of a broad range of products. On a pro forma basis for
SFX's 1998 acquisitions, the merger and the Cellar Door acquisition, SFX's
music businesses, including venue operations, comprised approximately 61% of
net revenues, theatrical comprised approximately 21% of net revenues, sports,
including representation of professional athletes and specialized motor sports,
comprised approximately 10% of net revenues and other operations comprised
approximately 8% of SFX's net revenues for the nine months ended September 30,
1998.
Promotion of events involves booking talent, renting or providing the
event venue, marketing the event to attract ticket buyers and providing for
local services required in the production of the event, such as security and
stage hands. Promoters generally receive revenues from the sale of tickets and
sponsorships. When an event is promoted at a venue owned or managed by the
promoter, the promoter also generally receives a percentage of revenues from
concessions, merchandising, parking, premium box seats and ticket rebates. SFX
earns promotion revenues principally by promoting music concerts, touring
Broadway-style shows and 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 intellectual property and other rights related to the
production. SFX earns revenues by producing:
o touring Broadway shows;
o specialized motor sports events; and
o other proprietary and non-proprietary entertainment events.
THE SPIN-OFF
On April 27, 1998, SFX Broadcasting, Inc. ("Broadcasting"), a company
primarily engaged in the radio broadcasting business, spun off SFX, one of its
subsidiaries. In connection with the spin-off, SFX and Broadcasting entered
into a distribution agreement, a tax sharing agreement and an employee benefits
agreement, each of which provides for certain indemnification obligations by
SFX. See "--Liquidity and Capital Resources-- Spin-Off."
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FINANCINGS
NEW NOTE OFFERING
On November 25, 1998, SFX completed an offering of $200.0 million in
principal amount of 91/8% Senior Subordinated Notes due December 1, 2008.
Interest is payable on the new notes on June 1 and December 1 of each year. SFX
used the proceeds from the new note offering to repay substantially all
outstanding borrowings under the revolving portion of SFX's credit facility.
SFX anticipates using its additional borrowing availability under the credit
facility to pay the cash portion of the purchase price for the Cellar Door
acquisition, to repay Marquee's debt upon consummation of the merger, to pay
fees and expenses related to the merger and the Cellar Door acquisition and for
other general corporate purposes, including potential future acquisitons. SFX
is obligated to offer to exchange substantially identical publicly registered
notes for all outstanding new notes.
OLD NOTE OFFERING
On February 11, 1998, SFX completed an offering of $350.0 million in
principal amount of 91/8% Senior Subordinated Notes due February 1, 2008.
Interest is payable on the old notes on February 1 and August 1 of each year.
SFX used the proceeds from the old note offering and the initial borrowings
under SFX's credit facility to consummate certain of SFX's 1998 acquisitions.
On July 15, 1998, SFX consummated the exchange of substantially identical
publicly registered notes for all outstanding old notes. All original old notes
were tendered for exchange and were canceled upon the issuance of the same
principal amount of exchange notes.
SENIOR CREDIT FACILITY
On February 26, 1998, SFX executed a Credit and Guarantee Agreement which
established a $300.0 million senior secured credit facility comprised of a
$150.0 million eight-year term loan and a $150.0 million seven-year reducing
revolving credit facility. On September 10, 1998, SFX entered into an agreement
with The Bank of New York to increase the revolving portion of the SFX credit
facility for a total borrowing availability of $350.0 million under its credit
facility. SFX was required to obtain the consent of the lenders under the SFX
credit facility to consummate the new note offering. In connection with such
consent, the applicable margins under the SFX credit facility were amended. See
"--Sources of Liquidity."
In addition, SFX is in discussions with its lenders to amend the SFX
credit facility to increase borrowing availability thereunder to $550.0 million
and amend certain covenants. The new facility is subject to the execution of a
definitive agreement, which SFX expects to enter into by the end of first
quarter of 1999.
EQUITY OFFERING
On May 27, 1998, SFX consummated an offering of 8,050,000 shares of its
Class A common stock at an offering price of $43.25 per share (the "SFX Equity
Offering") and received net proceeds of approximately $329.0 million. SFX used
the proceeds to consummate certain of SFX's 1998 acquisitions, to fund $97.3
million of tax indemnity payments and to pay fees and other expenses. See
"--Liquidity and Capital Resources."
PROPOSED EQUITY OFFERING
SFX contemplates issuing approximately 4,000,000 shares of SFX Class A
common stock in the proposed equity offering. See "--Liquidity and Capital
Resources--Sources of Liquidity."
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1997 ACQUISITIONS
SFX entered the live entertainment business in January 1997 with SFX
Broadcasting's acquisition of Delsener/Slater, a New York-based concert
promotion company, for an aggregate consideration of $26.8 million. In March
1997, Delsener/Slater acquired, for aggregate consideration of $23.8 million,
companies which hold a 37-year lease to operate the Meadows. In June 1997,
Broadcasting acquired Sunshine Promotions, a concert promoter in the Midwest,
for an aggregate cash consideration of $57.5 million and $4.0 million shares of
Broadcasting stock. As a result of the acquisition of Sunshine Promotions, SFX
owns the Deer Creek Music Theater and the Polaris Amphitheater, and has a
long-term lease to operate the Murat Centre. See "SFX's Business--1997
Acquisitions."
The cash portion of the purchase price for SFX's 1997 acquisitions was
financed through capital contributions from Broadcasting.
1998 ACQUISITIONS
ACQUISITION OF WESTBURY
On January 8, 1998, SFX acquired a long-term lease for Westbury Music
Fair, located in Westbury, New York, for an aggregate consideration of
approximately $3.0 million and 75,019 shares of SFX Class A common stock having
a negotiated value of approximately $1.0 million, which are subject to certain
put and call rights. During the period between the closing and January 8, 2000,
SFX has the right to repurchase all of such shares for an aggregate
consideration of $2.0 million, and the seller has the right to require SFX to
purchase all of such shares for an aggregate consideration of $750,000. SFX
financed the purchase price with its cash on hand.
ACQUISITION OF PACE AND PAVILION PARTNERS
On February 25, 1998, SFX acquired all of the outstanding capital stock of
PACE. In connection with the PACE acquisition, SFX acquired 100% of Pavilion, a
partnership that owns interests in ten venues, by acquiring one-third of
Pavilion through the acquisition of PACE and acquiring two-thirds of Pavilion
through separate agreements between SFX and Pavilion, PACE and Blockbuster and
PACE and Sony. The total consideration for the PACE acquisition was
approximately $109.5 million in cash, the repayment of approximately $20.6
million of debt and the issuance of 1.5 million shares of SFX Class A common
stock having a negotiated value of approximately $20.0 million. The total
consideration for the Pavilion acquisition was approximately $90.6 million,
comprised of $41.4 million in cash, the repayment of $43.1 million of debt and
the assumption of approximately $6.1 million of debt related to a capital
lease. See "--Liquidity and Capital Resources--Future Contingent Payments." SFX
financed the purchase price with borrowings under its credit facility and with
a portion of the proceeds of the old note offering.
ACQUISITION OF CONTEMPORARY
On February 27, 1998, SFX acquired Contemporary. The Contemporary
acquisition involved the merger of Contemporary International Productions
Corporation with and into SFX, the acquisition by a wholly-owned subsidiary of
SFX of substantially all of the assets, excluding certain cash and receivables,
of the remaining members of Contemporary and the acquisition of the 50%
interest in the Riverport Amphitheatre Joint Venture not owned by Contemporary.
The total consideration for the Contemporary acquisition was approximately
$101.4 million, including $72.8 million in cash, a payment for working capital
of $9.9 million, and the issuance of 1,402,850 shares of SFX Class A common
stock having a negotiated value of approximately $18.7 million. See
"--Liquidity and Capital Resources--Future Contingent Payments." In May 1998,
SFX and the Contemporary sellers agreed to place
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140,000 of the shares issued in connection with the Contemporary acquisition
into an escrow account. SFX may, at any time before May 18, 1999, cancel the
escrowed shares in full settlement of certain claims which SFX has made against
the Contemporary sellers. SFX financed the purchase price with borrowings under
the SFX credit facility and with a portion of the proceeds of the old note
offering.
ACQUISITION OF BGP
On February 24, 1998, SFX acquired all of the outstanding capital stock of
BGP for a total consideration of $60.8 million in cash, $12.0 million in
repayment of debt, which amount was at least equal to BGP's working capital,
and 562,640 shares of SFX Class A common stock having a negotiated value of
approximately $7.5 million. SFX financed the purchase price with borrowings
under the SFX credit facility and with a portion of the proceeds of the old
note offering.
ACQUISITION OF NETWORK
On February 27, 1998, SFX acquired Network. In the Network acquisition,
SFX acquired all of the outstanding capital stock of each of The Album Network,
Inc. and SJS Entertainment Corporation and purchased substantially all of the
assets and properties and assumed substantially all of the liabilities and
obligations of The Network 40, Inc. The total purchase price paid was
approximately $66.8 million, including approximately $52.0 million in cash, a
payment for working capital of $1.8 million, reimbursed seller's costs of
$500,000, the purchase of an office building and related property for
approximately $2.5 million and the issuance of approximately 750,000 shares of
SFX Class A common stock having a negotiated value of approximately $10.0
million. The purchase price is subject to an increase based on Network's actual
1998 EBITDA, as defined in the acquisition agreement. The increase will be $4.0
million if such EBITDA equals or exceeds $9.0 million, and may be as much as
$14.0 million if such EBITDA is greater than $11.0 million. Any increase will
be payable in SFX Class A common stock, or in certain circumstances in cash, by
no later than March 20, 1999. See "--Liquidity and Capital Resources--Future
Contingent Payments." The $2.5 million purchase of the office building and
related property used in connection with Network's business was comprised of
cash of $700,000 and the assumption of debt of $1.8 million. SFX financed the
purchase price with borrowings under the SFX credit facility and with a portion
of the proceeds of the old note offering. In connection with the Network
acquisition, the selling stockholders were reimbursed for working capital in
excess of $500,000.
ACQUISITION OF CONCERT/SOUTHERN
On March 4, 1998, SFX acquired Concert/Southern for a total cash
consideration of $16.9 million. This amount includes payments of $1.6 million,
representing the present value of a deferred purchase obligation, and $300,000
for the working capital adjustment. SFX financed the purchase price with
borrowings under the SFX credit facility and with a portion of the proceeds of
the old note offering.
ACQUISITION OF USA MOTOR SPORTS
On March 25, 1998, PACE acquired a 67% interest in certain assets and
liabilities of USA Motor Sports for an aggregate cash consideration of
approximately $4.0 million. Contemporary held the remaining 33% interest.
ACQUISITION OF AVALON
On May 14, 1998, SFX acquired all the outstanding equity interests in
Avalon for a total cash purchase price of $26.8 million. SFX financed the
purchase price with borrowings under the SFX credit facility, which it
subsequently repaid with a portion of the proceeds from the SFX Equity
Offering.
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ACQUISITION OF OAKDALE
On June 3, 1998, SFX acquired certain assets of Oakdale for a purchase
price of $9.4 million in cash and the assumption of $2.5 million of
liabilities. At the closing, SFX also made a non-recourse loan to the Oakdale
sellers in the amount of $11.4 million, a portion of which was used to repay
outstanding indebtedness. In addition, SFX may be required to make an
additional payment to the Oakdale sellers based on the Oakdale and Meadows
combined EBITDA, as defined in the acquisition agreement. If this EBITDA
exceeds $5.5 million in 1999, SFX will be obligated to pay the amount of such
excess multiplied by a factor of between 5.0 and 5.8. SFX financed the purchase
price with a portion of the proceeds from the SFX Equity Offering.
ACQUISITION OF FAME
On June 4, 1998, SFX acquired all of the outstanding capital stock of
FAME. The aggregate purchase price for FAME was approximately $82.2 million in
cash and 1.0 million shares of SFX Class A common stock having a negotiated
value of approximately $35.9 million. The cash portion of the purchase price
includes $7.9 million which SFX paid in connection with certain taxes to which
FAME will be subject and excluding approximately $4.7 million of taxes paid
which will be refunded to SFX in 1999. Under the FAME acquisition agreement,
SFX is obligated to pay to the FAME sellers additional amounts up to an
aggregate of $15.0 million in equal annual installments over 5 years contingent
on the achievement of certain EBITDA targets as described in the acquisition
agreement . See "--Liquidity and Capital Resources--Future Contingent
Payments." The agreement also provides for additional payments by SFX if FAME's
EBITDA performance exceeds the targets by certain amounts. The additional
payments are to be made within 120 days after the end of the year to which they
relate. SFX financed the purchase price with a portion of the proceeds from the
SFX Equity Offering.
ACQUISITION OF DON LAW
On July 2, 1998, SFX acquired certain assets of Don Law, for an aggregate
cash consideration of approximately $92.2 million, including the repayment of
approximately $7.0 million in debt. SFX financed the purchase price with a
portion of the proceeds of the SFX Equity Offering.
ACQUISITION OF MAGICWORKS
On September 11, 1998, SFX purchased all of the outstanding shares of
common stock of Magicworks, a publicly traded company, for a total
consideration of approximately $115.7 million in cash. SFX consummated the
acquisition by means of a tender offer, in which it purchased approximately
98.7% of the Magicworks shares, followed by a merger in which the remaining
shares were converted into cash consideration. SFX financed the acquisition
with available cash and borrowings under the SFX credit facility.
OTHER ACQUISITIONS
In the third quarter of 1998, SFX completed the acquisition of seven
companies in the theatrical and music segments. The seven acquisitions included
two concert promotion companies, two theatrical presenters, a theatrical
presenter and venue owner/operator, a concert merchandising company and an
equity owner of an SFX amphitheater. The aggregate purchase price for these
acquisitions was $107.2 million in cash, $8.2 million in deferred purchase
consideration and 300,000 shares of SFX Class A common stock having a
negotiated value of approximately $10.0 million, which are subject to piggyback
and demand registration rights. SFX may also be required to make additional
payments to the sellers of
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certain of the acquired companies based on the companies' EBITDA for the years
1998 through 2000 as described in the respective acquisition agreements. SFX
financed the purchase prices with available cash and a portion of the proceeds
of the SFX Equity Offering.
The foregoing descriptions do not purport to be complete descriptions of
the terms of the acquisition agreements and are qualified by reference to the
acquisition agreements. Copies of certain of these acquisition agreements are
exhibits to the registration statement and are incorporated herein by
reference. See "Where You Can Find More Information." Pursuant to the
acquisition agreements and the related agreements, SFX:
o under certain circumstances, may be required to repurchase shares of its
Class A common stock or make additional payments in connection therewith
(See "--Liquidity and Capital Resources--Future Contingent Payments");
o has granted certain rights of first refusal, certain of which are
exercisable at 95% of the proposed purchase price; and
o in connection with the PACE acquisition, has granted Brian Becker, an
Executive Vice President, a Member of the Office of the Chairman and a
director of SFX, the option to acquire, after February 25, 2000, SFX's then
existing motor sports line of business -- or, if that business has
previously been sold, SFX's then existing theatrical line of business -- at
its then fair market value.
See "Risk Factors--SFX may be forced to sell some of its subsidiaries which may
prevent SFX from realizing the full value of these subsidiaries" and "SFX
Management-- Employment Agreements and Arrangements with Certain Officers and
Directors--Becker Employment Agreement."
SFX's 1998 acquisitions were accounted for using the purchase method of
accounting, and the intangible assets created in the purchase transactions will
generally be amortized against future earnings, if any, over a 15-year period.
The amount of amortization will be substantial and will continue to affect
SFX's operating results in the future. These expenses, however, do not result
in an outflow of cash by SFX and do not impact EBITDA.
The consummation of the acquisitions by SFX and other future acquisitions
will result in substantial charges to earnings relating to interest expense and
the recognition and amortization of goodwill and other intangible assets. As of
September 30, 1998, SFX's goodwill was approximately $905.0 million. This
balance will substantially increase due to the Cellar Door acquisition and the
merger. Goodwill and other intangible assets are being amortized using the
straight-line method over periods up to 15 years.
RECENT ACQUISITION
On January 11, 1999, SFX completed the acquisition of a company in the
concert promotion and production industry, for a total consideration of $39.0
million. This amount includes $6.5 million in deferred purchase consideration
based on foreign tax credits SFX may become entitled to before January 2004 and
$4.0 million in deferred purchase consideration based on the seller's EBITDA,
as defined in the acquisition agreement. SFX financed the acquisition with
borrowings under the SFX credit facility.
MARQUEE MERGER
On July 23, 1998, SFX and Marquee entered into the merger agreement, which
was subsequently amended, whereby Marquee will become a wholly owned subsidiary
of SFX. See "The Merger."
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CELLAR DOOR ACQUISITION
In January, 1999, SFX and the owners of Cellar Door entered into a
definitive agreement for SFX's acquisition of all of the outstanding capital
stock of Cellar Door. The definitive agreement provides that the aggregate
purchase price will be:
o $70.0 million in cash payable at closing, less an amount equal to Cellar
Door's "secured fund" indebtedness and capitalized leases;
o shares of SFX's Class A common stock with a value of $20.0 million, up to
$15.0 million of which SFX may elect to pay in cash; and
o $8.5 million payable in five equal annual installments beginning on the
first anniversary of the closing date. In addition, SFX will issue to the
seller options to purchase 100,000 shares of SFX's Class A common stock.
See "Agreement Related to the Cellar Door Acquisition."
SFX expects to complete the Cellar Door acquisition by January 31, 1999,
subject to satisfaction of customary closing conditions. The applicable waiting
period under the HSR Act for the Cellar Door acquisition has expired. However,
the timing and completion of the Cellar Door acquisition are subject to a
number of other conditions, certain of which are beyond SFX's control. There
can be no assurance that the Cellar Door acquisition will be consummated during
such period, on the terms described herein, or at all.
The Cellar Door acquisition will be accounted for using the purchase
method of accounting and intangible assets created in the purchase transaction
will generally be amortized against future earnings over a fifteen-year period.
The amount of such amortization will be substantial and will continue to affect
SFX's operating results in the future. These expenses, however, do not result
in an outflow of cash by SFX and do not impact EBITDA.
The consummation of the acquisitions by SFX and other future acquisitions
will result in substantial charges to earnings relating to interest expense and
the recognition and amortization of goodwill and other intangible assets. As of
September 30, 1998, SFX's goodwill and other intangibles were approximately
$905.0 million. This balance will increase due to the merger and the Cellar
Door acquisition. Goodwill and other intangibles are being amortized using the
straight-line method over 2-15 years.
SFX is also currently pursuing certain additional acquisitions; however,
it has not entered into any definitive agreements with respect to such
acquisitions, and there can be no assurance that it will do so. See "Risk
Factors--If SFX is unable to complete other acquisitions in the future, SFX's
business and stock price may suffer."
ISI ACQUISITION
In January, 1999, SFX entered into a definitive agreement to acquire
Integrated Sports International for an aggregate purchase price of $13.5
million in cash and 60,000 shares of SFX Class A common stock. In addition,
during the five year period following the closing of the acquisition, SFX may
be required to make additional payments of up to $7.5 million in cash and
50,000 shares of SFX Class A common stock, based on the achievement by
Integrated Sports of certain target levels of EBITDA, as defined in the
acquisition agreement, during such period. SFX expects to complete the
Integrated Sports acquisition during the first quarter of 1999. SFX would be
required to pay liquidated damages of $2.0 million to Integrated Sports in the
event it is not able to close the acquisition on or prior to April 15, 1999.
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AGREEMENT WITH TICKETMASTER
On November 16, 1998, SFX and Ticketmaster entered into a binding letter
of intent pursuant to which SFX granted Ticketmaster the exclusive right to
sell and distribute tickets for SFX's events worldwide.
PROPOSED STOCK OPTION PLAN
Following a recommendation of the SFX's compensation committee, SFX has,
subject to stockholder approval, adopted a new incentive stock option plan
covering options to acquire up to three million shares of SFX Class A common
stock and granted the options available thereunder to certain officers and
employees of SFX. SFX anticipates that the proposed stock option plan will be
submitted to a vote of the stockholders at SFX's first annual meeting scheduled
to be held in the spring of 1999.
RESULTS OF OPERATIONS
The operating performance of entertainment companies, such as SFX, is
measured, in part, by their ability to generate EBITDA. Further, we use EBITDA
as our primary indicator of our operating performance, and secondarily as a
measure of liquidity. "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, we believe that the entertainment industry accepts EBITDA
as a generally recognized measure of performance and analysts who report
publicly on the performance of entertainment companies use EBITDA.
Nevertheless, you should not consider this measure in isolation or as a
substitute for operating income, net income, net cash provided by operating
activities or any other measure for determining our operating performance or
liquidity that is calculated in accordance with GAAP. EBITDA, as we calculate
it, may not be comparable to calculations of similarly titled measures
presented by other companies.
SFX's operations consist primarily of:
o concert promotion and venue operation;
o the promotion and production of theatrical events, particularly touring
Broadway shows;
o the promotion and production of motor sports events; and
o representation of professional athletes.
SFX also engages in various other activities ancillary to its live
entertainment businesses.
CONCERT PROMOTION/VENUE OPERATION
SFX'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's primary source of revenues from its
concert promotion activities is from ticket sales at events promoted by SFX. As
a venue operator, SFX's primary sources of revenue are sponsorships,
concessions, parking and other ancillary services, derived principally from
events promoted by SFX.
Revenue from ticket sales is affected primarily by the number of events
SFX promotes, the average ticket price and the number of tickets sold. The
average ticket price depends on the popularity of the artist whom SFX 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
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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
assumes the risk of ticket sales, although profits per event would tend to be
lower. Operating margins can vary from period to period.
SFX'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
SFX's theatrical operations are directed mainly towards the promotion and
production of touring Broadway shows, which generate revenues primarily from
ticket sales and sponsorships. SFX 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. To reduce its dependency on the success of any single
touring production, SFX sells advance annual subscriptions that provide the
purchaser with tickets for all of the shows that SFX intends to tour in the
particular market during the touring season. Historically, approximately 28% of
ticket sales for touring Broadway shows presented by SFX were sold through
advance annual subscriptions. Subscription related revenues received before the
event date are initially recorded on the balance sheet as deferred revenue;
after the event occurs, they are recorded on the statement of operations as
gross revenue. Expenses are capitalized on the balance sheet as prepaid
expenses until the event occurs. Subscriptions for touring Broadway shows
typically cover approximately two-thirds of SFX'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.
SFX 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 generally accounted for
using either the equity method or the cost method of accounting, based on the
relative size of the investment. SFX monitors the recoverability of these
investments on a regular basis, and SFX may be required to take write-offs if
the original production closes or if SFX determines that the production will
not recoup the investment. The timing of any write-off could adversely affect
operating results in a particular quarter.
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MOTOR SPORTS
SFX's motor sports activities consist principally of the promotion and
production of specialized motor sports, which generate revenues primarily from
ticket sales and sponsorships, as well as merchandising and video rights
associated with producing motor sports events. Ticket prices for these events
are generally lower than for theatrical or music concert events, generally
ranging from $5 to $30. Revenue from these sources is primarily affected by the
type of event and the general economic conditions and consumer tastes in the
particular markets and venues where the events are presented. Event-related
revenues received before the event date are initially recorded on the balance
sheet as deferred revenue. After the event occurs, they are recorded on the
statement of operations as gross revenue. Expenses are deferred on the balance
sheet as prepaid expenses until the event occurs.
Operating expenses associated with motor sports activities include talent,
rent, track preparation costs, security and advertising. These operating
expenses are generally fixed costs that vary based on the type of event and
venue where the event is held.
Under certain circumstances, SFX may be required to sell either its motor
sports or theatrical lines of business. See "Risk Factors--SFX may be forced to
sell some of its subsidiaries which may prevent SFX from realizing the full
value of these subsidiaries."
REPRESENTATION OF PROFESSIONAL ATHLETES
Through FAME, SFX's talent representation activities consist principally
of the representation of team sports athletes, primarily in the NBA, in player
contract and endorsement negotiations. FAME also provides certain investment
advisory services to its clients through an affiliate. FAME typically receives
a percentage of monies earned by a player, generally approximately 4% of a
player's sports contract and typically from 15% to 25% of endorsement deals.
Revenue from these sources is recognized as the player receives his salary or
endorsement payments based on the terms of the negotiated agreement. Revenue
from these sources is dependent upon a number of variables, many of which are
outside SFX's control, including a player's skill, health, public appeal and
the appeal of the sport in which the player participates. Principal operating
expenses include salaries, wages and travel and entertainment expenses.
On a pro forma basis for SFX's 1998 acquisitions, FAME's revenues would
have comprised approximately 1.0% of SFX's revenues for the nine months ended
September 30, 1998. The owners of the teams in the NBA had locked out their
players from participation in league activities and suspended the 1998-99
basketball season indefinitely, causing cancellation of some of the games for
the 1998-99 basketball season. The suspension of the NBA season ended on
January 6, 1999, and the NBA season is scheduled to begin February 5, 1999 with
a reduced game schedule. The cancellation of over 30 games for the upcoming NBA
season will have a negative impact on FAME's revenues and EBITDA.
OTHER BUSINESSES
SFX's other principal businesses include the production and distribution
of radio industry trade magazines, the production of radio programming content
and show-prep material and the provision of radio air play and music retail
research services. The primary sources of revenues from these activities
include the sale of advertising space in its publications and the sale of
advertising time on radio stations that carry its syndicated shows,
subscription fees for its trade publications and subscription fees for access
to its database of radio play lists and audience data. Revenues generally vary
based on the overall advertising environment and competition.
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SFX also provides marketing and consulting services pursuant to contracts
with individual clients for specific projects. Revenues from and costs related
to these services vary based on the type of service being provided and the
incremental associated costs.
SEASONALITY
SFX's operations and revenues have been largely seasonal in nature, with
generally higher revenue generated in the second and third quarters of the
year. For example, on a pro forma basis for SFX's 1997 and 1998 acquisitions,
SFX generated approximately 63% of its revenues in the second and third
quarters for the twelve months ended September 30, 1998. SFX's outdoor venues
are primarily used in the summer months and do not generate substantial revenue
in the late fall, winter and early spring. Similarly, the musical concerts that
SFX promotes largely occur in the second and third quarters. SFX's
entertainment marketing and consulting in connection with musical concerts also
predominantly generate revenues in the second and third quarters. Therefore,
the seasonality of SFX's business causes -- and will probably continue to cause
- -- a significant variation in SFX's quarterly operating results. These
variations in demand could have a material adverse effect on the timing of
SFX's cash flows and, therefore, on its ability to service its obligations with
respect to its indebtedness. However, SFX believes that this variation may be
somewhat offset with the acquisition of typically non-summer seasonal
businesses in the SFX's 1998 acquisitions, such as motor sports, which is
winter-seasonal, and touring Broadway shows, which typically tour between
September and May.
HISTORICAL RESULTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
SFX's revenue increased by $606.0 million to $680.4 million for the nine
months ended September 30, 1998, compared to $74.4 million for the nine months
ended September 30, 1997, primarily as a result of $578.5 million attributable
to SFX's 1998 acquisitions and $12.4 million attributable to the acquisitions
of the Meadows in March 1997 and Sunshine Promotions in June 1997. SFX's 1998
acquisitions significantly increased the concert promotion and venues operation
business and expanded SFX's business to include theatrical promotion and
production, motor sports promotion and production, representation of
professional athletes and radio magazine publishing, programming and research.
Cost of revenue increased by $539.5 million to $602.5 million for the nine
month period ended September 30, 1998, compared to $63.0 million for the nine
months ended September 30, 1997, primarily as a result of $513.5 million
attributable to SFX's 1998 acquisitions and $12.6 million attributable to the
acquisition of Sunshine Promotions in June 1997.
Depreciation and amortization expense increased to $40.3 million for the
nine month period ended September 30, 1998 compared to $4.0 million for the
nine month period ended September 30, 1997, due to the inclusion of $31.1
million of depreciation and amortization expense related to SFX's 1998
acquisitions and the acquisition of Sunshine Promotions in June 1997 and $1.2
million related to the completion of capacity expansion projects at two
amphitheaters. In addition, SFX recorded a $2.7 million write down of deferred
expense relating to the Triathlon Broadcasting Company agreement and recorded
$1.3 million of integration costs for the nine month period ended September 30,
1998. SFX recorded the fixed assets of the SFX's 1998 acquisitions and the
Sunshine Promotions acquisition at fair value and recorded intangible assets
equal to the excess of purchase price over the fair value of the net tangible
assets, which are being amortized over a 2-15 year period.
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Corporate expenses were $5.8 million for the nine month period ended
September 30, 1998, net of $398,000 in fees earned from Triathlon, compared to
$1.3 million for the nine months ended September 30, 1997, net of Triathlon
fees of $1.7 million. The increase in corporate expense reflects the growth of
SFX's operations and the formation of SFX Live, the national marketing division
of the Company. The fees earned from Triathlon are based on consulting services
provided by or on behalf of SCMC, 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. These fees fluctuate above the minimum annual fee of $500,000 based
on the level of acquisition and financing activities of Triathlon. SCMC
previously assigned its rights to receive fees payable from Triathlon to
Broadcasting, and Broadcasting assigned its rights to receive the fees to SFX,
pursuant to the distribution agreement. Triathlon has announced that it has
agreed to be acquired by a third party. When Triathlon is acquired, it will
cease paying consulting fees. See "Certain Relationships and Related
Transactions of SFX--Triathlon Fees."
Non-cash compensation and other non-cash charges recorded in the second
and third quarter of 1998 of $32.9 million consisted of:
o $23.9 million of compensation related to sale of 650,000 shares of SFX Class
B common stock and 190,000 shares of SFX Class A common stock at a purchase
price of $2.00 per share to certain executive officers pursuant to
employment agreements;
o $7.5 million associated with the issuance of 247,177 shares of SFX Class A
common stock to Mr. Sillerman in connection with the repurchase (the
"Meadows Repurchase") of shares of Broadcasting issued to the sellers of
Meadows; and
o $1.5 million related to the issuance of stock options to certain executive
officers pursuant to employment agreements exercisable for an aggregate of
352,500 shares of SFX Class A common stock.
Of these options, 345,000 vest over three years and have an exercise price
of $5.50 per share. SFX is recording non-cash compensation charges of
approximately $3.3 million annually over the three-year exercise period. See
"SFX Management--Executive Compensation" and "Certain Relationships and Related
Transactions of SFX--Meadows Repurchase."
The operating loss was $1.3 million for the nine month period ended
September 30, 1998, compared to income of $6.0 million for the nine months
ended September 30, 1997, due to the results discussed above.
Interest expense, net of investment income, was $28.2 million in the nine
months ended September 30, 1998, compared to $743,000 for the nine months ended
September 30, 1997, primarily as a result of $724.5 million attributable to the
incurrence of additional debt related to SFX's 1998 acquisitions and $15.7
million attributable to the debt assumed in connection with the Meadows and
Sunshine Promotions acquisitions.
Minority interest was $1.3 million for the nine months ended September 30,
1998, compared to no minority interest for the nine months ended September 30,
1997, as a result of SFX's 1998 acquisitions.
Income from equity investments was $4.0 million for the nine months ended
September 30, 1998, compared to income of $1.3 million for the nine months
ended September 30, 1997, as a result of SFX's 1998 acquisitions.
Income tax expense was $3.3 million for the nine month period ended
September 30, 1998. The provision is primarily for state and local taxes and
reflects the impact of
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non-deductible goodwill amortization and other non-cash compensation and other
non-cash charges. No federal tax benefit has been recognized due to the
uncertainty of realizing a tax benefit for SFX's losses.
SFX's net loss increased to $30.2 million for the nine month period ended
September 30, 1998, as compared to net income of $6.3 million for the nine
months ended September 30, 1997, due to the factors discussed above.
EBITDA, excluding non-cash compensation and other non-cash charges of
$32.9 million, increased to $72.0 million for the nine month period ended
September 30, 1998, compared to $10.0 million for the nine months ended
September 30, 1997, primarily as a result of $65.1 million attributable to
SFX's 1998 acquisitions and a deficit of $202,000 attributable to the
acquisition of Sunshine Promotions in June 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
SFX's concert promotion revenue increased by 91% to $96.1 million for the
year ended December 31, 1997, compared to $50.4 million for the year ended
December 31, 1996, as a result of the acquisitions of Sunshine Promotions and
Meadows, which increased concert promotion revenue by $45.5 million.
Concert promotion operating expenses increased by 65% to $83.4 million for
the year ended December 31, 1997, compared to $50.7 million for the year ended
December 31, 1996, primarily as a result of the acquisitions of Sunshine
Promotions and Meadows, which increased concert operating expenses revenue by
$37.1 million, which was offset in part by $4.4 million in decreased officer
salary expense paid to the former owners of Delsener/Slater.
Depreciation and amortization expense increased to $5.4 million for the
year ended December 31, 1997, compared to $747,000 for the year ended December
31, 1996, due to the inclusion of $2.6 million of depreciation and amortization
expense related to the acquisitions of Sunshine Promotions and Meadows and $1.4
million in depreciation and amortization recorded in 1997 related to the
purchase of Delsener/Slater on January 2, 1997 and $657,000 of depreciation and
amortization relating to the corporate office. In 1997, SFX recorded the fixed
assets of Delsener/Slater at fair value and recorded an intangible asset equal
to the excess of purchase price over the fair value of net tangible assets of
Delsener/Slater, which was amortized over a 15-year period.
Corporate expenses were $2.2 million for the year ended December 31, 1997,
net of $1.8 million in fees received from Triathlon, compared to no corporate
expenses for the year ended December 31, 1996. These expenses represent the
incremental costs of operating SFX's corporate offices, and therefore did not
exist in 1996.
Operating income was $5.1 million for the year ended December 31, 1997,
compared to a loss of $1.1 million for the year ended December 31, 1996, due to
the results discussed above.
Interest expense, net of investment income, was $1.3 million in the year
ended December 31, 1997, compared to net interest income of $138,000 for the
year ended December 31, 1996, primarily as a result of assumption of additional
debt related to the acquisitions of the Meadows and Sunshine Promotions.
Equity income in unconsolidated subsidiaries decreased 3% to $509,000 for
the year ended December 31, 1997, compared to $524,000 for the year ended
December 31, 1996.
Income tax expense increased to $490,000 for the year ended December 31,
1997, compared to $106,000 for the year ended December 31, 1996, primarily as a
result of higher operating income.
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SFX's net income increased to $3.8 million for the year ended December 31,
1997, as compared to a net loss of $515,000 for the year ended December 31,
1996, due to the factors discussed above.
EBITDA increased to $10.5 million for the year ended December 31, 1997,
compared to a negative $324,000 for the year ended December 31, 1996, as a
result of $8.3 million attributable to SFX's 1997 acquisitions, $4.4 million
attributable to the reduction in officers' salary expense and $340,000
attributable to improved operating results.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
SFX'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.
Concert promotion operating expenses increased by 7.2% to $50.6 million
for the year ended December 31, 1996, compared to $47.2 million for the year
ended December 31, 1995, primarily as a result of an increase in concert
activity.
Depreciation and amortization expense decreased slightly to $747,000 for
the year ended December 31, 1996, compared to $750,000 for the year ended
December 31, 1995.
SFX's operating loss was $1.1 million for the year ended December 31,
1996, compared to an operating loss of $362,000 for the year ended December 31,
1995, due to the results discussed above.
Interest income, net of interest expense, increased by 306% to $138,000
for the year ended December 31, 1996, compared to $34,000 for the year ended
December 31, 1995.
Equity income in unconsolidated subsidiaries increased 8% to $524,000 for
the year ended December 31, 1996, compared to $488,000 for the year ended
December 31, 1995, primarily as a result of $210,000 of income from the
investment in the PNC Bank Arts Center, offset by lower income from SFX's other
equity investments that was $174,000 lower.
SFX'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's net loss was $515,000 for the year ended December 31, 1996, compared
to net income of $147,000 for the year ended December 31, 1995, due to the
factors discussed above.
EBITDA was a negative $324,000 for the year ended December 31, 1996,
compared to $388,000 for the year ended December 31, 1995, primarily as a
result of operating income of $902,000 and officers' salary expense that was
$2,424,000 higher, partially offset by general and administrative expenses that
were $809,000 lower.
PRO FORMA RESULTS
NINE MONTHS ENDED SEPTEMBER 30, 1998
On a pro forma basis, assuming all acquisitions and relating financings
were completed as of January 1, 1997, revenue for the nine months ended
September 30, 1998 would have been $1.0 billion, as compared to the actual
results of $680.4 million. Operating expenses would have been $910.7 million,
as compared to the actual results of $602.5 million. Depreciation and
amortization would have been $73.6 million, as compared to the actual results
of $40.4 million. These increases in revenue, operating expenses and
depreciation and amortization resulted primarily from the inclusion of the
operating results from each of the acquired businesses and pending acquisitions
for the entire period.
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Corporate expenses would have been $6.0 million net of Triathlon fees, as
compared to the actual results of $5.8 million, reflecting the incremental cost
to the corporate office of operating a larger enterprise. Non-cash compensation
and other non-cash charges would have been $33.3 million, as compared to the
actual results of $32.9 million as a result of including Marquee's operations
in the pro forma results. Operating income for the nine months ended September
30, 1998 would have been $13.6 million, as compared to the actual loss of $1.3
million, due to the results discussed above.
Interest expense would have been $50.8 million for the nine months ended
September 30, 1998, as compared to the actual results of $31.7 million.
Interest increased primarily as a result of assumption in the pro forma
financial statements that the debt used to fund the acquisitions are
outstanding at the beginning of the period.
Income from equity investments would have been $6.0 million, as compared
to the actual results of $4.0 million. Income tax expense would have been $4.6
million, as compared to the actual provision of $3.3 million. These increases
reflect the inclusion of the operating results of the completed and pending
acquisitions for the entire period.
SFX's net loss for the nine months ended September 30, 1998 would have
been $36.6 million, as compared to the actual results of $30.2 million, due to
the results discussed above.
EBITDA, excluding non-cash charges of $33.3 million, would have been
$120.4 million, as compared to EBITDA, excluding non-cash charges of $32.9
million, of $72.0 million on a historical basis, due to the results discussed
above.
YEAR ENDED DECEMBER 31, 1997
On a pro forma basis, assuming all acquisitions and related financings had
been completed as of January 1, 1997, revenue for the year ended December 31,
1997 would have been $1.0 billion, as compared to the actual results of $96.1
million. Operating expenses would have been $892.2 million, as compared to the
actual results of $83.4 million. Depreciation and amortization would have been
$91.6 million, as compared to the actual results of $5.4 million. The increase
in revenue, operating expenses and depreciation and amortization was a result
of the inclusion of the operating results from each of the acquired businesses
and pending acquisitions for the entire period.
Corporate expenses, net of Triathlon fees would have been $8.0 million, as
compared to the actual results of $2.2 million, reflecting the incremental cost
to the corporate office of operating the larger enterprise. Non-cash
compensation and other non-cash charges would have been $1.4 million, resulting
from historical costs incurred by Marquee. Operating income for the year ended
December 31, 1997 would have been $8.1 million, as compared to the actual
results of $5.1 million, due to the results discussed above.
Interest expense would have been $67.7 million, as compared to the actual
results of $1.6 million. Interest increased primarily as a result of the
assumption in the pro forma financial statements that the debt used to fund the
acquisitions are outstanding at the beginning of the period.
Income from equity investments would have been $5.5 million, as compared
to the actual results of $509,000. Income tax expense would have been $4.9
million, as compared to the actual provision of $490,000. These increases
reflect the inclusion of the operating results of the completed and pending
acquisitions for the entire period.
SFX's net loss for the year ended December 31, 1997 would have been $54.8
million, as compared to the actual results of net income of $3.8 million, due
to the results discussed above.
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EBITDA, excluding non-cash charges of $1.4 million, would have been $101.0
million, as compared to the actual results of $10.5 million, due to the results
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
SFX's principal need for funds has been for acquisitions, interest
expense, working capital needs, certain payments in connection with the
spin-off and, to a lesser extent, capital expenditures. SFX's principal sources
of funds has been proceeds from the old note offering, the new note offering,
SFX's Equity Offering, borrowings under SFX's credit facility and cash flows
from operations. SFX used the net proceeds from the new note offering to repay
substantially all of the revolving portion of the SFX credit facility and
intends to use the additional borrowing availability under the SFX credit
facility to complete the Cellar Door acquisition and to make certain other
payments, as discussed below.
HISTORICAL CASH FLOWS
Net cash provided by operations was $22.3 million for the nine months
ended September 30, 1998 as compared to $789,000 for the nine months ended
September 30, 1997. The increase was primarily attributable to an increase in
operating income, before depreciation, amortization and non-cash compensation
and other non-cash charges of $40.4 million related to SFX's 1998 acquisitions,
partially offset by other changes in working capital.
Net cash used in investing activities for the nine months ended September
30, 1998 was $852.2 million as compared to $72.0 million for the nine months
ended September 30, 1997. The increase was primarily the result of SFX's 1998
acquisitions. During the nine months ended September 30, 1997, SFX completed
the acquisitions of Delsener/Slater, the Meadows and Sunshine Promotions.
Net cash provided by financing activities for the nine months ended
September 30, 1998 was $889.5 million as compared to $78.3 million for the nine
months ended September 30, 1997. During 1998, SFX completed the old note
offering for $350.0 million, borrowed $346.0 million under the SFX credit
facility and completed the SFX Equity Offering for $329.0 million, net, offset
by tax indemnification payments and spin-off related payments to Broadcasting
of $113.9 million and the payment of debt issuance costs of $17.5 million.
CELLAR DOOR ACQUISITION
The aggregate cash consideration in the Cellar Door acquisition is
expected to consist of approximately $78.5 million including $8.5 million to be
paid over five years. In addition, SFX will be required to refinance
approximately $33.1 million of Marquee's debt. SFX expects to incur
approximately $7.5 million in fees and expenses related to the Cellar Door
acquisition and the merger.
SFX expects to complete the Cellar Door acquisition by January 31, 1999,
subject to satisfaction of customary closing conditions, certain of which are
beyond the control of SFX. No assurance can be given that SFX will be able to
complete the Cellar Door acquisition on the terms described herein or at all.
FUTURE CONTINGENT PAYMENTS
Certain of the agreements relating to SFX's 1998 acquisitions provide for
purchase price adjustments and other future contingent payments under certain
circumstances. The PACE acquisition agreement provides that each PACE seller
will have an option, exercisable for 90 days after the fifth anniversary of the
closing of the PACE acquisition, to require SFX to repurchase up to 500,000
shares of the SFX Class A common stock received by that seller
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for $33.00 in cash per share, for an aggregate purchase price of up to $16.5
million. Pursuant to the terms of Brian Becker's employment agreement with SFX,
during the period between December 12, 1999 and December 27, 1999, Mr. Becker,
an Executive Vice President, a director and a Member of the Office of the
Chairman of SFX, will have the option to, among other things, require SFX to
purchase any stock or options granted to him by SFX and/or pay him an amount
equal to the present value of the compensation payable during the remaining
term of his employment agreement. Exercise of such option would result in
termination of Mr. Becker's employment agreement. See "SFX
Management--Employment Agreements and Arrangements with Certain Officers and
Directors--Becker Employment Agreement."
Moreover, if the average trading price of the SFX Class A common stock is
less than $13.33 during the twenty days before the second anniversary of the
Contemporary acquisition, SFX will be required to pay one-half of such
difference for each of the 1,402,850 shares issued in the acquisition and still
held by the sellers of Contemporary on such date.
Pursuant to the Network acquisition agreement, SFX agreed to increase the
purchase price for Network based on Network's actual 1998 EBITDA, as defined in
the acquisition agreement. The increase will be payable as follows:
o by $4.0 million if the 1998 EBITDA equals or exceeds $9.0 million;
o by an additional $4 for each $1 of additional 1998 EBITDA between $9.0
million and $10.0 million; and
o by an additional $6 for each $1 of additional 1998 EBITDA between $10.0
million and $11.0 million.
This contingent consideration of up to $14.0 million is payable in shares of
SFX's Class A common stock or, in certain circumstances, in cash by no later
than March 20, 1999.
Pursuant to the agreement relating to the acquisition of FAME, SFX is
obligated to pay to the FAME sellers additional amounts up to $15.0 million in
equal annual installments over five years contingent on the achievement by FAME
of certain EBITDA targets, as defined in the acquisition agreement. The FAME
agreement also provides for additional payments by SFX to the FAME sellers if
FAME's EBITDA performance exceeds the targets by certain amounts. Furthermore,
if SFX disposes of all or substantially all of the assets or voting interests
of FAME during the five years following the closing of the FAME acquisition,
certain payments may become due to the FAME sellers out of the proceeds of such
sale.
Pursuant to the agreement relating to the acquisition of certain assets of
Oakdale, SFX may be required to make an additional payment to the sellers based
on the Oakdale and Meadows combined EBITDA, as defined in the Oakdale
acquisition agreement. If this EBITDA exceeds $5.5 million in 1999, SFX will be
obligated to pay the Oakdale sellers between 5.0 to 5.8 times the amount of
such excess.
In addition, pursuant to the agreement relating to the acquisition of one
of the seven companies in the theatrical and music segments in July, August and
September 1998, if the EBITDA, as defined in the acquisition agreement, exceeds
$14.3 million in 1998 and $30.0 million in 1999, SFX will be obligated to pay
the sellers such excess.
Pursuant to the agreement relating to the acquisition of a concert
promotion and production company in January 1999, SFX may be obligated to pay
to the seller additional amounts up to $4.0 million over five years contingent
on the achievement by certain business segments of the seller of certain EBITDA
targets. Specifically,
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o for each dollar of SFX's EBITDA that is directly attributable to activities
relating to promoting, producing or booking tours of a certain musical
artist for such fiscal year, SFX will pay $0.65 to the seller;
o for each dollar of SFX's EBITDA that is directly attributable to activities
relating to promoting, producing or booking tours of a certain musical
artist for such fiscal year, SFX will pay $0.35 to the seller;
o for each dollar of SFX's EBITDA that is directly attributable to activities
relating to producing and promoting tours of artists that are clients of
SFX or any of its subsidiaries, except for certain musical artists, for
such fiscal year, SFX will pay $0.50 to the seller; and
o for each dollar of SFX's EBITDA that is directly attributable to activities
relating to promoting only clients of seller, subject to certain
exceptions, for such fiscal year, SFX will pay $0.05 to the seller.
Additionally, SFX deposited $6.5 million into an escrow account. The release of
such funds from escrow to the seller is dependent upon SFX achieving certain
foreign tax savings.
SPIN-OFF
In connection with the spin-off, SFX entered into the tax sharing
agreement with Broadcasting. Pursuant to such agreement, SFX is responsible for
certain taxes incurred by Broadcasting, including income taxes imposed with
respect to income generated by SFX for periods before the spin-off and taxes
resulting from gain recognized by Broadcasting in the spin-off. SFX has made an
estimated payment of $108.0 million in taxes in connection with the spin-off.
Management's estimates of the amount of the indemnity payment are based on
assumptions which management believes are reasonable. However, upon the
completion of all final tax returns, including any potential tax audits, such
assumptions could be modified in a manner that would result in a significant
variance in the actual amount of the tax indemnity.
INTEREST ON NOTES AND BORROWINGS UNDER THE SENIOR CREDIT FACILITY
On February 11, 1998, SFX completed the private placement of the old
notes, which were subsequently exchanged for the publicly registered notes on
July 15, 1998. Interest is payable on the exchange notes on February 1 and
August 1 of each year. In addition, as of October 30, 1998, SFX had borrowed
$346.0 million under the SFX credit facility, at an interest rate of
approximately 7.89%, to fund a portion of SFX's 1998 acquisitions. On November
25, 1998, SFX completed the offering of the new notes, which are required to be
exchanged for publicly registered new notes. In the event the new notes are not
so exchanged, liquidated damages to the holders of the new notes will become
payable. Interest is payable on the new notes on June 1 and December 1 of each
year. In addition, as of January 26, 1999, SFX had term loan indebtedness of
$149.0 million under its credit facility.
The degree to which SFX will be leveraged could have important
consequences including, but not limited to:
o making it more difficult for SFX to satisfy its obligations with respect to
the old notes and new notes;
o increasing SFX's vulnerability to general adverse economic and industry
conditions;
o limiting SFX's ability to obtain additional financing to fund future
acquisitions, working capital, capital expenditures and other general
corporate requirements;
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o requiring the dedication of a substantial portion of SFX's cash flow from
operations to the payment of principal of, and interest on, its
indebtedness, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures, or other general corporate purposes;
o limiting SFX's flexibility in planning for, or reacting to, changes in its
business and the industry; and
o placing SFX at a competitive disadvantage vis-a-vis less leveraged
competitors.
In addition, the SFX credit facility, the indenture governing the old
notes and the indenture governing the new notes contain financial and other
restrictive covenants that will limit the ability of SFX to, among other
things, borrow additional funds for future acquisitions or otherwise. Failure
by SFX to comply with such covenants could result in an event of default which,
if not cured or waived, could have a material adverse effect on SFX's business,
financial condition and results of operations. SFX's indebtedness under the SFX
credit facility is secured by a pledge of the stock of its subsidiaries and by
liens on substantially all of its and its subsidiaries' tangible assets. Most
of SFX's subsidiaries have also guaranteed the old notes, new notes and
borrowings under the credit facility. If SFX were unable to repay any
borrowings when due, the lenders could attempt to seize SFX's and its
subsidiaries' assets and the capital stock of SFX's subsidiaries. In addition,
the degree to which SFX is leveraged could prevent it from repurchasing all of
the old notes and new notes tendered to it upon the occurrence of a Change of
Control. See "Risk Factors--SFX's credit facility and indentures restrict its
operations" and "--SFX will be required to make large payments upon a change of
control which may harm SFX's financial condition."
SFX'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's operations. There can be no assurance that SFX will be
able to make planned borrowings, that SFX's business will generate sufficient
cash flow from operations, or that future borrowings will be available in an
amount to enable SFX to service its debt and to make necessary capital or other
expenditures. SFX may be required to refinance a portion of the principal
amount of its indebtedness before its maturities. There can be no assurance
that SFX will be able to raise additional capital through the sale of
securities, the disposition of assets or otherwise for any refinancing.
CAPITAL EXPENDITURES
Capital expenditures totaled $44.6 million for the nine months ended
September 30, 1998. SFX estimates that its remaining capital expenditures for
1998 were approximately $3.4 million, including $2.4 million of major projects
and $1.0 million of other capital expenditures. The Company expects capital
expenditures to be approximately $37.0 million, including $25.0 million of
major projects, in 1999, and are anticipated to be funded with cash flow from
operations.
YEAR 2000 COMPLIANCE
SFX is currently working to resolve the potential impact of the Year 2000
on the processing of date-sensitive information by SFX's computer systems. The
Year 2000 problem is the result of computer programs being written using two
digits, rather than four, to define the applicable year. Any of SFX's programs
that have time-sensitive software may recognize a date using "00" as the Year
1900 rather than the Year 2000, which could result in miscalculations or system
failures. The problem is not limited to computer systems. Year 2000 issues will
also potentially affect every non-information technology system that has an
embedded microchip, such as elevators.
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ASSESSMENT. SFX management has been conducting a review of its exposure to
the Year 2000 problem. Based on SFX's internal review and discussions with
third parties regarding the Year 2000 problem, SFX believes that its exposure
to potential Year 2000 problems exists in two general areas: technological
operations, including non-information technology systems, which are in the sole
control of SFX; and technological operations which are dependent in some way on
one or more third parties. Failure to achieve high levels of Year 2000
compliance in either area could have a material adverse impact on SFX.
REMEDIATION AND IMPLEMENTATION. In the area of technological operations
which are under SFX's exclusive control, SFX is currently involved in the
identification and remediation of affected technological functions, including
non-information technology systems. SFX is addressing the risks associated with
Year 2000 compliance with respect to its accounting and financial reporting
systems and is in the process of installing new accounting and reporting
systems. These systems will provide improved reporting, allow for more detailed
analysis, handle SFX's 1998 acquisitions, the merger and the Cellar Door
acquisition and be Year 2000 compliant. SFX expects that business segments
representing 88% of SFX's pro forma revenue for the year ended September 30,
1998 will have the new year 2000 compliant accounting and financial systems
installed as of January 1, 1999. SFX expects its remaining business segments to
have the new year 2000 compliant accounting and financial systems installed
before the summer of 1999. SFX is in the identification and assessment phase
with respect to its non-information technology systems, which is projected to
continue until the summer of 1999.
TESTING. SFX will begin updating and testing its systems after their
installation, and expects that all testing will be complete by the summer of
1999. Upon completion, SFX will be able to identify any internal computer
systems that remain non-compliant. At present, it is anticipated that SFX's
action plan for addressing Year 2000 problems will be successfully completed in
all material respects in advance of January 1, 2000.
ESTIMATED COSTS. The total financial effect that Year 2000 issues will
have on SFX cannot be predicted with any certainty at this time. In fact, in
spite of all efforts being made to rectify these problems, the success of SFX's
efforts will not be known with certainty until the year 2000 actually arrives.
SFX anticipates that the cost of implementing the new accounting and reporting
systems will be approximately $4.5 million, of which approximately $2.4 million
has been spent to date. Based on its assessment to date, SFX does not believe
that expenses related to addressing the Year 2000 problem will have a material
effect on the operations and financial condition of SFX.
THIRD PARTIES. In the area of technological operations dependent in some
way on one or more third parties, including vendors, suppliers, joint venture
partners or major customers, the situation is much less in SFX's ability to
predict or control. SFX has begun to assess the level of Year 2000 problems
associated with their various vendors, suppliers, joint venture partners and
major customers. SFX's significant vendors are ticketing companies, payroll
processors, utility companies and banks. SFX is communicating with some of
these third parties to assess their compliance efforts and SFX's exposure
resulting from Year 2000 issues. SFX is in the process of requesting written
assurances of Year 2000 compliance from each of its significant suppliers as a
part of SFX's contingency planning process. Although SFX is making these
efforts to ensure that the third parties on which it is heavily reliant are
Year 2000 compliant, it cannot predict the likelihood of such compliance
occurring nor the direct or indirect costs to SFX of non-compliance by those
third parties or of securing such services from compliant third parties. SFX
has no control over these third parties' compliance and cannot give assurances
that these third parties' representations to SFX are accurate. Therefore, there
can be no guarantee that Year 2000 problems originating with a third party
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will not occur and no absolute assurance that third parties will convert their
systems in a timely manner. Assuming that such third parties are not or do not
become Year 2000 compliant in a timely manner, to the extent SFX is unable to
replace the goods, services or customers with alternate sources of supply and
demand on a timely and economically equivalent basis, such failure would likely
have a material adverse effect on SFX's business and results of operations.
However, SFX does not anticipate that it will be subject to a material impact
in this area.
CONTINGENCY PLAN. SFX has not completed its implementation and testing of
Year 2000 compliant systems. However, a reasonably likely worst case scenario
is that certain of SFX's material suppliers or customers will be unable to
fully become Year 2000 compliant in a timely manner, which will disrupt SFX's
ability to provide services and generate revenues in certain areas in which it
does business. For example, disruptions in ticketing operations would
significantly reduce attendance. Disruptions in transportation could affect the
provision of concessions for sale at SFX's venues. These disruptions would
continue until alternate sources of supply and demand could be located. Based
on the results of the implementation and testing of SFX's Year 2000 affected
systems and the ongoing assessment of the readiness of its vendors, suppliers,
joint venture partners and major customers, SFX will develop appropriate
contingency plans that address the most reasonably likely worst case scenarios.
SFX expects to have such contingency plans in place by the summer of 1999. A
failure to address Year 2000 issues successfully could have a material adverse
effect on SFX's business, financial condition or results of operations.
SOURCES OF LIQUIDITY
As of September 30, 1998, SFX's cash and cash equivalents totaled $65.6
million, and its working capital was a negative $8.0 million. In February 1998,
SFX received the proceeds from the $350.0 million offering of old notes and
borrowed $150.0 million under the SFX credit facility. On May 27, 1998, SFX
received approximately $329.0 million in net proceeds from the SFX Equity
Offering. SFX used the proceeds from the SFX Equity Offering to repay certain
indebtedness, fund the tax indemnification payments and consummate the FAME,
Oakdale and certain other acquisitions. In the third quarter of 1998, SFX used
the remaining proceeds of the SFX Equity Offering and borrowed an additional
$196.0 million under the SFX credit facility to complete the Don Law
acquisition, the Magicworks acquisition and the acquisition of the seven
companies in the theatrical and music segments. On November 25, 1998, SFX
received approximately $192.5 million in net proceeds from the new note
offering.
SFX contemplates issuing approximately 4,000,000 shares of SFX Class A
common stock in the proposed equity offering. Assuming an offering price of
$57.00, the net proceeds of the offering are expected to be approximately
$216.3 million. SFX currently expects to use the estimated net proceeds from
the proposed equity offering to repay borrowings under the SFX credit facility
and to repay Marquee's indebtedness in the merger. There can be no assurance
that the proposed equity offering will be consummated.
SFX has incurred and will continue to incur substantial amounts of
indebtedness. As of September 30, 1998, on a pro forma basis giving effect to
the new note offering and the application of the net proceeds therefrom, the
consummation of the Cellar Door acquisition and the merger, anticipated
borrowings under the SFX credit facility and the proposed equity offering and
the application of the estimated proceeds therefrom, SFX's consolidated debt
would have been approximately $757.0 million. On the same basis, SFX's
consolidated debt would consist of:
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o $350.0 million of old notes;
o $200.0 million of new notes;
o $150.0 million in borrowings under the SFX credit facility; and
o $57.0 million in other debt.
SFX's temporary equity would have been $19.9 million, and its stockholders'
equity would have been approximately $714.3 million.
SFX's ratio of total debt to total capitalization as of September 30, 1998
would have been approximately 0.9 to 1. See "SFX Unaudited Pro Forma Condensed
Combined Financial Statements." SFX may incur indebtedness from time to time to
finance future acquisitions, for capital expenditures or for other purposes.
See "Risk Factors--SFX has a substantial amount of debt which may harm it and
its shareholders" and "--If SFX is unable to complete other acquisitions in the
future, SFX's business and stock price may suffer."
The SFX credit facility originally consisted of a $150.0 million
seven-year reducing revolving facility and a $150.0 million eight-year term
loan. On September 10, 1998, SFX entered into an agreement with The Bank of New
York to increase its borrowing availability under the revolver portion of the
SFX credit facility by an additional $50.0 million, which increased the
aggregate amount of borrowing availability under the SFX credit facility to
approximately $350.0 million. As of January 25, 1999, SFX had outstanding
approximately $230.0 million of borrowings under the SFX credit facility.
Giving pro forma effect to the proposed equity offering and the application of
the proceeds therefrom, anticipated borrowings under the SFX credit facility
and consummation of the Cellar Door acquisition and the merger, SFX expects to
have $150.0 million outstanding under the SFX credit facility. Loans
outstanding under the SFX credit facility will bear interest, at SFX's option,
at 1.625 to 3.625 percentage points over LIBOR or the greater of the Federal
Funds rate plus 0.50% or The Bank of New York's prime rate. The interest rate
spreads on the term loan and the revolver portion of the SFX credit facility
will be adjusted based on SFX's Total Leverage Ratio, as defined in the SFX
credit facility. SFX will pay a per annum commitment fee on unused availability
under the revolver of 0.375% to 0.5% and a per annum letter of credit fee equal
to the Applicable LIBOR Margin, as defined in the SFX credit facility, for the
revolver then in effect.
The revolver and term loan portion of the SFX credit facility contain
usual and customary covenants, including limitations on:
o line of business;
o additional indebtedness;
o liens;
o acquisitions;
o asset sales;
o dividends, repurchases of stock and other cash distributions;
o total leverage;
o senior leverage; and
o ratios of Operating Cash Flow, as defined in the SFX credit facility, to pro
forma interest expense, debt service and fixed charges.
SFX's obligations under the revolver and term loan are secured by substantially
all of its assets, including property, stock of subsidiaries and accounts
receivable and are guaranteed by SFX's subsidiaries.
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The consummation of the new note offering was conditioned upon the receipt
of the consent of the lenders under the SFX credit facility. In connection with
such consent, SFX agreed to increase the applicable margins as described above.
SFX paid a consent fee to each consenting lender of 0.25% of such lender's
commitment amount.
In addition, SFX is in discussions with its lenders to amend the SFX
credit facility to increase borrowing availability to $550.0 million and amend
certain covenants. The new facility is subject to the execution of a definitive
agreement, which SFX expects to enter into by the end of first quarter of 1999.
The aggregate consideration to be paid in the Cellar Door acquisition and
the merger is expected to consist of approximately $103.1 million in cash,
including the repayment of approximately $33.1 million in debt, and the
issuance of approximately 2.2 million shares of SFX Class A common stock. SFX
intends to finance the cash portion of the purchase price with borrowings under
the SFX credit facility. The availability of funds under the SFX credit
facility is subject to compliance with certain financial covenants, and there
can be no assurance that the funds required to complete the Cellar Door
acquisition and the merger will be available to SFX when needed. If SFX is
unable to complete the Cellar Door acquisition, it may be required to pay the
seller $10.0 million as liquidated damages. See "Agreement Related to the
Cellar Door Acquisition."
Furthermore, certain agreements of SFX, including the distribution
agreement, the tax sharing agreement, employee benefits agreement, certain
employment agreements and the agreements relating to the completed acquisitions
and the Cellar Door acquisition, provide for tax and other indemnities,
purchase price adjustments, repurchase of SFX stock and future contingent
payments in certain circumstances. There can be no assurance that SFX will have
sufficient sources of funds to make such payments should they come due.
In addition, consistent with its operating strategy, SFX is currently
negotiating additional acquisitions and expects to pursue additional
acquisitions in the live entertainment business in the future. However, SFX has
not entered into any definitive agreements with respect to such acquisitions
and there can be no assurance that it will do so. Any such acquisitions could
result in SFX:
o issuing more of its stock, which may dilute the value of existing stock of
SFX;
o incurring a substantial amount of additional debt; and/or
o amortizing expenses related to goodwill and other intangible assets.
However, there can be no assurance that SFX will be able to obtain financing
for such acquisitions on terms acceptable to SFX or at all. Any or all of these
actions could have a material adverse impact on SFX's business, financial
condition and results of operations. See "Risk Factors--If SFX is unable to
complete other acquisitions in the future, SFX's business and stock price may
suffer."
SFX may also be obligated to make payments relating to ongoing and future
litigation. See "SFX's Business--Litigation."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("FAS 131"), which is effective for years
beginning after December 15, 1997. FAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas
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and major customers. FAS 131 is effective for financial statements for fiscal
years beginning after December 15, 1997, and therefore SFX will adopt the new
requirements for fiscal year 1998. Management has completed its review of FAS
131 and has preliminarily determined that its reportable segments will be
music, theater, sports and other.
In June 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"), which is effective for fiscal years beginning after
December 15, 1998. Under SOP 98-5, the costs of start-up activities, including
organizational costs, would be expensed as incurred. SOP 98-5 broadly defines
start-up activities as those one-time activities related to opening a new
facility, introducing a new product or service, conducting business in a new
territory, conducting business with a new class of customer or beneficiary,
initiating a new process in an existing facility or beginning a new operation.
SOP 98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998. Earlier application is encouraged. The initial application
of SOP 98-5 is to be reported as a cumulative
effect of a change in accounting principle. Management has preliminarily
determined that SOP 98-5 will not have a material effect on its financial
position.
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MARQUEE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Marquee should be read in conjunction with the consolidated
financial statements and related notes thereto included in this proxy
statement--prospectus. The following discussion contains certain
forward-looking statements that involve risks and uncertainties. Marquee's
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to the differences are discussed elsewhere in
this proxy statement--prospectus. These include uncertainties related to
Marquee's business and growth strategies, difficulties in achieving cost
savings and revenue enhancements and difficulties in integrating the acquired
companies. Marquee 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.
BUSINESS
Marquee was formed in July 1995 to provide integrated event management,
television programming and production, marketing, sponsorship sales, talent
representation and consulting services in the sports, news and other
entertainment industries. From the time of its formation until the consummation
of its acquisitions of Sports Marketing and Television International, Inc.
("SMTI") and Athletes & Artists, Inc. ("A&A") in 1996, Marquee developed its
sports television production, marketing and consulting business. Marquee
financed its 1996 acquisitions with proceeds from its initial public offering
in December 1996. In October 1997, Marquee acquired ProServ, and QBQ. Marquee
also completed its secondary public offering of 8,500,000 shares of Marquee
common stock at $5.00 per share in October and November 1997 (the "Second
Offering"). In August and September 1998, Marquee acquired Alphabet City
Industries, Inc., Alphabet City Sports Records, Inc., Cambridge Holding
Corporation, Park Associates Limited, Tony Stephens Associates Limited and
Tollin/Robbins Productions. Marquee obtained the funds used to consummate its
1998 acquisitions principally from borrowings under the Marquee credit
agreement.
The primary sources of Marquee's revenues are fees from providing event
management, television programming and production, sports marketing,
sponsorship sales, and consulting services and commissions from representation
of sports, news and entertainment personalities. Marquee recognizes revenues
from event management services when the events are held. It recognizes revenues
from television programming and production services when the programs are
available for broadcast. It recognizes marketing revenues for guaranteed
amounts when contractual obligations are met; it records subsequent royalties
when received. It recognizes revenues from advertising services in the month
the advertisement is broadcast or printed. It records commissions based on
profit or gross receipt participations upon the determination of such amounts.
It recognizes consulting revenue as services are provided. It recognizes
commissions from its talent representation services as revenue when they become
payable to it under the terms of its agreements with its clients. Generally,
such commissions are payable by clients upon their receipt of payments for
performance of services.
Marquee's revenues may vary from quarter to quarter, due to the timing of
certain significant events and the resulting recognition of revenues from such
events. Historically, the fourth quarter produced the highest percentage of
revenues for the year, principally from Marquee's management and marketing of
The Breeders' Cup Championship and from representation agreements with
professional hockey players, which result in revenue to
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Marquee upon the commencement of the National Hockey League season. As a result
of Marquee's entry into the business of representing professional football
players and Marquee's 1997 acquisitions, Marquee anticipates that its revenues
and expenses will increase, and expects that these increased revenues and
expenses will be recorded substantially in the third as well as the fourth
quarter.
Marquee has derived a significant portion of its revenues to date from a
small number of events and clients. On a pro forma basis for Marquee's 1997
acquisitions and Marquee's 1998 acquisitions, The Breeders' Cup Championship
would have accounted for approximately 11% of Marquee's revenues for the year
ended December 31, 1997. The Breeders' Cup agreement ends on December 31, 2000,
with an automatic renewal under certain circumstances, unless terminated
earlier. The grounds for terminating the agreement include the termination, for
any reason, of Marquee's employment of Michael Letis or Michael Trager or the
unavailability of Messrs. Letis or Trager to perform the services necessary to
enable Marquee to comply with the terms of the agreement.
Marquee has recorded and will continue to record substantial compensation
charges and other non-cash charges to operations in connection with Marquee's
1997 acquisitions, Marquee's 1998 acquisitions and the issuance of securities
to certain officers, directors and consultants.
o In connection with Marquee's 1997 acquisitions and Marquee's 1998
acquisitions, Marquee recorded as intangibles the excess of the purchase
price over the net tangible assets acquired of approximately $60 million
which will be amortized over ten to twenty years.
o In the nine months ended September 30, 1998, Marquee recorded a charge to
operations of $180,000 as non-cash compensation, in recognition of the
probability of QBQ achieving certain financial thresholds that would
require the release of the shares of Marquee common stock placed in escrow
in connection with the acquisition of QBQ. This compensation charge will be
adjusted through the actual release date based upon the changes in the fair
market value of the shares subject to the escrow arrangement.
o Marquee may also record additional non-cash compensation expense during the
period if the Marquee escrow shares are released from escrow because
certain thresholds for the release are met. In connection with the merger,
the holders of the Marquee escrow shares waived their rights to receive
such shares, effective as of the date of the closing of the merger, except
that TSC's waiver was effective in July 1998.
o In addition, Marquee will record charges to operations over the next two
years aggregating $0.6 million related to its potential obligation to
repurchase the shares of common stock issued in connection with the
acquisition of ProServ.
o Marquee will also record charges to operations aggregating $1.3 million over
the remaining three to eight years related to imputed interest on the
indebtedness to the former stockholders of SMTI, A&A, QBQ and certain of
the businesses acquired in Marquee's 1998 acquisitions.
o Further, in connection with an officer's employment agreement, Marquee will
recognize a non-cash compensation charge of $300,000 over the next three
years.
These charges are principally not deductible for income tax purposes and
may significantly increase Marquee's losses or reduce or eliminate earnings, if
any, at such time.
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RESULTS OF OPERATIONS
Marquee's consolidated financial statements are not directly comparable
from period to period because Marquee consummated Marquee's 1996 acquisitions
in December 1996 and Marquee's 1997 acquisitions in October 1997. Marquee's
1998 acquisitions closed during August and September 1998. Marquee's reported
results of operations only include the operations of the acquired businesses
from the date of acquisition.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
For the nine months ended September 30, 1998, Marquee generated revenues
of approximately $35.5 million, compared to $12.0 million for the nine months
ended September 30, 1997. The increase in revenues of approximately $23.5
million is principally attributable to:
o the inclusion of $19.4 million from the operations of Marquee's 1997
acquisitions;
o the inclusion of $1.8 million from the operations of Marquee's 1998
acquisitions; and
o $1.8 million in programming and production activity related to the PBA Tour
broadcasts on ESPN and CBS, the syndicated series "More Than a Game," and
increased boxing productions on ESPN.
Marquee's operating expenses of $23.7 million for the nine months ended
September 30, 1998 increased $16.0 million from $7.7 million for the prior year
nine month period. The increase was principally the result of:
o $12.2 million from the inclusion of the operations of Marquee's 1997
acquisitions;
o the inclusion of $0.9 million from Marquee's 1998 acquisitions; and
o the activity associated with the PBA Tour broadcast on ESPN and CBS,
production of "More Than a Game," and ESPN boxing.
General and administrative expenses were approximately $8.2 million for
the nine months ended September 30, 1998, as compared to $4.5 million for the
same period in 1997. The increase was principally the result of:
o the inclusion of $2.8 million from the operations of Marquee's 1997
acquisitions;
o the inclusion of $0.2 million from the operations of Marquee's 1998
acquisitions; and
o increased staff and occupancy costs required to support Marquee's expanded
business operations.
Marquee's income from operations was $1.7 million for the nine months
ended September 30, 1998, compared to an operating loss of $0.4 million for the
same period in 1997. The nine month period ended September 30, 1998 was
additionally impacted by:
o a non cash compensation charge of $0.2 million as a result of the
determination that the financial thresholds required to be met for the
release of the QBQ escrow shares would probably be achieved in 1998, which
will be adjusted based upon the change in the fair value of the shares
through the actual release date of shares; and
o the charges for amortization of goodwill of $0.9 million for Marquee's 1997
acquisitions and of $0.3 million for Marquee's 1998 acquisitions.
Marquee's net income applicable to common stockholders for the nine months
ended September 30, 1998 was $0.8 million, compared to a net loss of $1.5
million for the same
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period in 1997. The nine months 1998 results include the non cash charges
mentioned above as well as a charge of $0.2 million related to the accretions
of Marquee's potential obligation in connection with the put option on common
stock issued in connection with the ProServ acquisition.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
For the year ended December 31, 1997, Marquee generated revenues of
approximately $21.3 million, compared to $2.9 million for the year ended
December 31, 1996. The increase in revenues of approximately $18.4 million was
principally attributable to:
o the inclusion of $12.0 million from the operations of Marquee's 1996
acquisitions for the year;
o $1.6 million from Marquee's 1997 acquisitions from the date of acquisition;
and
o increases of $3.3 million in Marquee's television production and programming
activities; and
o $1.0 million in consulting services.
The increase in television revenues included production of the US Open
Professional Figure Skating Championship, the Senior Pro Tour for the PBA, a
syndicated series--"More Than A Game"--and programming for various cable
networks. The increase in consulting revenues was principally attributable to
services rendered to Americast, a partnership of certain telephone companies,
to assist in the creation of local sports networks for cable television. The
partners in Americast disbanded their programming development department and
terminated Marquee's contract as of September 27, 1997.
Marquee's operating expenses of $14.5 million for 1997 increased $11.9
million from $2.6 million in the prior year, principally as a result of:
o the inclusion of the operations of $6.6 million from Marquee's 1996
acquisitions for the entire year;
o $1.1 million from Marquee's 1997 acquisitions from the date of acquisition;
and
o the costs related to the increased television production and programming in
1997.
General and administrative expenses were approximately $6.3 million for
1997 as compared to $2.2 million for the prior year. The increase was
principally the result of:
o the inclusion of the operations of Marquee's 1996 acquisitions for 1997;
o Marquee's 1997 acquisitions from the acquisition date; and
o increased staffing and occupancy costs required to support Marquee's
expanded business operations.
Marquee's loss from operations for the year ended 1997 was approximately
$489,000 compared to approximately $2.0 million for the prior year.
Marquee's net loss was $1.3 million in 1997 versus a net loss of $2.4
million in 1996. The 1997 net loss includes one-time charges resulting from
financing costs of approximately $868,000, including interest related to the
bridge facility with respect to the Marquee Tender Offer, as defined herein,
for its outstanding warrants, and a provision for loss on the abandonment of a
lease of $466,000. The 1996 net loss includes a one-time financing charge of
$193,000 related to Marquee's sale of debentures in a private placement. The
net loss applicable to common stockholders in 1997 includes charges of $59,000,
related to the accretion of Marquee's potential obligation under the put option
on common stock issued in connection with the ProServ acquisition.
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
For the year ended December 31, 1996, Marquee generated revenues of
approximately $2.9 million. The principal sources of revenues were fees derived
from Marquee's one-time representation of the sponsor of the 1996 Major League
Baseball All-Star balloting program and from production of boxing programs
broadcast on ESPN and ESPN2. Marquee also derived revenues from commissions
earned from talent representation and from production of other programs for
broadcast on various cable outlets.
Marquee's operating expenses for the year ended December 31, 1996 were
approximately $2.6 million and principally consisted of expenses related to the
one-time event management engagement and production of ESPN boxing programs.
General and administrative expenses for the year ended December 31, 1996
were $2.2 million and consisted principally of salary and benefits of $1.7
million.
Marquee's operating loss for the year ended December 31, 1996, as
reported, was $2.0 million. The operating loss in 1996 was principally due to
the increased costs and expenses associated with Marquee's new operations.
For the year ended December 31, 1996, Marquee's loss before taxes was
approximately $2.4 million, including interest expense of $283,000 and
financing expense of $193,000 related to the sale of debentures in the
aggregate principal amount of $2.0 million. For 1996, Marquee had a net loss of
$2.4 million after giving effect to an income tax benefit of $20,000.
PRO FORMA RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations on a
pro forma basis for Marquee's 1997 acquisitions include Marquee, ProServ and
QBQ, as if they had been consummated on January 1, 1997. The pro forma results
of operations discussions for Marquee's 1998 acquisitions include Marquee,
Marquee's 1997 acquisitions, Alphabet City, Cambridge, Park Associates, Tony
Stephens and Tollin/Robbins, each as defined herein, as if they had occurred on
January 1, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
On a pro forma basis, giving effect to Marquee's 1997 acquisitions and
Marquee's 1998 acquisitions, Marquee's revenues for the nine months ended
September 30, 1998 were $48.8 million compared to $37.2 million for the same
period in 1997. The increase on a pro forma basis of $11.6 million is related
to the matters discussed above in the historical results as well as:
o increased revenues of $3.0 million generated for The Guardian Cup, an ATP
tennis tournament held in the United Kingdom in February 1998;
o $1.2 million of revenues generated for securing the naming rights of a new
arena being built in Los Angeles and the procurement of various other
endorsements during the nine months ended September 30, 1998;
o talent representation fees increasing by $2.7 million due to the Billy Joel
tour and the addition of certain European soccer players;
o programming and production activities increasing by approximately $4.5
million related to the production of syndicated series Kenan & Kel, All
That, Cousin Skeeter and Arli$$, and the Paramount movie "Varsity Blues";
and
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o $2.0 million of reduced revenues from the AT&T Challenge Cup, an ATP tennis
tournament in Atlanta, and the loss of the sponsorship for a golf event
staged in Europe in 1997, which partially offset the amounts provided
above.
Marquee's operating expenses increased approximately $8.6 million for the nine
months ended September 30, 1998 compared to the same period in 1997 on a pro
forma basis giving effect to Marquee's 1997 acquisitions and Marquee's 1998
acquisitions. The increase is principally the result of matters previously
discussed in the historical results as well as:
o costs of $3.0 million associated with the ATP Tennis tournament in the
United Kingdom;
o increased talent representation expenses of $1.7 million associated with
increased revenues; and
o increased television production and distribution expenses for certain
sporting events for which Marquee has distribution rights.
General and administrative expenses increased $1.3 million for the nine
months ended September 30, 1998 from approximately $9.4 million in the same
period in 1997 on a pro forma basis giving effect to Marquee's 1997
acquisitions and Marquee's 1998 acquisitions. The increase is the result of
higher occupancy and staff costs required to support Marquee's expanded
business operations.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
On a pro forma basis, giving effect to Marquee's 1997 acquisitions and
Marquee's 1998 acquisitions, Marquee's 1997 revenues were $53.3 million, as
compared to actual revenues of
$2.9 million for the year ended December 31, 1996.
On a pro forma basis, giving effect to Marquee's 1997 acquisitions and
Marquee's 1998 acquisitions, Marquee's 1997 operating expenses were $34.3
million, as compared actual operating expenses of $2.6 million for the year
ended December 31, 1996.
On a pro forma basis, giving effect to Marquee's 1997 acquisitions and
Marquee's 1998 acquisitions, Marquee's 1997 general and administrative expenses
were $12.1 million, as compared to actual general and administrative expenses
of $2.2 million for the year ended December 31, 1996.
On a pro forma basis, giving effect to Marquee's 1997 acquisitions and
Marquee's 1998 acquisitions, Marquee would have reported income from operations
of approximately $1.7 million in 1997, as compared to an actual operating loss
of $2.0 million in 1996.
On a pro forma basis, giving effect to Marquee's 1997 acquisitions, and
Marquee's 1998 acquisitions, Marquee's net loss for the year ended December 31,
1997 would have been $2.5 million, and its net loss applicable to common
stockholders for the year ended December 31, 1997 would have been $2.8 million.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Marquee's principal sources of funds have been the net proceeds from its
IPO in December 1996 of approximately $15.6 million, net proceeds of
approximately $38.4 million from the Second Offering and borrowings of $33.1
million under the Marquee credit agreement in August and September 1998.
Marquee has paid approximately $58.9 million in connection with all of the
Marquee acquisitions, and used approximately $10.5 million to finance its
tender offer for its then outstanding warrants. Working capital as of September
30, 1998 was approximately $10.4 million.
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COMPLETED ACQUISITIONS
In 1997, Marquee purchased ProServ for an aggregate purchase price of
approximately $12.1 million, including $10.8 million in cash and the issuance
of 250,000 shares of Marquee's common stock. Marquee also repaid approximately
$2.4 million of the outstanding indebtedness of ProServ. The shares issued in
connection with the purchase of ProServ are subject to certain put and call
options. The holder of the put option, at any time within the 60 day period
following the second anniversary of the consummation of the ProServ
acquisition, may elect to transfer to Marquee up to all of the remaining common
stock of Marquee held by the option holder at a price per share of $7.70, for a
total purchase price of up to approximately $1.9 million. In addition, at any
time between the 61st and 90th day following the second anniversary of the
consummation of the ProServ acquisition, Marquee may purchase 50% of the common
stock of Marquee held by option holder at a price per share of $7.70, for a
total purchase price of $962,500 in the aggregate. Marquee may also be
obligated to make additional earn-out payments of up to $2.5 million over the
next 4 years based on the financial performance of ProServ.
In 1997, Marquee also purchased certain assets of QBQ for an aggregate
purchase price of approximately $6.7 million, of which $2.0 million was paid by
the issuance of 314,812 shares of Marquee common stock, $1.0 million will be
payable in equal annual installments over eight years, subject to acceleration
in certain circumstances and $615,000 will be payable in annual installments
over five years. In addition, Marquee deposited 78,702 shares of its common
stock with a value of approximately $500,000 into an escrow account. Marquee
has determined that it was probable that these shares will be released from
escrow and, accordingly, has recorded a charge to operations of $180,000 as
non-cash compensation. In connection with the QBQ acquisition, Marquee loaned
$1.5 million to the sole shareholder of QBQ, on a non-recourse basis, secured
by Marquee's common stock issued in the QBQ acquisition. The acquisition
agreement also provides that, at any time within the 30-day period following
the first to occur of October 14, 1999 or an Acceleration Event, as defined in
the QBQ acquisition agreement, QBQ may, at its option, elect to transfer to
Marquee up to 75% of the shares it received in connection with the QBQ
acquisition for an aggregate purchase price of up to $1.5 million. In addition,
at any time within the 30-day period following the first to occur of October
14, 1999 or a Pledge Event, as defined in the QBQ acquisition agreement,
Marquee may, at its option, elect to purchase 50% of such shares from QBQ for
an aggregate of $1.5 million. In addition, if the QBQ escrow shares are
released from escrow at any time within the first 30 days after October 14,
1999, or an Acceleration Event, QBQ may, at its option, elect to transfer up to
75% of the QBQ escrow shares to Marquee for an aggregate purchase price of up
to $375,000 and Marquee may, at its option, elect to purchase up to 50% of the
QBQ escrow shares for an aggregate purchase price of up to $750,000. Marquee
may also be obligated to make significant additional earn-out payments over the
next three years based on the financial performance of QBQ.
In connection with Marquee's 1996 acquisitions, Marquee paid $9.0 million
and agreed to pay $2.5 million to the former stockholders of SMTI and A&A in
five equal annual installments, which began on April 1, 1997. The second
installment of $500,000 was paid in April 1998.
On August 3, 1998, Marquee consummated its acquisition of substantially
all of the assets of Alphabet City Industries, Inc. and all of the outstanding
stock of Alphabet City Sports Records, Inc., both of which are sports and music
marketing companies which develop strategic alliances among sports leagues,
music companies and corporate sponsors. The aggregate purchase price for the
Alphabet City acquisition was approximately
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$4.0 million, consisting of approximately $3.4 million in cash, excluding
assumed liabilities, and 200,000 shares of Marquee's common stock. In addition,
Marquee may be obligated to make significant additional payments of up to $9.0
million based upon the financial performance of the acquired businesses.
On August 6, 1998, Marquee consummated its acquisition of all of the
outstanding stock of Cambridge Holding Corporation, a golf representation
company, whose client roster includes a mix of established PGA Tour winners and
many prospects on the Nike Tour. The aggregate purchase price for Cambridge was
approximately $3.9 million, consisting of approximately $3.5 million in cash
and 89,536 shares of Marquee's common stock. In addition, Marquee may be
obligated to make additional payments aggregating approximately $2.0 million
based upon the future financial performance of Cambridge.
On August 13, 1998, Marquee acquired PAL, a sports and media talent
representation firm in the United Kingdom. The initial consideration for the
PAL acquisition was approximately $3.2 million, consisting of approximately
$2.6 million in cash and 117,440 shares of Marquee common stock. In addition,
Marquee will pay an additional \P800,000--approximately $1.3 million--in cash
and \P200,000--approximately $330,000--in Marquee common stock, based on the
closing price of such stock as reported in The Wall Street Journal during the
twenty days before the date of each payment, in five equal annual installments.
On September 2, 1998, Marquee consummated its acquisition of all of the
outstanding stock of Tony Stephens Associates Limited, a soccer talent
representation and sports marketing firm in the United Kingdom. The initial
consideration for the Tony Stephens acquisition was approximately $3.0 million,
of which approximately $2.3 million was paid in cash and 142,291 shares of the
Marquee common stock were issued. In addition, Marquee will pay an additional
\P200,000--approximately $330,000--in cash and an additional \P50,000
- --approximately $83,000--in the form of shares of Marquee common stock.
On September 18, 1998, Marquee acquired Tollin/Robbins Productions, an
independent television and film production and a talent management company, for
an aggregate purchase price of $22.0 million. Of this amount, $16.0 million
will be payable in four equal annual installments beginning on September 1,
1999. In addition, Marquee will pay certain additional amounts payable in cash
and Marquee common stock based upon the financial performance of
Tollin/Robbins. Tollin/Robbins produces television series for HBO and
Nickelodeon and theatrical motion pictures for Paramount Pictures.
Marquee financed the cash portion of Marquee's 1998 acquisitions
principally with borrowings under the Marquee credit agreement.
CREDIT AGREEMENT
On July 31, 1998, Marquee entered into a credit agreement with BankBoston,
N.A., which provides for a revolving line of credit of up to $35.0 million in
the aggregate for loans and letters of credit, which are subject to a $2.0
million sub-limit. As of October 30, 1998, Marquee had outstanding
approximately $33.1 million of borrowings under the credit facility. The
revolving credit facility under the Marquee credit agreement may be used to
finance acquisitions and for working capital needs. Loans under the Marquee
credit agreement bear interest at a floating rate equal to a base rate that
approximates the prime plus an applicable margin or a Eurocurrency rate plus an
applicable margin, whichever is applicable. The applicable margin depends on
Marquee achieving certain leverage ratios. In August and September 1998,
Marquee borrowed approximately $33.1 million under the revolving credit
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facility in connection with Marquee's 1998 acquisitions. The interest rate
associated with such borrowings was 8.3% for domestic borrowings and 10.5% for
British pound loans at September 30, 1998.
Marquee's lenders under the Marquee credit agreement have a first priority
security interest in all existing and future acquired property of Marquee,
including the capital stock of its subsidiaries, and in all existing and future
property of its subsidiaries. Marquee's present and future subsidiaries also
guaranteed its obligations under the Marquee credit agreement. The Marquee
credit agreement also contains financial leverage and coverage ratios, which
may inhibit Marquee's ability to incur other indebtedness, and restrictions on
capital expenditures, distributions and other payments. However, the Marquee
credit agreement allows Marquee to incur additional indebtedness outside of the
Marquee credit agreement to acquire businesses secured solely by the assets of
the acquired businesses, as long as Marquee is in compliance with the financial
covenants of the Marquee credit agreement, exclusive of such indebtedness and
the related borrowing base related to the businesses acquired. The term of the
Marquee credit agreement is three years, with borrowing availability reduced
periodically, commencing January 1, 2000.
Management of Marquee believes that Marquee's working capital and cash
flow generated from operations, as well as the availability of additional
borrowings under the Marquee credit agreement, are sufficient to meet Marquee's
working capital requirements for the foreseeable future. However, if Marquee is
required to repurchase its shares issued in connection with Marquee's 1997
acquisitions, or make any of the earn-out payments described above, there can
be no assurance that Marquee will have funds available for such repurchases or
to make the additional earn-out payments. In addition, Marquee's strategy has
historically involved continued expansion through additional acquisitions, both
within its existing lines of businesses and within complementary lines of
businesses. Pursuant to such strategy, Marquee is currently negotiating with
respect to certain additional acquisitions, although it has not entered into
any definitive agreements with respect to such acquisitions, and there can be
no assurance that it will do so. Additional acquisitions will involve
additional debt financing and/or the issuance of equity securities. Additional
debt financing would require additional payments of principal and interest on
such indebtedness and would adversely impact Marquee's cash flows, and issuing
equity securities may dilute the ownership interests of Marquee's stockholders.
However, there can be no assurance that Marquee will be able to obtain such
financing on terms acceptable to Marquee or at all. Any such acquisitions may
result in charges to operations relating to interest expense or the recognition
and amortization of goodwill, which would have the effect of increasing
Marquee's losses or reducing or eliminating earnings, if any.
LOAN FROM SFX
In connection with amendment no. 4 to the merger agreement, SFX agreed to
lend to Marquee up to $5.0 million to finance a potential acquisition. If the
merger agreement is terminated, Marquee is required to repay this financing,
with interest, within one year of such termination. If required there can be no
assurance that Marquee will have sufficient resources to repay this financing
when due.
YEAR 2000 COMPLIANCE
GENERAL. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year.
Marquee's exposure to potential Year 2000 problems exists in two general areas:
technological operations in the sole control of Marquee, and technological
operations dependent in some way on one or more third parties. Failure to
achieve high levels of Year 2000 compliance in either area could have a
material adverse impact on Marquee.
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STATE OF READINESS. In the area of technological operations under
Marquee's exclusive control, Marquee has performed an internal assessment of
its information technology systems and believes such systems are Year 2000
compliant. Marquee has assessed its non-information technology, including the
embedded systems contained in its buildings and other infrastructure. Marquee
believes that such non-information technology systems are Year 2000 compliant.
THIRD PARTIES. In the area of technological operations dependent in some
way on one or more third parties, the situation is much less in Marquee's
ability to predict or control. Marquee has not performed its own tests on third
parties' systems, but Marquee has completed an internal assessment of third
parties' Year 2000 compliance, and intends to contact third parties with whom
it has a material relationship, if any, to obtain written assurance of such
compliance. Marquee intends to complete such assessments by the summer of 1999.
Marquee is at risk from Year 2000 failures on the part of its major business
counterparts, including suppliers and distributors as well as potential
failures in public and private infrastructure services, including electricity,
water, gas, transportation and communications. Assuming that the third parties
with whom Marquee has a material relationship are not or do not become Year
2000 compliant in a timely manner, system failures resulting from the Year 2000
problem may affect security, payroll operations or health and safety, as well
as such routine but important operations such as billing and collection. In
addition, to the extent Marquee is unable to replace the services or sources of
revenue with alternate sources on a timely and economically equivalent basis,
such failure would likely have a material adverse effect on Marquee's business
and results of operations. However, Marquee does not anticipate that it will be
subject to a material impact resulting from third party Year 2000 compliance
problems.
COSTS. Thus far Marquee has not incurred any material costs with respect
to the Year 2000 issue and based on currently available information, Marquee
does not expect that the costs of Year 2000 compliance will be material.
Nonetheless, in the event that major revenue sources or vendors experience Year
2000 compliance problems, Marquee could lose significant revenues for which it
will not have an immediate replacement and such losses would have a material
adverse effect on Marquee's business, financial condition or results of
operations.
CONTINGENCY PLAN. A reasonably likely worst case scenario resulting from
the Year 2000 problem is that certain of Marquee's material vendors, customers
or events will be unable to fully become Year 2000 compliant in a timely
manner, which will disrupt Marquee's ability to provide services and generate
revenues in certain areas in which it does business. Particularly, Marquee's
event management operations could be significantly impeded by failures in third
party ticket reservation and operating systems. These problems could impact
Marquee's revenues derived from the representation of athletes and musicians
since disruptions to these events would impact the earnings of talent
represented. In television programming and production, Year 2000 failures could
interfere with critical systems in such areas as the production, duplication
and distribution of Marquee's programs. All of these disruptions would continue
until alternative services or sources of revenue could be located.
At present, Marquee anticipates that its action plan with respect to
addressing Year 2000 problems will be successfully completed in all material
respects in advance of January 1, 2000, and that Marquee's cost will not be
material. Marquee does not currently anticipate developing a contingency plan
for Year 2000 issues. Nonetheless, a failure to address Year 2000 issues
successfully could have a material adverse effect on Marquee's business,
financial condition or results of operations.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued FAS 131,
which is effective for years beginning after December 15, 1997. FAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. FAS 131 is effective for financial statements for fiscal years
beginning after December 15, 1997, and therefore Marquee will adopt the new
requirements in 1998. Management has not yet completed its review of FAS 131
and therefore has not determined what reportable segments it will present.
In June 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, which is effective for fiscal years beginning after December
15, 1998. Under SOP 98-5, the costs of start-up activities, including
organizational costs, would be expensed as incurred. SOP 98-5 broadly defines
start-up activities as those one-time activities related to opening a new
facility, introducing a new product or service, conducting business in a new
territory, conducting business with a new class of customer or beneficiary,
initiating a new process in an existing facility or beginning a new operation.
SOP 98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998. Earlier application is encouraged. The initial application
of SOP 98-5 is to be reported as a cumulative effect of a change in accounting
principle. Management is currently assessing the potential impact of SOP 98-5.
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OVERVIEW OF THE LIVE ENTERTAINMENT INDUSTRY
CONCERT PROMOTION INDUSTRY
The concert promotion industry consists primarily of regional promoters
focused generally in one or two major metropolitan markets. According to
Amusement Business, industry gross box office receipts for North American
concert tours totaled $1.1 billion in 1997, compared to $321.7 million in 1985,
representing a compounded annual growth rate of approximately 10.9%. SFX
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, 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, often perform more than one of the booking, promotion and venue operation
functions.
The booking agent generally receives from the artist a fixed fee for its
services or, in some cases, a fee based on the success of the event or events.
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 to cover expenses and generate profits. If the event is
unprofitable, a promoter will sometimes renegotiate a lower guarantee to lessen
the promoter's losses, in a process known as "settlement." In some instances,
the promoter agrees to accept a fee from the booking agent for the promoter's
services, and the booking agent bears the financial risk of the event.
A venue operator typically contracts with a promoter to rent its venue for
a specific event on a specific date or dates. The venue operator provides
services such as concessions, parking, security, ushers and ticket-takers, and
receives revenues from concessions, merchandise, sponsorships, parking and
premium box seats. A venue operator will typically receive for each event it
hosts a fixed fee or percentage of ticket sales for use of the venue, as well
as a fee representing between 40-50% of total concession sales from the vendors
and 10-25% of total merchandise sales from the performer.
Concert venues generally consist of:
o stadiums, which typically have 32,000 or more seats;
o amphitheaters or arenas, which typically have 5,000 to 32,000 seats;
o clubs, which typically have less than 2,000 seats; and
o theaters, which typically have 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.
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THEATRICAL INDUSTRY
The audience for live professional theater has increased significantly in
the last two decades. According to Variety Magazine, gross ticket sales for the
entire industry of touring Broadway shows and Broadway shows have increased
from $476.5 million during the 1987-8 season to $1.4 billion during the 1997-8
season, a compounded annual growth rate of 11.0%. 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 47% in the
1987-8 season to approximately 59% in the 1997-8 season. The growth of the
national theatrical industry has resulted, in part, from:
o the development of local subscription series for touring Broadway shows;
o the construction of new performing arts centers with seating capacities of
2,500 or more in many municipalities;
o an increase in the quality of touring Broadway shows; and
o an increase in the number of multiple-week engagements produced for
presentation outside of New York City.
Touring Broadway shows are typically revivals of previous commercial successes
or reproductions of theatrical shows currently playing on Broadway in New York
City.
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, the producer assembles a
touring company and readies the show for the road. By comparison, dramatic
productions typically have smaller production budgets, shorter pre-production
periods and lower operating costs, and tend to occupy smaller theaters for
shorter runs.
A producer of a Broadway show or a touring Broadway show first acquires
the rights to the work from its owners, who typically receive royalty payments
in return. The producer then assembles the cast of the show, 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 then has the right to recover the amount of the guarantee plus its
local costs from ticket revenues. The promoter and the producer share any
remaining ticket revenues, with the producer typically receiving approximately
60% of the profits. Although touring Broadway shows are generally substantially
less expensive to produce than Broadway shows, their financing may take place
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
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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 to recoup production and touring costs.
Venues often sell tickets for touring Broadway shows 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, most markets host one to four motor sports events each year,
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. Typically, third parties create and finance monster
trucks, demolition derbies, thrill acts, air shows and other motor sports
concepts and events. They may perform in an individual event or in an entire
season of events. As in other motor sports, corporate sponsorships and
television exposure are important financial components that contribute to the
success of a single event or season of events.
TALENT REPRESENTATION INDUSTRY
The talent representation industry generally encompasses the negotiation
of employment agreements and the creation and evaluation of endorsement,
promotional and other business opportunities for the client. A provider in this
industry may also provide ancillary services, such as financial advisory or
management services to its clients in the course of the representation.
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SFX'S BUSINESS
SUMMARY
SFX is the largest diversified promoter, producer and venue operator for
live entertainment events in the United States. In addition, with its
acquisition of FAME in June 1998, SFX became a leading full-service marketing
and management company specializing in the representation of team sports
athletes, primarily in professional basketball. SFX owns, partially or entirely
and/or operates under lease or exclusive booking arrangements, the largest
network of venues used principally for music concerts and other live
entertainment events in the United States, with 71 venues in 29 of the top 50
markets, including 14 amphitheaters in 9 of the top 10 markets, after giving
effect to the Cellar Door acquisition.
SFX has benefited from significant growth in the live entertainment
industry over the last several years. SFX believes that its ability to provide
integrated services as a promoter, producer, venue operator and manager of live
entertainment events will encourage wider use of its venues by performers. SFX
further believes that this ability will allow SFX to capture a greater
percentage of revenues generated by those events and may contribute to the
overall growth of the live entertainment industry.
Through its large number of venues, its strong, branded presence in each
market served and its long operating history, SFX is able to provide integrated
promotion and production services for a broad variety of live entertainment
events locally, regionally and nationally. During 1998, giving effect to SFX's
recent and pending acquisitions, approximately 32.8 million people attended
11,650 events promoted and/or produced by SFX, including approximately 5,200
music concerts, 5,700 theatrical shows, 400 family entertainment shows and over
350 specialized motor sports shows. These events included:
o music concerts featuring artists such as The Rolling Stones, Phish,
Fleetwood Mac, Ozzy Osbourne and Alanis Morissette;
o music festivals such as the George Strait Country Music Festival;
o touring theatrical productions such as Jekyll & Hyde, Rent and The Magic of
David Copperfield; and
o specialized motor sports events, such as Truck Fest and American Motorcycle
Association Supercross racing events.
SFX also represents many prominent and prestigious athletes and
broadcasters for contract and marketing services. In addition, SFX's event
marketing programs reached over 15 million people in 1997. SFX believes that
its ability to provide integrated live entertainment services will, among other
things, encourage wider use of its venues by performers and allow SFX to
capture a greater percentage of revenues from national tours and ancillary
revenue sources.
SFX'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 and in third-party venues. As promoter, SFX
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:
o creates tours for music concerts, theatrical events, specialized motor
sports and other events;
o develops and manages touring Broadway-style theatrical shows; and
o develops specialized motor sports and other live entertainment events.
As venue owner/operator, SFX books and promotes events in the venues which
it controls. SFX believes that its leadership position in the industry enhances
its ability to maximize ancillary revenue opportunities, including corporate
sponsorship sales, advertising, concession sales and product merchandising. In
addition, SFX represents over 100
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professional athletes, many of whom are professional basketball players. The
following chart sets forth, on a pro forma basis, the appropriate percentages
of SFX's net revenues for the nine months ended September 30, 1998 represented
by its major areas of focus:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
LIVE ENTERTAINMENT % OF PRO FORMA NET REVENUES
- ------------------------------------- ----------------------------
<S> <C>
Music, including venue
operations ........................ 61%
Theater ........................... 21%
Sports, including representation of
professional athletes and
specialized motor sports
operations ........................ 10%
</TABLE>
In addition, SFX recently created a family entertainment division to
encompass certain of its family oriented music and theater operations.
BROADCASTING MERGER AND THE SPIN-OFF
Broadcasting was formed in 1992 principally to acquire and operate radio
broadcasting stations. Broadcasting formed SFX as its wholly-owned subsidiary
in December 1997. On May 29, 1998, Broadcasting merged with and into an
affiliate of Hicks, Muse Tate & Furst Incorporated. As a condition to the
Broadcasting merger, Broadcasting contributed to SFX all of its assets relating
to its entertainment business, and, on April 27, 1998, distributed the SFX
common stock to certain stockholders of Broadcasting on a pro rata basis. The
spin-off separated Broadcasting's entertainment business from its
radio-broadcasting business and enabled Broadcasting buyer to acquire only
Broadcasting's radio broadcasting business in the Broadcasting merger.
In conjunction with the Broadcasting merger and the spin-off, SFX,
Broadcasting and Broadcasting buyer entered into the distribution agreement,
the tax sharing agreement and the employee benefits agreement. Each of these
agreements provides for indemnification obligations by SFX and Broadcasting.
See "SFX Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Spin-Off."
1997 ACQUISITIONS
Broadcasting formed SFX Concerts, Inc. ("Concerts") in January 1997 to
acquire and hold Broadcasting's live entertainment operations. Broadcasting
formed SFX as a wholly-owned subsidiary in December 1997 to be the parent
company of Concerts. See "SFX Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DELSENER/ SLATER
In January 1997, Concerts acquired Delsener/Slater, a leading concert
promotion company. Delsener/Slater has long-term leases or is the exclusive
promoter for several of the major concert venues in the New York City
metropolitan area, including the Jones Beach Amphitheater, which is a
14,000-seat complex located in Wantagh, New York, and the PNC Bank Arts Center,
which is a 17,500-seat complex located in Holmdel, New Jersey, and was formerly
known as the Garden State Arts Center.
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<PAGE>
MEADOWS
In March 1997, Concerts acquired the stock of certain companies which own
and operate the Meadows, a 25,000-seat indoor/outdoor complex located in
Hartford, Connecticut. See "Certain Relationships and Related Transactions of
SFX--Meadows Repurchase."
SUNSHINE PROMOTIONS
In June 1997, Concerts acquired the stock of Sunshine Promotions, one of
the largest concert promoters in the Midwest. Sunshine Promotions owns the Deer
Creek Music Theater, a 21,000-seat complex located in Indianapolis, Indiana,
and the Polaris Amphitheater, a 20,000-seat complex located in Columbus, Ohio,
and has a long-term lease to operate the Murat Centre, a 2,700-seat theater and
2,200-seat ballroom located in Indianapolis, Indiana.
1998 ACQUISITIONS
Following is a brief description of the businesses SFX acquired in 1998.
The following descriptions are not intended to be complete descriptions of the
terms of the acquisition agreements and are qualified by reference to the
acquisition agreements. Copies of certain of these acquisition agreements are
filed as exhibits to the registration statement and are incorporated herein by
reference. See "SFX Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Where You Can Find More Information."
WESTBURY
On January 8, 1998, SFX acquired a long-term lease for Westbury Music
Fair, located in Westbury, New York.
BGP
On February 24, 1998, SFX acquired BGP, one of the oldest promoters and
producers of live entertainment in the United States and the principal promoter
of live entertainment in the San Francisco Bay area.
PACE AND PAVILION PARTNERS
On February 25, 1998, SFX acquired all of the outstanding capital stock of
PACE, one of the largest diversified promoters and producers of live
entertainment in the United States. PACE has what SFX believes to be the
largest distribution network in each of its music concerts, theatrical shows
and motor sports events business segments. In connection with the acquisition
of PACE, SFX has obtained 100% of Pavilion, a partnership that owns interests
in 10 of the 71 venues owned by SFX, by acquiring one-third of Pavilion through
the acquisition of PACE and the remaining two-thirds of Pavilion from Sony and
Blockbuster. Under certain circumstances, SFX may be required to sell either
its motor sports or theatrical lines of business. See "Risk Factors--SFX may be
forced to sell some of its subsidiaries, which may prevent SFX from realizing
the full value of these subsidiaries."
In connection with its acquisition of partnership interests in Lakewood
Amphitheater in Atlanta, Georgia and Starplex Amphitheater in Dallas, Texas,
PACE entered into a co-promotion agreement with its partner. The co-promotion
agreement contains a provision that purports, under certain circumstances, to
require PACE to co-promote, and share one-half of the profits and losses, with
such partnership certain concerts which are presented by PACE or any of its
affiliates in another venue located in either Atlanta, Georgia or
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<PAGE>
Dallas, Texas. However, SFX acquired an interest in Chastain Park Amphitheater,
also in Atlanta, in the Concert/Southern acquisition described below. SFX is
currently involved in litigation with its partner. See "--Litigation."
CONTEMPORARY
On February 27, 1998, SFX acquired by merger and asset acquisition the
music concert, live entertainment, event marketing, computerized ticketing and
related businesses of Contemporary and the 50% interest in the Riverport
Amphitheater Joint Venture not owned by Contemporary. Contemporary is a
vertically-integrated live entertainment and special event promoter and
producer, venue operator and consumer marketer. Contemporary is also one of the
top special event sales promotion and marketing companies in the country.
Contemporary develops programs for national consumer product companies and for
demonstrating, sampling and selling products to consumers. Contemporary's
clients have included AT&T, CBS TV, Radio Shack, Coca Cola USA, Reebok, Nabisco
and the NBA.
NETWORK
On February 27, 1998, SFX acquired Album Network, Inc., SJS Entertainment
Corporation and the assets of The Network 40 as well as an office building and
related property. Network is engaged in music marketing, research and artist
development activities and is a publisher of trade magazines for radio
broadcasters, music retailers, performers and record industry executives.
CONCERT/SOUTHERN
On March 4, 1998, SFX acquired Concert/Southern, a promoter of live
entertainment in the Atlanta metropolitan area.
USA MOTOR SPORTS
On March 25, 1998, PACE acquired a 67% interest in certain assets and
liabilities of USA Motor Sports. The remaining 33% interest is held by
Contemporary.
AVALON
On May 14, 1998, SFX acquired Avalon, a leading music concert producer and
promoter in the Los Angeles area.
OAKDALE
On June 3, 1998, SFX acquired certain assets of Oakdale. Oakdale is a
promoter and producer of concerts in Connecticut and the owner of the Oakdale
Theater, a new 4,800 seat facility located in Wallingford, Connecticut.
FAME
On June 4, 1998, SFX acquired all of the outstanding capital stock of
FAME, a leading full-service marketing and management company which specializes
in the representation of team sports athletes, primarily in professional
basketball. FAME was founded in 1992 by David Falk and Curtis Polk and
currently represents some of the premier athletes in professional team sports,
including, among others, Michael Jordan, Patrick Ewing, Alonzo Mourning, Juwan
Howard and Allen Iverson. In addition, FAME provides specialized financial
advisory services to its clients. Mr. Falk continues to serve as the Chairman
of FAME and was appointed as a Member of the Office of the Chairman and a
director of SFX. SFX believes that, through its acquisition of FAME, it will be
able to capitalize on the cross-marketing opportunities that may arise by
virtue of representing prominent team athletes while selling corporate
sponsorships and other marketing rights at its existing venues.
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<PAGE>
DON LAW
On July 2, 1998, SFX acquired certain assets of Don Law, a concert and
theater promoter in New England. Don Law currently owns and/or operates three
venues in New England with an aggregate seating capacity of 27,400.
MAGICWORKS
On September 11, 1998, SFX purchased all of the outstanding shares of
common stock of Magicworks, a publicly-traded company. Magicworks specializes
in the production and promotion of live entertainment events such as theatrical
shows, musical concerts, ice skating shows and other forms of live
entertainment. Magicworks also provides personal representation and sports
marketing services to professional athletes in such sports as figure skating,
baseball and tennis.
OTHER ACQUISITIONS
In the third quarter of 1998, SFX completed the acquisition of seven
additional companies in the theatrical and music segments. The seven
acquisitions included two concert promotion companies, two theatrical
presenters, a theatrical presenter and venue owner/operator, a concert
merchandising company and an equity owner of an SFX amphitheater.
RECENT ACQUISITION
On January 11, 1999, SFX acquired all of the outstanding equity interests
of a company involved in business management and tour production in music and
the performing arts.
MARQUEE MERGER
On July 23, 1998, SFX and Marquee entered into a merger agreement, which
was subsequently amended, whereby Marquee will become a wholly owned subsidiary
of SFX. See "The Merger."
CELLAR DOOR ACQUISITION
In January 1999, SFX and the beneficial owner of all of the outstanding
equity interests of Cellar Door entered into a definitive agreement with
respect to SFX's acquisition of all of the outstanding capital stock of Cellar
Door. Cellar Door is a leading promoter and producer of live entertainment
events. The closing is expected to be subject to customary closing conditions.
See "Agreement Related to the Cellar Door Acquisition."
ISI ACQUISITION
Integrated Sports International is a full-service marketing company
utilizing a completely integrated approach in the development of client
programs. Integrated Sports International is involved in:
o corporate consulting and property marketing;
o athlete/celebrity marketing and representation;
o team and venue services;
o event planning and management; and
o licensing and merchandising.
AGREEMENT WITH TICKETMASTER
On November 13, 1998, SFX and Ticketmaster entered into a binding letter
of intent in which SFX granted Ticketmaster the exclusive right to sell and
distribute tickets for SFX's events worldwide. SFX anticipates that the
revenues associated with its ticket sales will
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<PAGE>
increase in 1999 as a result of this agreement. SFX is currently evaluating its
existing internal ticket operations, which were acquired in SFX's 1998
acquisitions; however, SFX does not believe that its ticketing operations are
material to its financial condition or results of operation.
SERVICES PROVIDED BY SFX
SFX is engaged in:
o booking and promoting live entertainment events and tours;
o producing live entertainment events and tours;
o owning and/or operating concert and other entertainment venues;
o representing professional athletes; and
o selling corporate sponsorships and advertising, and providing marketing and
consulting services to third-parties.
BOOKING AND PROMOTION
SFX books and promotes music concerts, theatrical events, specialized
motor sports and other live entertainment events and tours such as music
festivals, comedy tours, figure skating shows, gymnastics tours, motivational
speaking tours and other special events. SFX books and promotes events in a
number of types of venues that are owned and/or operated by SFX or by third
parties. See "--Venue Operations." SFX primarily promotes concerts performed by
newer performers having widespread popularity--such as Phish, Dave Matthews
Band and Hootie & the Blowfish--and by more established performers having
relatively long-standing and more stable bases of popularity--such as James
Taylor and Jimmy Buffett. SFX believes that its large distribution network will
enable it to set an aggregate guarantee for a series of shows, mitigating the
risk of loss associated with a single show. SFX also believes that the market
research and audience demographics database that it acquired in SFX's 1998
acquisitions, when combined with its existing audience data collection efforts,
will permit highly-effective, targeted marketing, such as direct-mail and
subscription series campaigns, which SFX believes will increase ticket
pre-sales and overall sales in a cost-efficient manner.
The following table identifies artists whose events SFX recently promoted,
on a pro forma basis:
<TABLE>
<S> <C> <C>
Aerosmith Elton John Phil Collins
Alabama Fleetwood Mac* Pink Floyd
Alanis Morissette James Taylor Phish
Bette Midler Janet Jackson R.E.M.
Billy Joel Jerry Seinfeld* Rod Stewart*
Brooks & Dunn Jimmy Buffett The Rolling Stones
Chris Rock* Live Seal
Clint Black Melissa Etheridge Sheryl Crow
Crosby, Stills & Nash Metallica Smashing Pumpkins
Dave Matthews Michael Bolton* Stone Temple Pilots
Depeche Mode Ozzy Osbourne* Tim Allen*
The Eagles Pearl Jam Tina Turner
Earth, Wind & Fire Peter Gabriel U2
</TABLE>
- ----------
* SFX produced a national tour.
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<PAGE>
PRODUCTION
SFX is currently involved in creating tours for music concert and other
live entertainment events. SFX's production activities include:
o creating tours for music concert, theatrical, specialized motor sports and
other live entertainment events;
o developing and managing touring Broadway shows; and
o developing specialized motor sports shows, proprietary characters and
television programming.
The acquired businesses produce tours on a national or regional basis and,
in 1997, structured national tours for Fleetwood Mac and Ozzy Osbourne, among
others. SFX 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--typically 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.
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<PAGE>
The touring Broadway show production and promotion industry is highly
fragmented. SFX believes it is the largest multiple-market presenter of touring
Broadway shows in the United States. SFX competes with other producers and
presenters to obtain presentation arrangements with venues and performing arts
organizations in various markets, including in markets that have more than one
venue suitable for presenting a touring Broadway show. SFX's competitors, some
of whom have also been partners of PACE and Magicworks in certain theater
investments from time to time, include a number of New York-based production
companies that also promote touring Broadway shows and a number of regional
presenters. On a pro forma basis, SFX would have had a producing interest or
investment in the following shows for 1997 and/or 1998, among others:
<TABLE>
<CAPTION>
SHOW TITLE TYPE SFX'S INVOLVEMENT
- -------------------------------- -------------------- --------------------------
<S> <C> <C>
Big Touring Production
Cabaret Touring Production
Damn Yankees Touring Production
Death Trap Touring Production
Evita Touring Production
Funny Girl Touring Production
The Gin Game Touring Production
Harmony Development Production
Jekyll & Hyde Broadway Production
Kiss of the Spiderwoman Touring Production
Lord of the Dance Touring (Europe) Production
The Magic of David Copperfield Touring Production
Man of La Mancha Touring Production
Smokey Joe's Cafe Touring Production
The Sound of Music Touring Production
Victor, Victoria Touring Production and Investment
West Side Story Touring Production
A Chorus Line Touring (US & UK) Investment
Annie Broadway Investment
Carousel Touring Investment
Cirque Broadway & Touring Investment
Chicago Broadway & Touring Investment
How to Succeed in Business Broadway & Touring Investment
Martin Guerre West End (UK) Investment
Rent Broadway & Touring Investment
Steel Pier Broadway Investment
Triumph of Love Broadway Investment
West Side Story Touring (UK) Investment
</TABLE>
SFX 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. Most
of these cities have only a limited number of venues that can accommodate a
touring Broadway show.
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<PAGE>
SFX currently sells subscription series for its touring Broadway shows in
the following 38 markets that maintain active touring schedules:
<TABLE>
<CAPTION>
<S> <C> <C>
Albuquerque, NM Indianapolis, IN Pittsburgh, PA
Atlanta, GA Jacksonville, FL Portland, OR
Austin, TX Long Beach, CA Salt Lake City, UT
Baltimore, MD Louisville, KY San Antonio, TX
Boise, ID Miami, FL Seattle, WA
Boston, MA Milwaukee, WI Tampa, FL
Cincinnati, OH Minneapolis, MN Tempe, AZ
Colorado Springs, CO Nashville, TN Tucson, AZ
Columbus, OH New Orleans, LA Wallingford, CT
Dallas, TX Omaha, NE Wichita, KS
Eugene, OR Orange County, CA Ottawa, Canada
Ft. Lauderdale, FL Orlando, FL Edmonton, Canada
Houston, TX Palm Beach, FL
</TABLE>
SFX also produces motor sports events, such as monster truck events,
tractor pulls, mud races, demolition derbies and motor cross races, and designs
tracks and other elements for those events. Competition among producers in the
specialized motor sports industry is between three large companies and a number
of smaller regional companies. SFX believes that it is the largest participant
in the industry, on a pro forma basis having produced over 190 events in 1997.
SFX also competes with several regional specialized motor sports companies,
which each present only a small number of events, as well as a number of local
promoters that present only one or two events per year. See "Risk Factors--SFX
may be forced to sell some of its subsidiaries which may prevent SFX from
realizing the full value of these subsidiaries."
In addition, SFX produces a variety of other forms of live entertainment,
including music festivals, radio programs, air shows, figure skating shows,
gymnastics tours, comedy tours, motivational speaking tours and television
programming based on certain of its events and other events.
VENUE OPERATIONS
SFX derives revenues from its venue operations primarily from corporate
sponsorships and advertising, concessions, merchandise, parking and other
related items. A venue operator typically receives for each event it hosts a
fixed fee or percentage of ticket sales for use of the venue, as well as a fee
representing 40-50% of total concession sales from the vendors and 10-25% of
total merchandise sales from the performer. As a venue owner, SFX typically
receives 100% of sponsorship and advertising revenues. Since few artists will
play in every available market during a tour, SFX 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 a
performer's decision to choose to perform in an amphitheater market. In certain
cities, SFX also competes with other venues to promote an artist in that city.
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SFX believes that it controls the largest network of venues used
principally for music concerts and other live entertainment events in the
United States. Upon closing of the Cellar Door acquisition, SFX will wholly or
partially own and/or operate 71 venues in 29 of the top 50 markets, including
14 amphitheaters in 9 of the top 10 markets. The following chart sets forth
certain information with respect to the venues that SFX wholly or partially
owns and/or operates:
<TABLE>
<CAPTION>
TOTAL AVG. NO. OF TOTAL
MARKET TYPE OF SFX'S SEATING ATTENDANCE EVENTS SEATS SOLD
MARKET AND VENUE RANK (1) VENUE INTEREST CAPACITY IN 1997 IN 1997 IN 1997
- ----------------------------- ---------- -------------- ------------- --------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
New York--Northern New 1
Jersey--Long Island:
PNC Bank Arts Center amphitheater 22-year 17,500 6,456 57 368,004
(formerly Garden State lease that
Arts Center) ............... expires
October 31,
2017
Jones Beach Theatre ......... amphitheater 10-year 14,400 7,992 45 359,653
license
agreement
that expires
December 31,
1999
Roseland Ballroom ........... theater exclusive 3,600 2,614 41 107,174
booking
agent
Westbury Music Fair ......... theater 43-year 2,870 2,198 148 325,348
lease that
expires
December 31,
2034
Irving Plaza ................ theater 10-year 1,121 963 208 200,250
lease that
expires
July 30,
2007
Beacon Theatre .............. theater 49% 2,849 2,000(2) 40(2) 80,000(2)
partnership
interest in
15-year
lease that
expires
December 31,
2006
Los Angeles--Riverside-- 2
Orange County:
Glen Helen Blockbuster amphitheater 25-year 25,000(3) 10,162 15 152,432
Pavilion ................... lease that
expires
July 1, 2018
Irvine Meadows amphitheater facility 15,500 11,537 19 219,211
Amphitheater ............... owned;
20-year land
lease that
expires
February
28, 2017
Thousand Oaks Civic Arts theater 5-year 1,800 1,164 24 27,929
Plaza ...................... exclusive
booking
agent for
contemporary
music
events that
expires
May 2003
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TOTAL AVG. NO. OF TOTAL
MARKET TYPE OF SFX'S SEATING ATTENDANCE EVENTS SEATS SOLD
MARKET AND VENUE RANK (1) VENUE INTEREST CAPACITY IN 1997 IN 1997 IN 1997
- ---------------------------------- ---------- -------------- -------------- ---------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Chicago--Gary--Kenosha: 3
The Palace Theater(4) ............ theater 50% 2,350 N/A N/A N/A
partnership
interest in
49-year
lease that
expires
May, 2048
Washington--Baltimore: 4
Nissan Pavilion at Stone amphitheater 20-year 25,000 11,116 31 344,600
Ridge(5) ........................ lease that
expires
June 9,
2014
San Francisco--Oakland-- San 5
Jose:
Shoreline Amphitheater ........... amphitheater facility 22,000 12,600 40 504,013
owned; land
leased for
35 years,
expiring
November 30,
2021
Concord Pavilion ................. amphitheater 10-year 12,500 6,226 42 261,479
exclusive
outside
booking
agent until
December 31,
2005
Greek Theater .................... theater 4-year 8,500 6,191 9 55,718
promotion
agreement
that expires
October 31,
2002
Warfield Theatre ................. theater 10-year 2,250 1,677 77 129,129
lease that
expires
May 31,
2008
Fillmore Auditorium .............. theater 10-year 1,249 1,051 180 189,103
lease that
expires
August 31,
2007
Punch Line Comedy Club ........... club 5-year lease 175 97 422 41,138
that expires
September 15,
2001
Philadelphia--Wilmington-- 6
Atlantic City:
Blockbuster/SONY Music amphitheater 31-year 25,000 8,973 54 484,528
Entertainment Centre at lease that
the Waterfront .................. expires
September 29,
2025
Boston--Worcester--Lawrence: 7
Great Woods Center for the amphitheater owned 19,500 11,943 54 644,875
Performing Arts .................
Harborlights Pavilion(6) ......... amphitheater license 4,800 3,180 45 143,100
agreement
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TOTAL AVG. NO. OF TOTAL
MARKET TYPE OF SFX'S SEATING ATTENDANCE EVENTS SEATS SOLD
MARKET AND VENUE RANK (1) VENUE INTEREST CAPACITY IN 1997 IN 1997 IN 1997
- -------------------------------- ---------- -------------- ---------------- --------------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Orpheum Theatre ................ theater 4-year 2,700 2,475 184 622,586
operating
agreement
that expires
December 31,
2000
Avalon ......................... club 5-year 1,350 1,116 54 60,213
exclusive
booking
agent until
June 30,
2003 and
beneficial
owner of a
minority
interest
Charles Playhouse (main theater owned 525 439 416 182,448
stage) ........................
Charles Playhouse (basement) theater owned 200 104 416 43,480
Wilbur Theatre ................. theater 5-year lease 1,223 959 129 123,732
that expires
August 25,
2001
Colonial Theatre ............... theater 8-year lease 1,704 1,330 208 276,754
that expires
August 31,
2001
Detroit--Ann Arbor--Flint: 8
Pine Knob Music Theatre(5) ..... amphitheater preferred 16,646 11,277 45 507,469
booking
The Palace at Auburn arena preferred 15,000(7) 15,893 23 365,549
Hills(5) ...................... booking
Detroit State Theatre(5) ....... theater exclusive 3,000 2,388 36 85,979
booking
Meadowbrook amphitheater exclusive 7,619 4,235 5 21,174
Amphitheater(5) ............... booking
Dallas--Fort Worth: 9
Starplex Amphitheater .......... amphitheater 32.5% 20,500 8,799 35 307,981
partnership
interest in
31 year
lease that
expires
December 31,
2028
Houston--Galveston--Brazoria: 10
Cynthia Woods Mitchell amphitheater 15-year 13,000 8,381 35 293,350
Pavilion ...................... management
contract
that expires
December 31,
2009
Aerial Theater at Bayou theater 50% 2,800 3,223 18 58,019(8)
Place ......................... partnership
interest in
10-year
lease that
expires
December 31,
2007
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TOTAL AVG. NO. OF TOTAL
MARKET TYPE OF SFX'S SEATING ATTENDANCE EVENTS SEATS SOLD
MARKET AND VENUE RANK (1) VENUE INTEREST CAPACITY IN 1997 IN 1997 IN 1997
- -------------------------------- ---------- -------------- -------------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Atlanta: 11
Lakewood Amphitheater .......... amphitheater 32.5% 19,000 9,257 32 296,225
partnership
interest in
35-year
lease that
expires
January 1,
2019
Chastain Park Amphitheater ..... amphitheater 10-year 7,000 5,777 28 161,755
lease that
expires
December 31,
2000
Roxy Theater ................... club 7-year lease 1,500 848 102 86,498
that expires
March 31,
2004
Cotton Club .................... club 5-year lease 650 403 151 60,829
that expires
August 30,
2000
Miami--Fort Lauderdale: 12
Sunrise Musical Theatre (5) .... theater owned 3,968 3,366 34 114,444
Parker Playhouse ............... theater 4-year 1,185 749 112 83,904
exclusive
booking
that expires
October 17,
2000
Seattle--Tacoma--Bremerton: 13
White River Amphitheatre amphitheater long-term 20,000 N/A N/A N/A
(9) ........................... management
agreement
Phoenix--Mesa: 16
Desert Sky Blockbuster amphitheater 60-year 19,900 9,179 23 211,114
Pavilion ...................... lease that
expires
June 30,
2049
St. Louis: 18
Riverport Amphitheater ......... amphitheater owned 21,000 10,531 42 442,302
American Theater ............... theater 10-year 2,000 1,510 24 36,236
lease that
expires
July 31,
2004
Westport Playhouse ............. theater year-to-year 1,100 880 15 13,196
lease, with
renewal
under
negotiation
Pittsburgh: 19
Star Lake Amphitheater ......... amphitheater 45-year 22,500 12,361 42 519,182
lease that
expires
December 31,
2034
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TOTAL AVG. NO. OF TOTAL
MARKET TYPE OF SFX'S SEATING ATTENDANCE EVENTS SEATS SOLD
MARKET AND VENUE RANK (1) VENUE INTEREST CAPACITY IN 1997 IN 1997 IN 1997
- --------------------------------- ---------- -------------- ----------------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
I.C. Light Amphitheater ......... amphitheater year to year 4,235 2,257 82 185,029
license
agreement
expired
December 31,
1998 (extension
to December 31,
2004 negotiated-
awaiting
execution of
agreement)
Kansas City: 24
Sandstone Amphitheater. ......... amphitheater 10-year 18,000 8,109 32 259,488
lease that
expires
December 31,
2002
Starlight Theater ............... theater concert 9,000 3,772 9 33,948
presentation
agreement
that expires
September 30,
2000
Memorial Hall ................... theater 5-year 3,000 1,910 11 21,014
management
contract
that expires
January 1,
2004
Milwaukee--Racine: 25
Marcus Amphitheater (5) ......... amphitheater 50% 22,828 8,334 11 91,670
partnership
in lease that
expires in
2000
Modjeska Theater(5) ............. theater exclusive 1,800 965 21 20,262
booking
Sacramento--Yolo: 26
Punch Line Comedy Club .......... club 9-year lease 245 90 355 31,834
that expires
December 31,
2000
Yuba County amphitheater owned 18,500 N/A N/A N/A
Amphitheatre (9) ...............
Norfolk--Virginia Beach-- 27
Newport News:
GTE Virginia Beach amphitheater 30-year 20,000 10,428 32 333,688
Amphitheater(5). ............... lease that
expires in
2026
The Boathouse(5) ................ concert hall lease that 2,460 1,494 42 62,762
expires 2013
The Abyss(5) .................... club exclusive 900 329 16 5,269
booking
Indianapolis: 28
Deer Creek Music Center ......... amphitheater owned 21,000 11,348 42 476,617
Murat Theatre ................... theater and 50-year 2,700 1,412 144 211,920
ballroom lease that
expires
August 31,
2045
Columbus: 30
Polaris Amphitheater ............ amphitheater owned 20,000 7,732 39 301,555
</TABLE>
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<TABLE>
<CAPTION>
TOTAL AVG. NO. OF TOTAL
MARKET TYPE OF SFX'S SEATING ATTENDANCE EVENTS SEATS SOLD
MARKET AND VENUE RANK (1) VENUE INTEREST CAPACITY IN 1997 IN 1997 IN 1997
- --------------------------------- ---------- -------------- --------------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Charlotte--Gastonia--Rock Hill: 32
Charlotte Blockbuster amphitheater owned 18,000 8,592 34 292,135
Pavilion .......................
Hartford: 37
Meadows Music Theater ........... amphitheater facility 25,000 9,807 26 254,982
owned; land
leased for
40 years
until
September 13,
2034
Oakdale Theater ................. theater facility 4,800 2,944 142 418,000
owned;
15-year land
lease that
expires
June 3,
2013 and
SFX will
purchase
land upon
expiration
Nashville: 40
Starwood Amphitheater ........... amphitheater owned 17,000 8,208 25 205,204
Rochester: 41
Finger Lakes Amphitheater ....... amphitheater year to year 12,700 6,123 15 91,845
co-promotion
agreement
that expires
December 31,
1999
Raleigh--Durham--Chapel 45
Hill:
Walnut Creek Amphitheater ....... amphitheater 40-year 20,000 10,498 40 419,919
lease that
expires
October 31,
2030 (10)
West Palm Beach--Boca 48
Raton:
SONY Music/Blockbuster amphitheater lease that 20,000 11,244 26 292,340
Coral Sky Amphitheater ......... expires
December 31,
2005 (10)
Royal Poinciana Playhouse ....... theater 6-year lease 878 601 84 50,509
that expires
October 31,
2004
Louisville: 49
Palace Theatre .................. theater 50% 2,700 N/A N/A N/A
ownership
Richmond--Petersburg: 51
Classic Amphitheatre(5) ......... amphitheater year to year 11,000 6,208 14 86,917
management
contract
Springfield: 70
Tanglewood ...................... amphitheater exclusive 13,802 5,786 8 46,289
booking
agent--expires
July 27,
1999
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TOTAL AVG. NO. OF TOTAL
MARKET TYPE OF SFX'S SEATING ATTENDANCE EVENTS SEATS SOLD
MARKET AND VENUE RANK (1) VENUE INTEREST CAPACITY IN 1997 IN 1997 IN 1997
- ---------------------------------- ---------- -------------- ------------- ---------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Reno: 125
Reno Hilton Amphitheater ......... amphitheater 4-year 8,500 3,420 19 64,983
exclusive
promotion
agreement
that expires
December 31,
2001
</TABLE>
- ----------
(1) Based on the July 1996 population of metropolitan statistical areas as
set forth in the Internet Press Release, dated December 1997, by the
Population Estimates Program, Population Division, U.S. Bureau of the
Census. Excludes venues where SFX sells subscriptions for touring
Broadway shows.
(2) Approximate numbers.
(3) Additional seating of approximately 40,000 is available for certain
events.
(4) Venue is closed for renovation and is scheduled to re-open in May 1999.
(5) Venues to be acquired in the Cellar Door acquisition.
(6) SFX has negotiated a new license agreement for this facility and is
awaiting approval of this agreement by the appropriate governmental
authority.
(7) Additional seating of approximately 5,000 is available for certain
events.
(8) Includes New Year's Eve Festival with attendance of approximately 15,000.
(9) Venue is currently under development.
(10) Upon closing of the Cellar Door acquisition, SFX will own a 100% interest
in each of these leases. SFX currently holds a 66 2/3% partnership
interest in the Walnut Creek Amphitheater lease and a 75% partnership
interest in the SONY Music/Blockbuster Coral Sky Amphitheater lease.
Because SFX operates a number of its venues under leasing or booking
agreements, its long-term success will depend on its ability to renew these
agreements when they expire or end. There can be no assurance that it 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.
REPRESENTATION OF PROFESSIONAL ATHLETES
Upon consummation of the FAME acquisition in June 1998, SFX became a
leading full-service provider of marketing and management services,
specializing in the representation of team sports athletes, primarily in
professional basketball. It generates revenues through the negotiation of
professional sports contracts and endorsement contracts for its clients. FAME's
clients have endorsed products for companies such as Nike, McDonald's,
Coca-Cola and Chevrolet. In addition, FAME generates a small portion of its
revenues by providing certain financial management and planning services to its
clients, through its investment affiliate that was also acquired in the FAME
acquisition, which is a registered investment advisor. SFX believes that it
will be able to capitalize on the synergies which exist between the
representation of athletes in corporate marketing opportunities and the sale of
corporate sponsorships and other marketing rights at its existing venues.
FAME has derived a significant portion of its revenues to date from a
small number of its clients, primarily in professional basketball. SFX
estimates that five of FAME's basketball clients accounted for approximately
78% of FAME's revenue for the nine months ended September 30, 1998, and, on a
pro forma basis, FAME's revenues would have comprised approximately 1% of SFX's
revenues for the same period. The amount of endorsement and other revenues that
these clients generate is a function of, among other things, the clients'
professional performance and public appeal. Factors beyond SFX's control, such
as injuries
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to clients, declining skill or labor unrest, among others, could have a
material adverse affect on SFX's operations. Representation agreements with
clients are generally for a term equal to the term of the player's professional
sports contract but are terminable on 15 days' notice, although FAME would
continue to be entitled to the revenue streams generated during the remaining
term of any contracts that it negotiated. The termination or expiration of
FAME's contracts with certain clients could have a material adverse affect on
SFX's operations.
The owners of the teams in the NBA locked out their players from
participation in league activities from July 1, 1998 to January 6, 1999, which
caused cancellation of some of the games for the upcoming basketball season.
This NBA season is scheduled to begin on February 5, 1999 with a reduced game
schedule. The cancellation of over 30 games for the upcoming NBA season will
have a negative impact on FAME's revenues and EBITDA.
SPONSORSHIPS AND ADVERTISING; MARKETING AND OTHER SERVICES
To maximize revenues, SFX actively pursues the sale of local, regional and
national corporate sponsorships, including naming venues such as the PNC Bank
Arts Center and designating "official" event or tour sponsors, providers of
concessions such as 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's venues currently have no sponsorship arrangements in many of the
available categories, including naming rights. SFX believes that the national
venue network it has assembled will likely attract a larger number of major
corporate sponsors and enable SFX to sell national sponsorship rights at a
premium over local or regional sponsorship rights. SFX also pursues the sale of
corporate advertising at its venues, and believes that it has substantial
billboard and other advertising space available that it has not yet begun to
utilize. SFX also believes that its relationships with advertisers will enable
it to better utilize available advertising space and the aggregation of its
audiences nationwide will create the opportunity for advertisers to access a
nationwide market.
SFX provides a variety of marketing and consulting services derived from
or complementary to its live entertainment operations, including local,
regional and national live marketing programs and subscription or fee based
radio and music industry data compilation and distribution. Live marketing
programs are generally specialized advertising campaigns designed to promote a
client's product or service by providing samples or demonstrations in a live
format, typically at malls and college campuses. For example, Contemporary
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 believes that Contemporary
is one of the leading producers of national mall touring events, producing over
65 events every year in the country's shopping malls. These events, either in
stores or mall congregation areas, are designed to promote brand awareness and
drive follow-up sales. Contemporary recently had mall tour campaigns for
Newsweek magazine and for Radio Shack. SFX believes that, along with mall
events, Contemporary is one of the industry leaders in events produced on
college campuses. Currently in its seventh year, the CBS College Tour will
appear at 40 colleges in the United States. In addition to promoting the image
of the CBS Television Network, these tours also create value-added tie-in
promotions and marketing programs for the network's top advertisers. During
each year, Contemporary uses over 100 vehicles, 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.
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SFX is engaged in music marketing, research and artist development
activities, and is a publisher of trade magazines for radio broadcasters, music
retailers, performers and record industry executives. Each of SFX's magazines
focuses on research and insight common to a specific contemporary radio format.
SFX also provides radio airplay and music retail research services to record
labels, artist managers, retailers and radio broadcasters.
SFX, through Network, creates and distributes network radio special events
and live concert programming for over 400 music radio stations in the top 200
United States radio markets. Additionally, SFX produces eight daily radio "show
prep" services that stations use to supplement in-house content production.
Network also provides consulting and entertainment marketing services to
corporate clients with music business interests.
OPERATING STRATEGY
SFX's principal objectives are to maximize revenue and cash flow growth
opportunities by being a leading promoter and producer of live entertainment
events and a leading provider of talent representation services and owning
and/or operating leading live entertainment venues in the United States. SFX's
specific strategies include the following:
OWN AND/OR OPERATE LEADING LIVE ENTERTAINMENT VENUES IN NATION'S TOP 50
MARKETS
A key component of SFX's strategy is to own and/or operate a network of
leading live entertainment venues in the nation's top 50 markets. SFX believes
that this strategy will enhance its ability to:
o utilize its nationwide venue footprint, significant industry expertise and
access to a large aggregate audience to secure more events and distribute
content on a national scale;
o sell additional products and maximize numerous other related revenue
sources, including sponsorships and other marketing opportunities;
o position itself to produce national tours by leading performers to capture a
greater percentage of revenues from those tours;
o encourage wider use by performers of SFX's venues by providing centralized
access to a nationwide network of venues; and
o take advantage of economies of scale to increase, for example, concession
and related revenues.
SFX believes that it controls the largest network of venues used
principally for music concerts and other live entertainment events in the
United States. Upon closing of the Cellar Door acquisition, SFX will wholly or
partially own and/or operate under lease or exclusive booking arrangements 71
venues in 29 of the top 50 markets, including 14 amphitheaters in 9 of the top
10 markets.
MAXIMIZE ANCILLARY REVENUE OPPORTUNITIES
SFX intends to enhance revenues and cash flows by maximizing revenue
sources arising from and related to its leadership position in the live
entertainment business. Management believes that these related revenue sources
generally have higher margins than promotion and production revenues and
include, among others, the sale of corporate sponsorship, naming and other
rights, concessions, merchandise, parking and other products and services and
the sale of rights to advertise to SFX's large aggregate national audience.
Categories available for sponsorship arrangements include the naming of the
venue itself and the designation of "official" event or tour sponsors,
concessions providers, 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's venues currently have no sponsorship arrangements in many of the
available
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<PAGE>
categories, including naming rights. SFX also intends to maximize related
revenues by developing and exploiting intellectual property rights associated
with its production of musical concert tours and themed events such as regional
music festivals and branded characters created as an integral part of the
content, marketing and merchandising of certain motor sports events.
SFX has recently entered into memoranda of understanding covering the sale
of naming rights with respect to four venues. SFX has also recently entered
into 16 national sponsorships with respect to national tours arranged by SFX or
the exploitation of the SFX national network of venues. The majority of these
sponsorships are for clients that are either new to SFX or to the entertainment
industry generally.
EXPLOIT SYNERGIES OF THE ACQUIRED BUSINESSES
SFX plans to maximize revenues by exploiting synergies among, and
incorporating the best business practices of, its various existing businesses,
including the businesses to be acquired. SFX also intends to exploit synergies
resulting from the consolidation of venue ownership and SFX's expanding overall
size. For example, SFX believes that the radio industry trade publications of
Network will enable SFX 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. In addition, SFX believes that it will be able to
capitalize on the cross-marketing opportunities that may arise by virtue of
representing prominent team athletes while selling corporate sponsorships and
other marketing rights at its existing venues.
INCREASE USE OF VENUES; DIVERSIFICATION OF ACTS AND VENUES
Typically, a venue is not used for many of the dates available for live
entertainment events in any given season. SFX believes that it will be able to
increase the utilization of its venues through:
o its ability to affect scheduling on a nationwide basis;
o its local knowledge, relationships and expertise; and
o 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 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 plans to use innovative event marketing to increase admissions,
sponsorship and advertising revenues, and, to develop ticketing strategies that
more accurately reflect demand, resulting in increased sales of both lower and
premium printed tickets. In particular, SFX believes that it can increase the
profitability of its venues by offering premium ticket packages, including:
o season ticket packages that include amenities such as preferred seating, VIP
parking, waiter service, private club and/or "upscale" concession menus;
o subscription series packages, allowing customers to purchase tickets for a
set of performances; and
o preferred seating, such as box seating and VIP seating areas, which
typically generate higher revenues per seat.
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SFX acquired market research and audience demographics databases through
certain of SFX's 1998 acquisitions. These databases, when combined with SFX's
existing audience data collection efforts, will permit highly-effective
targeted marketing, such as direct-mail and subscription series campaigns,
which SFX believes will increase ticket pre-sales and overall sales in a
cost-efficient manner.
STRICT COST CONTROLS; NATIONALLY COORDINATED BOOKING, MARKETING &
ACCOUNTING
SFX'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 believes that its size will enable it to achieve substantial
economies of scale by:
o completing the implementation of a nationally coordinated booking system for
contracting for and scheduling acts, while continuing to utilize the
substantial local expertise of the acquired businesses;
o establishing a centralized marketing team to exploit ancillary revenue
streams on local, regional and national levels, including from sponsorship,
advertising and merchandising opportunities; and
o implementing a centralized accounting system.
PURSUE COMPLEMENTARY ACQUISITION OPPORTUNITIES
The live entertainment business is characterized by numerous participants,
including booking agents, promoters, producers, venue owners and venue
operators, many of which are entrepreneurial, capital-constrained local or
regional businesses that do not achieve significant economies of scale from
their operations. SFX believes that the fragmented nature of the industry
presents attractive acquisition opportunities, and that its larger size will
provide it with improved access to the capital markets that will give it a
competitive advantage in implementing its acquisition strategy. Through
consolidation, SFX believes that it will be better able to coordinate
negotiations with performers and talent agents, addressing what SFX believes is
a growing desire among performers and talent agents to deal with fewer, more
sophisticated promoters. SFX intends to pursue additional strategic
acquisitions of:
o amphitheater and other live entertainment venues;
o local and regional promoters and producers of music concert, theatrical,
specialized motor sports and other live entertainment events; and
o companies in the sports marketing and talent representation industry.
In addition to the Cellar Door acquisition, SFX is currently in the process of
negotiating certain additional acquisitions of live entertainment and related
businesses; however, it has not entered into definitive agreements with respect
to any of such acquisitions and there can be no assurance that it will do so.
See "Risk Factors--If SFX is unable to complete other acquisitions in the
future, SFX's business and stock price may suffer."
REGULATORY MATTERS
Because SFX relies on acquisitions of existing businesses and assets for
its growth, restrictions imposed by local, state and federal regulatory,
licensing, approval and permit requirements, including those relating to
zoning, operation of public facilities, consumer protection and antitrust, will
significantly affect its ability to acquire and operate its business. For
example, the Federal Trade Commission and the Antitrust Division of the U.S.
Department of Justice have the authority to challenge SFX's acquisitions on
antitrust
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grounds before or after the acquisitions are completed. Each state where SFX
operates may also challenge an acquisition under state or federal antitrust
laws. SFX may be unable to obtain the licenses, approvals and permits it
requires, including approvals under the HSR Act, from time to time to acquire
and operate live entertainment businesses in accordance with its expansion
strategy.
SFX received a preliminary inquiry from the Department of Justice seeking
information on SFX's acquisitions of live entertainment venues and businesses
throughout the United States. See "Risk Factors--The Department of Justice
investigation may harm SFX's operations."
PROPERTIES
SFX's executive offices are located at 650 Madison Avenue, 16th Floor, New
York, New York 10022. SFX wholly or partially owns and/or operates 71 venues as
more fully described under "--Services Provided by SFX--Venue Operations." In
addition, SFX owns or leases office space throughout the United States and
abroad in connection with its operations.
LITIGATION
In a complaint filed October 8, 1998 in the Superior Court of the State of
California, Los Angeles County, Universal Concerts II, Inc., a California
corporation formerly named MCA Concerts II, Inc., brought suit against PACE
Amphitheaters, Inc., PACE Entertainment Group, Inc., SFX Entertainment, Inc.,
Brian Becker and Allen Becker. The complaint alleged, among other things, that
SFX's acquisitions of PACE and Concert/Southern caused breaches of PACE's
various agreements with Universal. The complaint alleged that PACE is in breach
of a co-promotion agreement, that Brian and Allen Becker are in breach of
non-competition agreements and that SFX has intentionally interfered with
contracts between the plaintiff and certain of the defendants. The defendants
have removed the case from the State Court to the Federal Court for the Central
Division of California and have answered the complaint denying liability.
Although the lawsuit seeks damages in an unspecified amount, in SFX
management's view, the realistic amount in controversy is not material to the
business or prospects of SFX. The defendants intend to defend the case
vigorously.
On November 20, 1998, a group of plaintiffs filed a complaint against 11
talent agencies and 29 promoters, including SFX, several of its subsidiaries
and other entities to be acquired in the Cellar Door acquisition. According to
the complaint, the plaintiffs are five corporations owned by African-Americans.
The compliant alleges action by the defendants to exclude African-Americans
from promoting concerts and seeks injunctive relief and damages for civil
rights and antitrust violations. The focus of the action appears to be
industry-wide, rather than specifically directed at SFX. SFX intends to defend
the action vigorously.
SFX is also involved in litigation relating to the merger. See "The
Merger--Litigation."
Although SFX 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.
EMPLOYEES
As of December 31, 1998, SFX had approximately 1,300 full-time employees.
Upon closing of the merger and the Cellar Door acquisition, SFX expects to have
approximately 1,650 full-time employees. SFX will also, from time to time, hire
or contract for part-time or seasonal employees or independent contractors,
although its staffing needs will vary.
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Management believes that its relations with its employees are good. A number of
the employees to be retained by SFX are covered by collective bargaining
agreements. See "SFX Management."
ADDITIONAL INFORMATION
Certain information about SFX is publicly available. See "Where You Can
Find More Information."
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MARQUEE'S BUSINESS
SUMMARY
Marquee provides integrated event management, television programming and
production, marketing, talent representation and consulting services in the
sports, news and other entertainment industries. Marquee's event management,
television programming and production and marketing services involve:
o managing sporting events;
o producing television programs, principally sports entertainment and
children's programs; theatrical motion pictures; and
o marketing professional and collegiate athletic leagues and organizations.
Marquee also arranges and negotiates sports and entertainment-related
television rights, advertising, corporate sponsorships and entitlements or
naming rights for its clients. Marquee produces and distributes sports music
compact discs and in-stadium/in-arena music and entertainment programming. The
talent representation services provided by Marquee include negotiating
employment agreements and creating and evaluating various business
opportunities for sports, news and entertainment personalities. Marquee also
provides a variety of consulting services to clients either engaged in, or
seeking exposure in, sports and entertainment-related industries.
Marquee was organized in July 1995 by Robert M. Gutkowski and Robert F.X.
Sillerman. Mr. Gutkowski is Marquee's President and Chief Executive Officer and
has over 20 years of experience in the television, sports and entertainment
industries. He served as President of Madison Square Garden Corporation, which
included overall responsibility for MSG Cable Network from November 1991 until
September 1994. Mr. Sillerman is the Chairman of Marquee, and his principal
occupation is Executive Chairman of the Board of Directors of SFX.
From the time of its organization until its IPO in December 1996, Marquee
developed its sports television programming and production, marketing and
consulting business and negotiated its initial acquisitions. Simultaneously
with the IPO, Marquee acquired SMTI, a leading provider of television
programming and production and marketing services in the sports and other
entertainment industries since 1984, and A&A, a sports and news talent
representation firm founded in 1977, which has a client list that includes
premier athletes, sports and news broadcasters and media executives. Since the
IPO, Marquee has continued to grow by hiring individuals whose businesses and
expertise complement those of Marquee and by providing services to an
increasing number of clients. In October 1997, Marquee acquired ProServ and
substantially all of the assets of QBQ. In August and September 1998, Marquee
acquired Alphabet City, Cambridge, PAL, Tony Stephens and Tollin/Robbins.
Through both acquisitions and internal growth, Marquee has developed or
substantially expanded its event management, television programming and
production, marketing, talent representation and consulting capabilities.
1997 ACQUISITIONS
PROSERV ACQUISITION. In October 1997, Marquee acquired ProServ, an
established provider of international sports event management, television
programming and production, marketing, talent representation and consulting
services. ProServ was founded in 1969 by the then-Captain of the U.S. Davis Cup
team, Donald Dell, who also co-founded the Association of Tennis Professionals
and pioneered the commercial development of tennis as a major international
sport. Mr. Dell continues to serve as the chairman and chief executive officer
of
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ProServ and is also a director of Marquee. In addition, although Marquee's
primary operations have been in the United States, Marquee believes ProServ's
existing international operations will facilitate Marquee's goal of becoming a
major competitor in the burgeoning business of international sports,
particularly in European and Pacific Rim markets.
QBQ ACQUISITION. In October 1997, Marquee also acquired the assets of QBQ,
a company that books tours and appearances for a variety of entertainers. Since
its founding in 1986, QBQ has developed relationships with, and has provided
booking and touring representation services to, a variety of musicians and
groups, including Billy Joel, Metallica, Lynyrd Skynyrd, Luther Vandross,
Michael Bolton and Bruce Hornsby. Marquee believes that the music business
offers commercial opportunities similar to the sports business, such as
corporate sponsorships and entitlements. Mr. Gutkowski has significant
expertise in the music concert business, having served as President of Madison
Square Garden Corporation, a premier indoor concert venue, and has been
actively involved in various aspects of the music concert business, including
production of televised concerts.
1998 ACQUISITIONS
ALPHABET CITY. On August 3, 1998, Marquee consummated its acquisition of
substantially all of the assets of Alphabet City Industries, Inc. and Alphabet
City Sports Records, Inc. (collectively "Alphabet City"), both of which are
sports and music marketing companies which develop strategic alliances among
sports leagues, music companies and corporate sponsors. Alphabet City produces
national television spots, in-stadium/in-arena video programming and radio
advertising campaigns for such clients as Foot Locker and Coca-Cola and
develops music compilation compact discs for sports teams such as the New York
Yankees, Chicago Bulls, the Green Bay Packers and the Denver Broncos, which it
distributes through retail chain stores.
CAMBRIDGE. On August 6, 1998, Marquee acquired all of the issued and
outstanding capital stock of Cambridge, a golf representation company, whose
client roster includes a mix of established PGA Tour winners and many prospects
on the Nike Tour.
PARK ASSOCIATES. On August 13, 1998, Marquee acquired PAL, a sports and
media talent representation firm in the United Kingdom.
TONY STEPHENS. On September 2, 1998, Marquee consummated its acquisition
of all of the outstanding stock of Tony Stephens, a soccer talent
representation and sports marketing firm in the United Kingdom.
TOLLIN/ROBBINS. On September 18, 1998, Marquee acquired Tollin/Robbins, an
independent television and film production and talent management company.
Tollin/Robbins produces television series for HBO and Nickelodeon and
theatrical motion pictures for Paramount Pictures.
ACQUISITION AND OPERATING STRATEGY
As part of its strategy to provide comprehensive services to sports, news
and entertainment-related businesses, Marquee intends to continue to expand
through the acquisition of companies and events and through attracting
individuals with relevant expertise, both within its existing lines of business
and within complementary lines of business. Marquee believes that the highly
fragmented nature of its industry offers many attractive acquisition
opportunities, and Marquee intends to rely on the experience of its management
team to continue to identify acquisition candidates whose businesses will
complement Marquee's existing operations and whose operations may be
constrained by lack of capital. In particular, Marquee intends to focus on
consolidation opportunities presented
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by privately-held competitors of moderate size. In the European and Asian
markets, Marquee intends to focus on companies with an established presence in
their market and experienced management. Marquee believes that it is one of the
few publicly-traded companies within its industry, and, as a result, Marquee
will have certain advantages over many of its smaller competitors in
negotiating and consummating acquisitions.
To capitalize on the opportunities available in the sports, news and other
entertainment industries, Marquee has developed an operating and acquisition
strategy consisting of the following major elements:
ENHANCE REVENUES BY OFFERING INTEGRATED SERVICES. Marquee intends to
enhance its revenues from its event management, television programming and
production, marketing, talent representation and consulting businesses by
offering integrated sports and entertainment-related services. Marquee will
continue to cross-promote its various services by offering additional
complementary services within its lines of business to new and existing
clients. For example, in connection with a particular event, Marquee may
organize the event, provide the talent and/or broadcasters, produce the
television coverage, sell the corporate advertising and sponsorships and
negotiate the distribution and other ancillary rights. It is Marquee intends to
expand its involvement with current clients for whom it provides less than a
full complement of services, and to market its full service capabilities to new
clients by emphasizing its ability to deliver integrated services, thereby
relieving the client of the costly and inefficient burden of sourcing multiple
providers. Furthermore, where possible, Marquee intends to create and/or seek
ownership interests in sports and entertainment-related events to maximize its
earnings potential from such events.
INCREASE BREADTH OF SERVICES. Marquee intends to continue to expand its
current lines of business to provide a more comprehensive array of services to
its clients. As the needs of companies utilizing advertising and marketing
services become increasingly sophisticated, Marquee believes that its clients
will require a broader range of the types of services it provides. Marquee will
utilize its breadth of services, its financial resources, its heightened
visibility and its management's experience and reputation to provide it with
expanded opportunities. For example, Marquee's financial resources may enable
it to create or purchase ownership interests in sporting events and develop
in-house television production capabilities. In addition, Marquee has begun
developing certain speciality services such as the brokering of team franchise
sales, the sale of entitlements to sports stadiums and the representation of
women in sports and the marketing of women's sports events.
In addition, Marquee intends to continue to expand its consulting business
to utilize management's substantial expertise in various aspects of sports and
entertainment event management, television programming and production and
marketing. Through its wide array of activities, Marquee is able to gain
experience and insight into the overall economics and developments in the
sports and other entertainment industries, including such issues as pricing,
marketability, logistics and publicity. Various sports and
entertainment-related businesses require such expertise to maximize revenues
from activities such as
o team and event ticket sales;
o venue management;
o sales of television rights;
o program development; and
o obtaining and maintaining sponsorships.
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Marquee is also able to use its expertise in advising businesses that are
seeking exposure through sports and entertainment events.
INCREASE INTERNATIONAL MARKET PENETRATION. Marquee intends to continue to
pursue expansion opportunities in international markets, focusing on the
European and Pacific Rim markets. Marquee believes that the sports, news and
entertainment industries in these markets are less developed than in the United
States and therefore present significant opportunities for Marquee. Marquee
also believes that, over the next few years, these international markets will
exhibit rapid growth, in which case there could be significant opportunities to
provide the types of services offered by Marquee. Marquee currently has offices
or representatives in England, Australia and Japan.
SERVICES PROVIDED BY MARQUEE
Marquee believes that it is one of the leading integrated providers of
comprehensive event management, television programming and production,
marketing, talent representation and consulting services within the sports,
news and entertainment industries. The following are descriptions of Marquee's
lines of business:
EVENT MANAGEMENT, TELEVISION PROGRAMMING AND PRODUCTION AND MARKETING
SERVICES
Marquee manages sporting events, produces sports and entertainment
television programs and markets professional and collegiate athletic leagues
and organizations. Marquee also arranges and negotiates sports and
entertainment-related television rights, advertising, corporate sponsorships
and entitlements for its clients. Further, Marquee produces theatrical motion
pictures, produces and distributes sports music compact discs and
in-stadium/in-arena music and entertainment videos.
Marquee mainly derives its revenue for these services from commissions
and/or fees for managing sporting events, selling broadcast rights to
television networks and cable stations, packaging an event for a particular
corporate sponsor, producing and distributing television programming or videos
and selling entitlements and signage to sporting events and venues. For an
event in which Marquee has ownership rights, Marquee derives revenues from the
various revenue streams associated with the event's operations.
Although they may vary from event to event, Marquee's activities in event
management include:
o site selection;
o recruitment of athletes or personalities;
o procurement of television coverage;
o merchandising, sale of corporate sponsorship;
o creation of corporate hospitality programs; and
o general administrative duties, including contract negotiation and
scheduling.
Marquee generally receives fixed fees and/or commissions, generally
ranging from 15% to 35% of the contracted amount, although these fees and
commissions are negotiated between the parties on an event-by-event basis.
Marquee's corporate sponsorship projects are generally on a short-term basis
and may not be evidenced by written agreements in advance of the company's
expenditures or at all, which Marquee believes to be common in its industry.
Marquee provides event management, television programming and production
and/or marketing services to many clients or events, including the following:
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<TABLE>
<CAPTION>
SERVICES FIRST YEAR OF
PROJECT SPORT/FOCUS PROVIDED AFFILIATION
- --------------------------- ----------------------- ----------------------- ---------------
<S> <C> <C> <C>
The Breeders' Cup Thoroughbred horse Event management, 1994
Championship racing and marketing television production
The Hambletonian Harness horse racing Television production 1985
and marketing
Legg Mason Tennis Classic Tennis Event management 1969
and marketing
AT&T Challenge* Tennis Event management, 1986
television and
production and
marketing
U.S. Open Tennis Tennis Television marketing 1991
Championship
French Open Tennis Tennis Television marketing 1991
Championship
Isuzu Celebrity Golf Golf Event management 1991
Championship* and marketing
ESPN Boxing Boxing Television production 1996
ESPN-Subaru American Wilderness television Television production 1996
Outback series
The PBA Tour Bowling Television production 1996
and marketing
More Than a Game Sports television Television production 1997
series
The Guardian Direct Cup Tennis Event management, 1997
television production
and marketing
Little League Baseball Baseball Television production 1997
and marketing
Sale of Entitlements, Professional and Sale of entitlements, 1997
Team Sponsorships and Collegiate Sports team sponsorships
Signage for Stadiums signage and stadium and
concourse signage
Members of the US Soccer Event management 1998
Women's National Soccer and marketing
Team
National Thoroughbred Thoroughbred horse Television production 1998
Racing Association racing--television and rights
negotiation
</TABLE>
- ----------
* Marquee has an ownership interest in these events.
THE BREEDERS' CUP CHAMPIONSHIP. In 1984, SMTI, together with the
Thoroughbred Racing Association and NBC Sports, created The Breeders' Cup
Championship. This event consists of an annual series of thoroughbred horse
races held at a rotating series of
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racetracks, including Churchill Downs, Santa Anita and Belmont Park. As
co-creator of The Breeders' Cup Championship, SMTI handles substantially every
management, television production, marketing and sponsorship aspect of the
event. Marquee has entered into a marketing agreement with Breeders' Cup
Limited, pursuant to which Marquee was granted the right to provide general
marketing consultation, sales of broadcast and sponsorship rights, television
advertising production, media placement, publicity, public relations,
television and video production, production of promotional materials,
merchandising and licensing of Breeders' Cup Limited in connection with The
Breeders' Cup Championship. Marquee also supervises the televising of the event
and has sold the television rights to NBC-TV, with which it works to create a
four-hour broadcast. The Breeders' Cup agreement ends on December 31, 2000,
unless terminated earlier in accordance with the terms of the agreement,
including the termination, for any reason, of Marquee's employment of Michael
Letis or Michael Trager or the unavailability of Mr. Letis or Mr. Trager to
perform the services necessary to enable Marquee to comply with the terms of
the Breeders' Cup agreement. Giving pro forma effect to Marquee's 1997
acquisitions and Marquee's 1998 acquisitions, the Breeders' Cup agreement would
have accounted for approximately 11% of Marquee's revenues for the year ended
December 31, 1997.
THE HAMBLETONIAN. Since April 1985, Marquee has acted as the exclusive
television agent for The Hambletonian, a premier event in harness horse racing
held annually at The Meadowlands. Marquee's responsibilities include
negotiating all television contracts and producing the telecast of the event.
The agreement expired in March 1998, and The Hambletonian has orally agreed to
renew for an additional two years.
LEGG MASON TENNIS CLASSIC. Since July 1969, when this event was first
held, ProServ has operated all aspects of this event for the Washington Tennis
Foundation, a non-profit group which runs programs for "at-risk" youths
throughout the metropolitan Washington area. This event is a Championship
Series event on the ATP tour that features 56 singles players and 28 doubles
teams. ProServ's agreement to manage this event expires in 2005, although it
can be terminated earlier under certain circumstances.
AT&T CHALLENGE. In January 1986, ProServ created the AT&T Challenge, a
men's tennis tournament authorized by the ATP Tour that features 32 singles
players and 16 doubles teams. ProServ owns the rights to this event, which
serves as a major clay-court tune-up event for the French Open. ProServ
provides all event management and television production services relating to
the event, including ticket sales, sponsorship sales, player procurement, site
preparation, public relations, television rights and event management.
U.S. OPEN TENNIS CHAMPIONSHIP. Since October 1990, ProServ has negotiated
the sale of U.S. cable television rights to the U.S. Open Tennis Championship.
This event is one of only four Grand Slam events on the professional tennis
tour. ProServ's agreement with respect to the U.S. Open Tennis Championship
expires in October 2002.
FRENCH OPEN TENNIS CHAMPIONSHIP. Since 1991, ProServ has acted as the
exclusive consultant and representative for the distribution and sale of all
television rights to the French Open Tennis Championship in North America. The
French Open Tennis Championship is another of the four Grand Slam events on the
professional tennis tour. ProServ's agreement with the French Tennis Federation
expires in January 2001.
ISUZU CELEBRITY GOLF CHAMPIONSHIP. In January 1995, Marquee and NBC formed
Celebrity Golf Championship, LLC, a company in which Marquee owns a 25%
interest, to conduct the Isuzu Celebrity Golf Championship. This event is an
annual celebrity
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professional golf tournament held in Lake Tahoe, Nevada, where the competitors
include well-known sports, entertainment and media personalities. In
partnership with NBC, Marquee organizes all aspects of the event, including
event management, sponsorship sales and television production.
ESPN BOXING. Since March 1996, Marquee has produced all of the boxing
matches broadcast on ESPN and ESPN2. During 1997 and 1998, Marquee will produce
approximately 100 such boxing matches. Marquee's television production services
in connection with these boxing matches include reviewing sites, arranging for
television cameras, lighting, audio and video equipment and technical
facilities and coordinating the use of on-air broadcasters. Marquee's agreement
with ESPN expires in April 2000.
ESPN-SUBARU AMERICAN OUTBACK. In October 1996, Marquee agreed to produce
"Subaru America Outback," an outdoor television series featuring adventurers
who take on the challenges of the wilderness. Forty-eight half-hour episodes
aired on ESPN and ESPN2 in 1997 and 1998.
THE PBA TOUR. Since September 1996, Marquee has served as the exclusive
representative to the PBA Pro Bowlers Tour, one of the longest-running sports
series on network and cable television. In connection therewith, Marquee
handles sponsorship sales, television rights negotiations and television
production. Marquee receives a portion of the proceeds from the sale of
television rights and fees for television production and sponsorship sales.
Marquee's agreement with the PBA expires in December 1999.
MORE THAN A GAME. In February 1997, Marquee agreed with Raycom Sports, a
television syndication company, to produce 52 episodes of "More Than a Game," a
weekly syndicated sports magazine show featuring athletes and sports
personalities who present examples of the positive side of sports. The episodes
began airing in the third quarter of 1997. For 1998, Marquee will produce an
additional 24 original episodes.
THE GUARDIAN DIRECT CUP. In October 1997, Marquee entered into a joint
venture to operate all aspects of The Guardian Direct Cup, a championship
series on the ATP tour. In March 1998, the event was held in London, England.
The agreement expires in 2000, and Marquee has an option to renew for an
additional two years.
LITTLE LEAGUE BASEBALL. In December 1997, Marquee agreed to act as the
exclusive sponsorship agency for Little League Baseball. Marquee is also
responsible for the television production for two of Little League's champion
events. The agreement expires in December 1998 but may be terminated earlier at
the Little League's option.
SALE OF ENTITLEMENTS, TEAM SPONSORSHIPS AND SIGNAGE FOR STADIUMS. Marquee
has entered into agreements to sell signage at Jack Kent Cooke Stadium in
Washington D.C. and The Rose Bowl in Pasadena, California and to sell team
sponsorships for the San Francisco Giants. In addition, Marquee sold the
entitlement to Staples Center in Los Angeles, California and has entered into
agreements to sell entitlements to the stadium to be used by the Baltimore
Ravens and to consult with Time Warner in the sale of the entitlement for the
stadium to be used by the Atlanta Hawks and Atlanta Thrashers. The agreements
to sell stadium signage and team sponsorships are generally short-term.
MEMBERS OF THE U.S. WOMEN'S NATIONAL SOCCER TEAM. Marquee is working with
the members of this gold medal-winning team to develop a range of off-the-field
marketing activities that take advantage of the team's prominence in the
upcoming 1999 Women's World Cup and the 2000 Olympics in Sydney, Australia.
These activities will include endorsements, publishing projects, television
programming and event marketing. The contract for these services was entered
into in July 1998 and extends through 2000.
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NATIONAL THOROUGHBRED RACING ASSOCIATION. In April 1998, the Company
agreed to consult with the National Thoroughbred Racing Association to develop
a plan to expand the presence of horse racing on network television. In
collaboration with the NTRA, Marquee has developed a new television series of
horse races which Marquee has placed on Fox and Fox Sports Net. The contract
with NTRA expires in September 2000.
TALENT REPRESENTATION
Marquee represents broadcasting, sports, news and entertainment
personalities. These representation services encompass the negotiation of
employment agreements and the creation and evaluation of endorsement,
promotional and other business opportunities for such personalities. Fees for
these services may be fixed, but ordinarily represent a percentage of income
realized by Marquee's clients through its efforts. Marquee's fees generated
from a particular client are not necessarily related to the prominence of such
client. Marquee's written representation agreements with its clients are
generally terminable annually on 30 days' notice, although Marquee will
continue to be entitled to revenue streams generated during the remaining term
of any contracts which Marquee negotiated. Marquee lacks written representation
agreements with certain of its clients, which Marquee believes to be common in
the industry. In addition, Marquee's relationship with the talent that it
represents may be dependent upon Marquee's continued relationship with the
particular agent who represents such talent. While Marquee has agreements with
many of its agents, there can be no assurance that they will continue to be
employed by Marquee during the term of such agreements.
Marquee represents, or derives revenues from the representation of, over
500 professional athletes, broadcasters, musicians and entertainers, including:
SELECTED ATHLETES
<TABLE>
<S> <C> <C>
TENNIS HOCKEY FOOTBALL
Alex Corretja Nikolai Khabibulin Tony Brackens
Stefan Edberg Brian Leetch Ben Coates
Jan Michael Gambill Dmitri Miranov Irving Fryar
Petr Korda Sergei Samsonov Travis Jarvey
Patrick Rafter Sergei Zubov Michael McCrary
Greg Rusedski Dmitrius Zubrus Winfred Tubbs
Gabriela Sabatini
BASEBALL SOCCER GOLF
Rico Brogna David Beckham John Daly
Orlando "El Duque" Hernandez Emile Heskey Scott Hoch
Jorge Posada Michael Owen Scott Verplank
Mike Remlinger Graeme Le Saux
Darryl Strawberry Alan Shearer
</TABLE>
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SELECTED BROADCASTERS
<TABLE>
<S> <C> <C> <C>
Kenny Albert Christiane Amanpour Willow Bay Chris Berman
Len Berman Wolf Blitzer Bud Collins Dan Dierdorf
John Donvan Mike Emrick Bill Geist Jim Gray
Kevin Harlan Leon Harris Fred Hickman John Hockenberry
Tom Jackson Craig James Brent Jones Mark Jones
Jim Lampley Gary Linker Sean McDonough Al Michaels
Russ Mitchell Eileen O'Connor Judd Rose Summer Sanders
Forrest Sawyer Dick Schaap Claire Shipman Charley Steiner
Mike Tirico Al Trautwig Meredith Viera Sam Wyche
</TABLE>
Marquee, through QBQ, books tours and appearances for a variety of
musicians, entertainers and groups. As a booking representative, QBQ is
exclusively responsible for, among other things, evaluating and reserving
particular concert venues, planning and scheduling concert routes and
negotiating the entertainer's fees. In some instances, QBQ also negotiates
merchandising agreements in connection with a concert tour. QBQ generally
receives payment based upon a percentage of the entertainer's fees. QBQ has
provided such booking and touring representation services to a variety of
musicians, entertainers and groups including:
SELECTED MUSICIANS AND ENTERTAINERS
<TABLE>
<S> <C> <C> <C> <C>
Billy Joel Bruce Hornsby Damn Yankees Def Leppard Duran Duran
Everlast Luther Vandross Lynyrd Skynyrd Metallica Motley Crue
Rammstein Richard Marx Rodney Dangerfield Styx Ted Nugent
</TABLE>
QBQ's revenues depend, to a large extent, on the caliber of talent which
it represents. Although many of the clients represented by QBQ have an extended
history with QBQ, touring periodically over a number of years, generally, QBQ's
agreements are for one-time tours or events. QBQ's agreements with clients and
venues regarding specific performances are generally not evidenced by written
contracts until shortly before such performances. QBQ's revenues will vary
depending on the timing, frequency and size of concert tours its clients
conduct.
Marquee believes that transactions between personalities it represents and
entities for which it produces events generally have been conducted at arms'
length and on terms no less favorable to the personalities and entities than
could be obtained from independent third parties. However, there can be no
assurance that Marquee will not have a conflict of interest between
personalities and entities that it represents in differing capacities.
CONSULTING
Marquee offers specialized consulting services to clients either engaged
in, or seeking exposure in, the sports and entertainment-related industries.
Marquee's employees have substantial experience in all aspects of sports, news
and entertainment event management, marketing, sales and television production.
Marquee's employees also have numerous personal contacts within the sports,
news and other entertainment industries with individuals who work for companies
that are in need of consulting services or are in a position to refer clients
to Marquee.
Sports, news and entertainment-related businesses often require expertise
in areas that are outside of their principal line of business. Such businesses
may seek consultants to advise
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them in connection with team and event ticket sales, venue management of
concert halls and sporting arenas, sales of television rights, program
development, public relations and obtaining and maintaining sponsorships. In
addition, businesses that are seeking exposure within the sports and
entertainment industries may seek consultants to advise them on the most
efficient way to reach their target audiences. Marquee will seek to enter into
agreements with businesses pursuant to which it will provide customized
services in these and other areas. Marquee provides consulting services to
certain clients to which it also provides event management, television
production and/or marketing services.
Marquee provides the following consulting services:
EXCITE. Excite is one of the leading World Wide Web search engines.
Marquee is designing and producing a wide range of in-stadium/in-arena sports
marketing activities that feature the company's search engine. These activities
include musical video programming and fan entertainment developed to be played
on the videoboards at stadiums and arenas for NFL, NBA and MLB teams. Marquee
is also consulting with Excite on other potential sports sponsorship
activities.
FOOTLOCKER. FootLocker is a major retailer of athletic footwear. Marquee
is creating sports music and media projects targeted to reach the chain's
target market. These projects include sports music and FootLocker-branded
compact discs, television and radio advertising campaigns and the distribution
of teen-focused magazines.
HERSHEY FOODS CORPORATION. Hershey Foods Corporation manufactures,
distributes and sells a broad line of chocolate and non-chocolate
confectionary, pasta and grocery products. Since October 1993, ProServ has
provided consulting services to Hershey Foods Corporation. ProServ's consulting
duties include strategic consulting regarding Hershey Foods Corporation's
investments in sports and entertainment. ProServ provides such services
pursuant to an oral understanding.
MAJOR LEAGUE BASEBALL. Since September 1993, Marquee has consulted with
Major League Baseball Properties, Inc. in its negotiations with current and
potential corporate sponsors. Marquee also consults on the creation and
management of sponsorship campaigns and derives fees for such services.
Marquee's representation of Major League Baseball Properties, Inc. is not
evidenced by a formal agreement.
SCHERING-PLOUGH CORPORATION. Schering-Plough Corporation produces
Claritin, a drug used in alleviating allergies and sinus problems. Since March
1997, ProServ has assisted in the promotion of Claritin by developing and
implementing sponsorships of PGA Tour events and by creating a wide range of
opportunities for consumers to sample Claritin. ProServ's agreement with
Schering-Plough Corporation expires on December 31, 1998.
STAPLES, INC. Staples, Inc. owns and operates a chain of office products
superstores. Since January 1994, ProServ has assisted Staples, Inc. in
developing and implementing sponsorships of major league sports teams.
ProServ's agreement with Staples, Inc. may be terminated by Staples, Inc. at
its discretion.
DEPENDENCE ON A LIMITED NUMBER OF CLIENTS AND EVENTS; REVENUE RECOGNITION
Marquee has derived a significant portion of its revenues to date from a
small number of clients and events. On a pro forma basis, giving effect to
Marquee's 1997 acquisitions and Marquee's 1998 acquisitions, the Breeders' Cup
Championship would have accounted for approximately 11% of Marquee's revenues
for the year ended December 31, 1997. Moreover, a limited number of clients and
events represent a significant portion of Marquee's revenues.
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The loss of any of these clients or events without a replacement could have a
material adverse effect on the business and operations of Marquee.
Marquee's revenues vary throughout the year. Historically, the fourth
quarter produced the highest percentage of revenues for the year, principally
from Marquee's management and marketing of The Breeders' Cup Championship and
from representation agreements with professional hockey players, which result
in revenue to Marquee upon the commencement of the National Hockey League
season. However, as a result of Marquee's entry into the business of
representing professional football players and Marquee's 1997 acquisitions,
Marquee anticipates that its revenues will be recorded substantially in the
third as well as the fourth quarter.
COMPETITION
The business of providing services in the sports, news and other
entertainment industries is highly competitive. Marquee's competitors include
several large companies, such as Advantage International Inc., which is part of
the Interpublic Group of Companies, Inc., and International Management Group in
the sports industry and Creative Artists Agency, Inc., ICM Artists, Ltd. and
the William Morris Agency, Inc. in the entertainment industry. Certain of these
competitors have substantially greater financial and other resources than
Marquee. In addition, Marquee competes with many smaller entities. The success
of Marquee will be dependent upon its ability to obtain additional event
management, television production, marketing, talent representation and
consulting opportunities and to generate revenues from such activities. Marquee
believes that it competes with other companies primarily on the basis of the
experience of its management and the breadth of the services that it offers.
EMPLOYEES
As of December 11, 1998, Marquee had 175 full-time employees, none of whom
was covered by a collective bargaining agreement. Marquee considers its
relations with its employees to be good. In addition, from time to time,
Marquee engages independent contractors to provide certain of the services
required by its business.
PROPERTIES
Marquee's executive offices are located at 888 Seventh Avenue, New York,
New York, and are occupied under a lease that expires in October 2007. Marquee
also leases office space in Phoenix, Arizona; Los Angeles, California;
Greenwich, Connecticut; Atlanta, Georgia; Herndon, Virginia; Washington, D.C.;
London, England and Richmond Upon Thames, United Kingdom.
Marquee believes that its facilities will be sufficient for its current
operations for the foreseeable future. However, Marquee's expansion plans may
require Marquee to obtain the use of additional office space or other
facilities in the future. Marquee anticipates that such facilities will be
available at a reasonable cost.
LITIGATION
Marquee is a defendant in various legal actions, involving breach of
contract and various other claims, which are incidental to the conduct of its
business. In the opinion of management, there are no material threatened or
pending legal proceedings against Marquee which if adversely decided, would
have a material effect on Marquee's financial condition, results of operations
or liquidity. Marquee is also involved in litigation regarding the merger. See
"The Merger--Litigation."
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POTENTIAL CONFLICTS OF INTEREST
In any transaction or arrangement between Marquee and SFX before the
closing of the merger, Messrs. Sillerman and Tytel are likely to have conflicts
of interest as officers and directors of Marquee. These transactions or
arrangements will be subject to the approval of the Marquee special committee
and the SFX independent committee, except that booking arrangements in the
ordinary course of business will be subject to periodic review but not the
approval of each particular arrangement. See "Certain Relationships and Related
Transactions of SFX--Potential Conflicts of Interest."
ADDITIONAL INFORMATION
Certain information about Marquee is publicly available. See "Where You
Can Find More Information."
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AGREEMENT RELATED TO THE CELLAR DOOR ACQUISITION
The following is a summary of the material terms of the definitive
acquisition agreement which SFX and John J. Boyle and members of his family,
the stockholders of Cellar Door, entered into in January, 1999. This summary is
not intended to be a complete description of the terms of the agreement. There
can be no assurance that SFX will be able to consummate the Cellar Door
acquisition on the terms described herein, or at all.
The Cellar Door acquisition agreement provides that SFX will buy all of
the issued and outstanding stock of Cellar Door for a purchase price of:
o $70.0 million in cash, minus an amount equal to Cellar Door's secured
indebtedness and capitalized leases;
o $8.5 million in cash, to be paid in five equal annual installments;
o $20.0 million in shares of SFX Class A common stock, valued based on a
twenty-day trading average; however, SFX will have the ability to
substitute up to $15.0 million of such amount in cash; and
o options to purchase an aggregate of 100,000 shares of SFX Class A common
stock, granted over a five-year period.
Mr. Boyle will be entitled to retain all net income of Cellar Door for 1998,
subject to certain limitations. In addition, Mr. Boyle will become an employee
of SFX and the Chairman of SFX's Music Group at closing, with an annual base
salary of $300,000. He will also be appointed as a non-voting observer to the
SFX Board.
The agreement provides that 50% of the shares issuable at closing will be
subject to:
o a right of Mr. Boyle to "put" any of those shares to SFX at a price equal to
90% of the value originally ascribed to them, exercisable for 30 days after
the second anniversary of the closing of the Cellar Door acquisition;
o a right of SFX to "call" any of those shares at a price equal to 120% of the
value originally ascribed to them, exercisable during the same period as
the "put" right; and
o a restriction on transfer for 2 years and 30 days after issuance.
The remaining 50% of the shares issuable at closing will be subject to a
restriction on transfer for 1 year after issuance.
If claims exceed $500,000 in the aggregate, SFX expects the agreement to
provide that Mr. Boyle will indemnify SFX in full for certain claims arising
after the closing. The closing of the Cellar Door acquisition is expected to
occur by January 31, 1999, subject to the satisfaction of customary closing
conditions.
The applicable waiting period under the HSR Act relating to the Cellar
Door acquisition has expired.
SFX will be required to pay Mr. Boyle $10.0 million in liquidated damages
if:
o Cellar Door terminates the stock purchase agreement because the closing of
the Cellar Door acquisition does not occur, and Cellar Door is not in
material breach of any of its representations, warranties or covenants
under the agreement, or
o SFX does not complete the acquisition of Cellar Door for reasons other than
a material misrepresentation or material breach of warranty by Cellar Door
under the stock purchase agreement, a material breach by Cellar Door of its
obligations under the agreement, or failure of certain conditions
precedent.
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SFX MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to the SFX Certificate of Incorporation and SFX Bylaws, the SFX
Board manages the business of SFX. The SFX Board conducts its business through
meetings of the SFX Board and its committees. The standing committees of the
SFX Board are described below.
The SFX Bylaws authorize the SFX Board to fix the number of directors from
time to time. The number of directors of SFX is currently eleven. All directors
hold office until the next annual meeting of stockholders following their
election or until their successors are elected and qualified. Officers of SFX
are to be elected annually by the SFX Board and serve at the SFX Board's
discretion. In the election of directors, the holders of the SFX Class A common
stock are entitled by class vote, exclusive of all other stockholders, to elect
two-sevenths, rounded up, of the directors to serve on the SFX Board, with each
share of the SFX Class A common stock entitled to one vote.
Currently, the SFX Board consists of:
o the individuals who previously served as directors of Broadcasting;
o Brian Becker, who was appointed to the SFX Board upon the consummation of
the PACE acquisition; and
o David Falk, the Chairman and a founder of FAME, who was appointed as a
director and a Member of the Office of the Chairman of SFX upon the
consummation of the FAME acquisition.
All of the individuals who previously served as directors of Broadcasting
ceased to be directors of Broadcasting at the time of the Broadcasting merger.
All of the executive officers of Broadcasting entered into five-year
employment agreements with SFX, except Mr. Armstrong, who resigned as an
executive officer of SFX. See "--Employment Agreements and Arrangements with
Certain Officers and Directors."
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The following table sets forth information as to the directors and the
executive officers of SFX:
<TABLE>
<CAPTION>
POSITION(S) HELD WITH SFX AGE AS OF
NAME ENTERTAINMENT JANUARY 20, 1999
- ------------------------------- ---------------------------------------- -----------------
<S> <C> <C>
Robert F.X. Sillerman ......... Director, Executive Chairman and 50
Member of the Office of the Chairman
Michael G. Ferrel ............. Director, President, Chief Executive 49
Officer and Member of the Office of
the Chairman
Brian Becker .................. Director, Executive Vice President and 42
Member of the Office of the Chairman
David Falk .................... Director and Member of the Office of 48
the Chairman
Howard J. Tytel ............... Director, Executive Vice President, 52
General Counsel and Secretary
Thomas P. Benson. ............. Director, Vice President and Chief 36
Financial Officer
Richard A. Liese .............. Director, Senior Vice President and 48
Associate General Counsel
D. Geoffrey Armstrong Director 41
James F. O'Grady, Jr. ......... Director 70
Paul Kramer ................... Director 66
Edward F. Dugan ............... Director 64
Robert M. Gutkowski(1) Non-voting observer to Board of 50
Directors
John J. Boyle(2) .............. Non-voting observer to Board of 64
Directors
</TABLE>
- ----------
(1) Upon closing of the merger, SFX will appoint Mr. Gutkowski as a
non-voting observer to its board of directors.
(2) Upon closing of the Cellar Door acquisition, SFX will appoint Mr. Boyle
as a non-voting observer to its board of directors.
ROBERT F.X. SILLERMAN has served as the Executive Chairman, a Member of
the Office of the Chairman and a director of SFX since its formation in
December 1997. Mr. Sillerman also served as the Executive Chairman of
Broadcasting from July 1, 1995 until the consummation of the Broadcasting
merger. From 1992 through June 30, 1995, Mr. Sillerman served as Chairman of
the Board of Directors and Chief Executive Officer of Broadcasting. Mr.
Sillerman is Chairman of the Board of Directors and Chief Executive Officer of
SCMC, a private company that makes investments in and provides financial
consulting services to companies engaged in the media business, and of TSC, a
private company that makes investments in and provides financial advisory
services to media-related companies. Through privately held entities, Mr.
Sillerman controls the general partner of Sillerman Communications Partners,
L.P., an investment partnership. Mr. Sillerman is also the Chairman of the
Board and a founding stockholder of Marquee, a publicly-traded company
organized in 1995, which is engaged in various aspects of the sports, news and
other entertainment industries. Mr. Sillerman is also a founder and a
significant stockholder of Triathlon, a publicly-traded company that owns and
operates radio stations in medium and small-sized markets in the mid-western
and western United States. For the last twenty years, Mr. Sillerman has been a
senior executive of and principal investor in numerous entities
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operating in the broadcasting business. In 1993, Mr. Sillerman became the
Chancellor of the Southampton campus of Long Island University.
MICHAEL G. FERREL has served as the President, Chief Executive Officer, a
Member of the Office of the Chairman and a director of SFX since its formation
in December 1997. Mr. Ferrel also served as the President, Chief Executive
Officer and a director of Broadcasting from November 22, 1996 until the
consummation of the Broadcasting merger. Mr. Ferrel served as President and
Chief Operating Officer of Multi-Market Radio, Inc., a wholly-owned subsidiary
of Broadcasting ("MMR"), and a member of MMR's board of directors since MMR's
inception in August 1992 and as Co-Chief Executive Officer of MMR from January
1994 to January 1996, when he became the Chief Executive Officer. From 1990 to
1993, Mr. Ferrel served as Vice President of Goldenberg Broadcasting, Inc., the
former owner of radio station WPKX-FM, Springfield, Massachusetts, which was
acquired by MMR in July 1993.
BRIAN E. BECKER has served as an Executive Vice President, a Member of the
Office of the Chairman and a director of SFX since the consummation of the PACE
acquisition in February 1998. Mr. Becker has served as Chief Executive Officer
of PACE since 1994 and was appointed as President of PACE in 1996. He first
joined PACE as the Vice President and General Manager of PACE's theatrical
division at the time of that division's formation in 1982, and subsequently
directed PACE's amphitheater development efforts. He served as Vice Chairman of
PACE from 1992 until he was named its Chief Executive Officer in 1994.
DAVID FALK serves as a Member of the Office of the Chairman and a director
of SFX. Mr. Falk will also serve as a director and as Chairman of SFX's sports
group and several subsidiaries within SFX's sports group which includes FAME.
Mr. Falk, who has represented professional athletes for over twenty years, is
presently a director, Chairman and Chief Executive Officer of FAME, positions
he has held since he founded FAME in 1992. Mr. Falk also serves as Chairman of
the HTS Sports-a-Thon to benefit the Leukemia Society of America, is a member
of the Executive Committee of the College Fund and is on the Board of Directors
of the Juvenile Diabetes Foundation and Share the Care for Children.
HOWARD J. TYTEL has served as an Executive Vice President, General
Counsel, Secretary and a director of SFX since its formation in December 1997.
Mr. Tytel also served as a director, General Counsel, Executive Vice President
and Secretary of Broadcasting from 1992 until the consummation of the
Broadcasting merger. Mr. Tytel is Executive Vice President, General Counsel and
a director of SCMC and TSC and holds an economic interest in those companies.
Mr. Tytel is a director and a founder of Marquee and a founder of Triathlon.
Mr. Tytel was a Director of Country Music Television from 1988 to 1991. From
March 1995 until March 1997, Mr. Tytel was a Director of Interactive Flight
Technologies, Inc., a publicly-traded company providing computer-based
in-flight entertainment. For the last twenty years, Mr. Tytel has been
associated with Mr. Sillerman in various capacities with entities operating in
the broadcasting business. From 1993 to 1998, Mr. Tytel was Of Counsel to the
law firm of Baker & McKenzie, which represented Broadcasting and currently
represents SFX and other entities with which Messrs. Sillerman and Tytel are
affiliated on various matters.
THOMAS P. BENSON has served as the Vice President, Chief Financial Officer
and a director of SFX since its formation in December 1997. Mr. Benson also
served as the Chief Financial Officer and a director of Broadcasting, having
served in such capacity from November 22, 1996 until the consummation of the
Broadcasting merger. Mr. Benson became the Vice President of Financial Affairs
of Broadcasting in June 1996. He was the Vice President--External and
International Reporting for American Express Travel Related
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Services Company from September 1995 to June 1996. From 1984 through September
1995, Mr. Benson worked at Ernst & Young LLP as a staff accountant, senior
accountant, manager and senior manager.
RICHARD A. LIESE has served as a Senior Vice President since September,
1998, and as a Vice President, Associate General Counsel and a director of SFX
since its formation in December 1997. Mr. Liese also served as a director, Vice
President and Associate General Counsel of Broadcasting, having served in such
capacity from 1995 until the consummation of the Broadcasting merger. Mr. Liese
has also been the Assistant General Counsel and Assistant Secretary of SCMC
since 1988. In addition, from 1993 until April 1995, he served as Secretary of
MMR.
D. GEOFFREY ARMSTRONG has served as a director of SFX since its formation
in December 1997. He served as an Executive Vice President of SFX from its
formation until September 1, 1998. Mr. Armstrong currently serves as a Director
of Capstar Broadcasting Corporation, a publicly-traded radio broadcasting
company. Mr. Armstrong also served as the Chief Operating Officer and an
Executive Vice President of Broadcasting, having served in such capacity from
November 22, 1996 until the consummation of the Broadcasting merger. Mr.
Armstrong has served as a Director of Broadcasting since 1993. Mr. Armstrong
became the Chief Operating Officer of Broadcasting in June 1996 and the Chief
Financial Officer, Executive Vice President and Treasurer of Broadcasting in
April 1995. Mr. Armstrong was Vice President, Chief Financial Officer and
Treasurer of Broadcasting from 1992 until March 1995. He had been Executive
Vice President and Chief Financial Officer of Capstar, a predecessor of
Broadcasting, since 1989. From 1988 to 1989, Mr. Armstrong was the Chief
Executive Officer of Sterling Communications Corporation.
JAMES F. O'GRADY, JR. has served as a director of SFX since its formation
in December 1997. Mr. O'Grady also served as a director of Broadcasting before
the consummation of the Broadcasting merger. Mr. O'Grady has been President of
O'Grady and Associates, a media brokerage and consulting company, since 1979.
Mr. O'Grady has been a Director of Orange and Rockland Utilities, Inc. since
1980 and a Director of Video for Broadcast, Inc. since 1991. Mr. O'Grady has
been the co-owner of Allcom Marketing Corp., a corporation that provides
marketing and public relations services for a variety of clients, since 1985,
and has been Of Counsel to Cahill and Cahill, Brooklyn, New York, since 1986.
He also served on the Board of Trustees of St. John's University from 1984 to
1996, and has served as a Director of The Insurance Broadcast System, Inc.
since 1994.
PAUL KRAMER has served as a director of SFX since its formation in
December 1997, served as a director of Broadcasting before the Broadcasting
merger and currently serves as a director of Nations Flooring, Inc. Mr. Kramer
has been a partner in Kramer & Love, financial consultants specializing in
acquisitions, reorganizations and dispute resolution, since 1994. From 1992 to
1994, Mr. Kramer was an independent financial consultant. Mr. Kramer was a
partner in the New York office of Ernst & Young LLP from 1968 to 1992.
EDWARD F. DUGAN has served as a director of SFX since its formation in
December 1997. Mr. Dugan also served as a director of Broadcasting before the
Broadcasting merger. Mr. Dugan is President of Dugan Associates Inc., a
financial advisory firm to media and entertainment companies, which he founded
in 1991. Mr. Dugan was an investment banker with Paine Webber Inc., as a
Managing Director, from 1978 to 1990, with Warburg Paribas Becker Inc., as
President, from 1975 to 1978 and with Smith Barney Harris Upham & Co., as a
Managing Director, from 1961 to 1975.
ROBERT M. GUTKOWSKI will become a non-voting observer to the board of
directors of SFX upon closing of the merger. See "Marquee Management--Directors
and Executive Officers."
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JOHN J. BOYLE will become a non-voting observer to the board of directors
of SFX and the Chairman of SFX's Music Group upon closing of the Cellar Door
acquisition. Mr. Boyle currently serves as the Chief Executive Officer and
Chairman of the Board of Directors of Cellar Door. Mr. Boyle purchased Cellar
Door in 1963, and has been in the concert promotion business for over thirty
years. See "Agreement Related to the Cellar Door acquisition."
AUDIT COMMITTEE
The Audit Committee will review and report to the SFX Board on various
auditing and accounting matters, including the selection, quality and
performance of SFX'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. The members of the Audit
Committee are Messrs. Kramer, O'Grady and Dugan.
COMPENSATION COMMITTEE
The Compensation Committee reviews and makes recommendations with respect
to certain of SFX's compensation programs and compensation arrangements with
respect to certain officers, including Messrs. Sillerman, Ferrel, Tytel, Benson
and Liese. The members of the Compensation Committee are Messrs. Kramer,
O'Grady and Dugan, none of whom is a current or former employee or officer of
Broadcasting or SFX.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The SFX Board approved the issuance of shares of SFX Class A common stock
to holders as of the spin-off record date of stock options or SARs of
Broadcasting, whether or not vested. These holders included the members of the
Compensation Committee. The issuance was approved to allow the holders of these
options and SARs to participate in the spin-off in a similar manner to holders
of Broadcasting's Class A common stock and as consideration for past services
to SFX. In connection with this issuance, Mr. Kramer received 13,000 shares of
SFX Class A common stock, Mr. O'Grady received 13,000 shares of SFX Class A
common stock and Mr. Dugan received 3,000 shares of SFX Class A common stock.
STOCK OPTION COMMITTEE
The Stock Option Committee grants options, determines which employees and
other individuals performing substantial services to SFX may be granted options
and determines the rights and limitations of options granted under SFX's plans.
The members of the Stock Option Committee are Messrs. Kramer, O'Grady and
Dugan.
COMPENSATION OF DIRECTORS
Directors employed by SFX receive no compensation for meetings they
attend. Each director not employed by SFX receives a fee of $1,500 for each SFX
Board meeting he attends, in addition to reimbursement of travel expenses. Each
non-employee director who is a member of a committee also receives $1,500 for
each committee meeting he attends that is not held in conjunction with a SFX
Board meeting. If the committee meeting occurs in conjunction with a SFX Board
meeting, each committee member receives an additional $500 for each committee
meeting he attends.
In addition, SFX adopted a deferred compensation plan for the non-employee
directors effective as of January 1, 1998. Pursuant to the plan, SFX pays each
non-employee director a quarterly retainer of $7,500, at least one-half of
which must be paid in shares of SFX Class A
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common stock which are credited to a book-entry account maintained by SFX for
each participant. Each non-employee director's account was initially credited
with 5,455 shares of SFX Class A common stock, representing one year's annual
retainer fee based upon $5.50 per share.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
FOR THE YEAR ENDED DECEMBER 31, 1998
The following table sets forth the annual and long-term compensation
earned by the Executive Chairman and SFX's four other most highly compensated
executive officers (the "Named Executive Officers") during 1998. SFX was spun
off from Broadcasting on April 27, 1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------ --------------------------------
SECURITIES
UNDERLYING
RESTRICTED STOCK OPTION
NAME AND POSITION SALARY(1) BONUS(2) AWARDS($)(3) AWARDS(#)
- ------------------------------------ ----------- ---------- ------------------ -----------
<S> <C> <C> <C> <C>
Robert F.X. Sillerman $291,667 $14,250,000 620,000
Executive Chairman and Member
of the Office of the Chairman
Michael G. Ferrel 204,167 4,275,000 225,000
President, Chief Executive Officer
and Member of the Office of the
Chairman
Brian E. Becker 245,000 -- 75,000
Executive Vice President and
Member of the Office of the
Chairman
David Falk 183,750 -- 100,000
Member of the Office of the
Chairman
Howard J. Tytel 175,000 2,280,000 105,000
Executive Vice President, General
Counsel and Secretary
</TABLE>
- ----------
(1) SFX began compensating Messrs. Sillerman and Ferrel upon the consummation
of the Broadcasting merger, which occurred on May 29, 1998. SFX began
compensating Mr. Falk on June 4, 1998, upon the consummation of the FAME
acquisition. SFX began compensating Mr. Tytel on June 1, 1998. SFX began
compensating Mr. Becker upon the consummation of the PACE acquisition,
which occurred on February 25, 1998. See "Certain Relationships and
Related Transactions of SFX" for additional transactions between SFX and
the Named Executive Officers.
(2) Each of these executive officers may receive a bonus for fiscal 1998 in
the discretion of the SFX Board. The SFX Board has not yet determined the
amount of any such bonus.
(3) Pursuant to the Spin-Off, SFX awarded Mr. Sillerman 500,000 and Mr.
Ferrel 150,000 restricted shares of SFX Class B common stock, and awarded
Mr. Tytel 80,000 restricted shares of SFX Class A common stock. Each such
individual paid $2.00 per share for such restricted stock. The price of
SFX's Class A common stock, as reported on the Nasdaq National Market,
was $30.50. The value of the shares of restricted stock is reported in
the table above. On December 31, 1998, the closing price of SFX's Class A
common stock, as reported on the Nasdaq National Market, was $54.875. On
December 31, 1998, the value of the shares of restricted stock held by
Messrs. Sillerman, Ferrel and Tytel was $26,437,500, $7,931,250 and
$4,230,000, respectively. All calculations of the value of the restricted
stock assumes that the shares of Class B common stock are equal in value
to the shares of SFX Class A common stock.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL-END OPTION
VALUES
The following table sets forth, for each of the Named Executive Officers,
certain information concerning the exercise of stock options during 1998,
including the year-end value of unexercised options.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS
FY-END (#) AT FY-END ($)(1)
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ------------------- ----------------- -------------------- --------------- ------------------
<S> <C> <C> <C> <C>
Robert F. X.
Sillerman 0 0 0/620,000 0/15,268,750
Michael G. Ferrel 0 0 0/225,000 0/5,562,500
Brian E. Becker 0 0 0/75,000 0/1,225,000
David Falk 0 0 0/100,000 0/1,325,500
Howard J. Tytel 0 0 0/105,000 0/2,588,125
</TABLE>
- ----------
(1) Calculated by determining the difference between the closing price of SFX
Class A common stock as reported on the Nasdaq National Market on
December 31, 1998 ($54.875) and the exercise price of the options.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to each grant of
stock options during 1998 to the Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
------------------------------------------------------------- ASSUMED
ANNUAL RATES OF STOCK PRICE
NUMBER OF % OF TOTAL APPRECIATION
SECURITIES OPTIONS FOR OPTION TERM (10 YEARS)(1)
UNDERLYING GRANTED TO EXERCISE OR ---------------------------------
OPTIONS/ EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SHARE)(2) DATE 5%($) 10%($)
- ------------------------ ------------- -------------- -------------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Robert F. X. Sillerman 250,000 12.9% $ 43.25 5/27/08 $6,812,500 $17,192,500
250,000 12.9 29.125 4/27/08 4,586,250 11,576,250
120,000 6.2 5.50 1/15/08 416,400 1,050,000
Michael G. Ferrel 100,000 5.2 43.25 5/27/08 2,725,000 6,877,000
75,000 3.9 29.125 4/27/08 1,375,875 3,472,875
50,000 2.6 5.50 1/15/08 173,500 437,500
Brian E. Becker 50,000 2.6 43.25 5/27/08 1,362,500 3,438,500
25,000 1.3 29.125 4/27/08 458,625 1,157,625
David Falk 100,000 5.2 41.62 6/4/08 2,622,000 6,618,000
Howard J. Tytel 50,000 2.6 43.25 5/27/08 1,362,500 3,438,500
30,000 1.6 29.125 4/27/08 550,350 1,389,150
25,000 1.3 5.50 1/15/08 86,250 218,750
</TABLE>
- ----------
(1) The dollar gains under these columns result from calculations required by
the SEC and assume 5% and 10% growth rates in the trading prices of the
SFX Class A common stock. The figures given are not intended to forecast
future price appreciation of the SFX Class A common stock. The gains
reflect a future value based upon growth at these prescribed rates.
(2) The $43.25 and $29.125 exercise prices represent the fair market value of
a share of SFX Class A Common Stock on the date of grant. On January 15,
1998 the shares of SFX Class A Common Stock had not yet commenced trading
on the Nasdaq National Market System. The SFX Board determined that $5.50
was the fair market value of a share of SFX Class A Common Stock on
January 15, 1998.
SFX and Broadcasting have also entered into certain agreements and
arrangements with their officers and directors from time to time in the past.
See "Certain Relationships and Related Transactions of SFX."
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<PAGE>
STOCK OPTION AND RESTRICTED STOCK PLAN
SFX's 1998 Stock Option and Restricted Stock Plan provides for the
issuance of options to purchase up to 2,000,000 shares of SFX Class A common
stock. The purpose of the plan is to provide additional incentive to officers
and employees of SFX. 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 is administered by the Stock Option Committee. The SFX
Board has approved the issuance of stock options exercisable for an aggregate
of 1,982,166 shares under the plan. See "--Employment Agreements and
Arrangements with Certain Officers and Directors" and "--Option Grants."
PROPOSED STOCK OPTION PLAN
Following a recommendation of the SFX's compensation committee, SFX has,
subject to stockholder approval, adopted a new incentive stock option plan
covering options to acquire up to three million shares of SFX Class A common
stock and granted the options available thereunder to certain officers and
employees of SFX. The plan will be designed to broaden the equity ownership of
SFX's employees at all levels. SFX anticipates that the proposed stock option
plan will be submitted to a vote of the stockholders at SFX's first annual
meeting scheduled to be held in the spring of 1999.
SPIN-OFF SHARES
SFX has issued shares of SFX Class A common stock to holders as of the
spin-off record date of stock options or SARs of Broadcasting, whether or not
vested. See "Certain Relationships and Related Transactions of SFX--Issuance of
Stock to Holders of Broadcasting's Options and SARs."
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS WITH CERTAIN OFFICERS AND DIRECTORS
SFX has entered into employment agreements with each of its executive
officers. The employment agreements became effective upon the Broadcasting
merger or shortly thereafter, except for Mr. Becker's employment agreement,
which is described below.
AGREEMENTS WITH MESSRS. SILLERMAN, FERREL, TYTEL AND BENSON
The respective employment agreements provide for annual base salaries of
$500,000 for Mr. Sillerman, $350,000 for Mr. Ferrel, $300,000 for Mr. Tytel and
$235,000 for Mr. Benson, increased annually by the greater of five percent or
the rate of inflation. Each executive officer will receive a bonus to be
determined annually in the discretion of the SFX Board, on the recommendation
of its Compensation Committee. Each employment agreement is for a term of five
years, and unless terminated or not renewed by SFX or the employee, the term
will continue thereafter on a year-to-year basis on the same terms existing at
the time of renewal.
If an executive officer is terminated by SFX without Cause or if there is
a Constructive Termination Without Cause, as such terms are defined in the
respective employment agreements, then the executive officer will be entitled
to receive the following payments:
o his base salary for a period of three years following his termination or
until the end of the term of the employment agreement, whichever is longer;
o a bonus for the unexpired term of the agreement, based on the bonus received
for the year before termination, multiplied by the unexpired term; and
o options to purchase shares of SFX Class A common stock.
If the executive officer is terminated for any reason other than Cause, or
if there is a Constructive Termination Without Cause, as such terms are defined
in the respective
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employment agreements, following a change in control of SFX, then he will be
entitled to receive, in addition to the foregoing, additional options to
purchase shares of SFX Class A common stock. SFX has also agreed to indemnify
the executive officers for taxes that they incur if any of the change of
control payments are deemed "parachute payments" under the Code. Mr. Tytel's
agreement permits him or SFX to end his employment after one year, in which
case all of his options would immediately vest, he would receive two years'
salary paid in a lump sum and he would be granted options to purchase between
25,000 and 50,000 shares of SFX Class A common stock at the lowest exercise
price of any options granted by SFX during that year.
In connection with entering into the employment agreements, SFX sold the
following shares of restricted stock:
o 500,000 shares of Class B common stock to Mr. Sillerman;
o 150,000 shares of Class B common stock to Mr. Ferrel;
o 80,000 shares of Class A common stock to Mr. Tytel; and
o 10,000 shares of Class A common stock to Mr. Benson.
The shares of restricted stock were sold to the officers at a purchase price of
$2.00 per share. In addition, the SFX Board, on the review and recommendation
of the Compensation Committee, also approved the issuance of the following
stock options exercisable for shares of SFX Class A common stock:
o options to purchase 120,000 shares to Mr. Sillerman;
o options to purchase 50,000 shares to Mr. Ferrel;
o options to purchase 25,000 shares to Mr. Tytel;
o options to purchase 10,000 shares to Mr. Benson; and
o options to purchase 40,000 shares to Mr. Armstrong, who was then an SFX
officer.
The SFX Board, other than Messrs. Kramer, O'Grady and Dugan, also approved the
issuance of stock options to purchase 2,500 shares of SFX Class A common stock
to each of Messrs. Kramer, O'Grady and Dugan. The options will vest over one
year and will have an exercise price of $5.50 per share. See "SFX Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Upon the Broadcasting merger, SFX assumed Broadcasting's obligations
arising under the employment agreements or arrangements between Broadcasting
and SFX's executive officers, with certain exceptions. SFX also assumed the
obligation to make the following change of control payments under these
individuals' existing employment agreements with Broadcasting:
o Mr. Sillerman -- approximately $3.3 million;
o Mr. Ferrel -- approximately $1.5 million; and
o Mr. Benson -- approximately $200,000.
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<PAGE>
BECKER EMPLOYMENT AGREEMENT
As a condition to the execution of the PACE agreement, SFX entered into an
employment agreement with the Chief Executive Officer and President of PACE,
Brian Becker. The agreement has a term of five years that commenced on February
25, 1998. Mr. Becker will continue as President and Chief Executive Officer of
PACE. In addition, for the term of his employment, Mr. Becker will serve as a
member of SFX's Office of the Chairman, an Executive Vice President of SFX and
a director of each of PACE and SFX, subject to shareholder approval. During the
term of his employment, Mr. Becker will receive 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 an annual bonus in the discretion of
the Board.
SFX has agreed that it will not sell either the theatrical or motor sports
line of business of PACE before February 25, 1999. If SFX sells either line of
business after the first anniversary, it has agreed not to sell the other line
of business before March 11, 2000. Mr. Becker's employment agreement provides
Mr. Becker with a right of first refusal if, between February 25, 1999 and
February 25, 2000, SFX receives a bona fide offer from a third party to
purchase all or substantially all of either the theatrical or motor sports
lines of business at a price equal to 95% of the proposed purchase price. The
Fifth Year Put Option, as defined in the PACE acquisition agreement and
described in note 1 to SFX Selected Consolidated Financial Data, will also be
immediately exercisable as of such closing. If Mr. Becker does not exercise his
right of first refusal and either of the theatrical or motor sports line of
business is sold, then he will have an identical right of first refusal for the
sale of the remaining line of business beginning on February 25, 2000 and
ending August 25, 2000. Mr. Becker will be paid an administrative fee of
$100,000 if he does not exercise his right of first refusal and if SFX does not
consummate the proposed sale. Mr. Becker would thereafter retain all rights to
Becker's right of first refusal.
Beginning on December 12, 1999, Mr. Becker will have the option (the
"Becker Second Year Option"), exercisable within 15 days thereafter, to elect
one or more of the following:
o to sell to SFX any stock or options and/or any compensation to be paid to
Mr. Becker by SFX;
o to become a consultant to SFX for no more than an average of 20 hours per
week for the remainder of the term and with the same level of compensation
set forth in his employment agreement; or
o to acquire PACE's motor sports line of business--or, if that line of
business was previously sold, PACE's theatrical line of business--at its
fair market value as determined in his employment agreement.
Exercise of the Becker Second Year Option would result in the termination
of Mr. Becker's employment agreement.
Mr. Becker's employment agreement may be terminated by SFX for Cause, as
defined in the agreement, by SFX for Mr. Becker's death or permanent disability
or by Mr. Becker at any time for any reason or upon exercise of the Becker
Second Year Option.
In addition, Mr. Becker's employment may be terminated by SFX at any time
in SFX's sole discretion or by Mr. Becker at any time following, among other
things:
o failure to elect or re-elect Mr. Becker as a director of SFX;
o a reduction in Mr. Becker's base salary or in the formula to calculate his
bonus;
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o discontinuation of Mr. Becker's participation in any stock option, bonus or
other employee benefit plan;
o the sale of either the motor sports or theatrical line of business to any
person other than Mr. Becker before March 7, 2000, unless Mr. Becker
elected not to exercise Becker's right of first refusal;
o the sale of all or substantially all of the assets of PACE;
o a change of control of SFX; or
o the failure by SFX to contribute any acquired business, which derives a
majority of its revenues from either a theatrical or motor sports line of
business, to PACE.
If Mr. Becker's employment is terminated, then, among other things:
o from the date of termination until February 25, 2003, SFX must pay Mr.
Becker the base salary and any bonus to which he would otherwise be
entitled and Mr. Becker will be entitled to participate in all of the
profit-sharing, retirement income, stock purchase, savings and executive
compensation plans to the same extent he would otherwise have been entitled
to participate;
o for one year after the date of termination, SFX will maintain Mr. Becker's
life, accident, medical, health care and disability programs or
arrangements and provide Mr. Becker with use of the same office and related
facilities; and
o if the termination occurs before March 11, 2000, Mr. Becker will retain the
Becker Second Year Option and Becker's 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 or its affiliates or
solicit any of its employees to leave SFX or its affiliates. However, these
restrictions will not apply if Mr. Becker exercises his rights, or SFX breaches
its obligations, with respect to Becker's right of first refusal or the Becker
Second Year Option.
FALK EMPLOYMENT AGREEMENT
On April 29, 1998, SFX entered into an employment agreement with David
Falk. The agreement has a term of five years commencing June 4, 1998. SFX
employs Mr. Falk as the Chairman of FAME and SFX's Sports Group and as a Member
of the Office of Chairman of SFX and appointed him a director of SFX. Pursuant
to the agreement, Mr. Falk directs the day to day operations of FAME and SFX's
Sports Group and any other sports businesses acquired by SFX. The agreement
provides for an annual base salary of $315,000, reviewed annually and increased
by a minimum of 4.0% per year. In addition, Mr. Falk will be considered for an
annual bonus consistent with the bonuses given to other senior executives of
SFX. Mr. Falk received an option to purchase 100,000 shares of SFX Class A
common stock at an exercise price of $41.62 per share. The option will fully
vest on June 4, 1999. In addition, SFX has agreed to make annual stock option
grants to Mr. Falk to purchase at least 30,000 shares of SFX Class A common
stock in the first four years of his employment agreement.
SFX may terminate Mr. Falk's employment at any time with or without cause,
as defined in his employment agreement. If the agreement is terminated for any
reason other than a voluntary termination or termination for cause, then:
o all stock options granted pursuant to the agreement will immediately vest
and become exercisable;
o any remaining stock options to be granted pursuant to the agreement will
immediately be granted and will vest and become exercisable; and
168
<PAGE>
o SFX will be obligated to pay Mr. Falk his base salary and annual bonuses at
a rate equal to 50% of his base salary through the original term of the
agreement, as well as certain additional benefits.
In addition, if a Change in Control, as defined in the agreement, occurs, SFX
may be required to pay a portion of certain taxes incurred by Mr. Falk as a
result of the Change of Control.
For one year following the termination of the employment agreement by Mr.
Falk or for cause, as defined in the agreement, except in certain events, Mr.
Falk has agreed that he will not become employed in any capacity by, or become
an officer, director, shareholder or general partner of any entity that
competes with any material business of FAME as conducted as of the closing date
of the FAME acquisition and he will not solicit any employee of SFX or any
entities that are directly or indirectly controlled by SFX to leave such
employment.
SFX and Broadcasting have also entered into certain additional agreements
and arrangements with their officers and directors from time to time in the
past. See "Certain Relationships and Related Transactions of SFX."
OPTION GRANTS
On April 27, 1998, SFX granted the following options to purchase shares of
SFX Class A common stock at $29.125 per share:
o options to purchase 250,000 shares to Mr. Sillerman;
o options to purchase 75,000 shares to Mr. Ferrel;
o options to purchase 25,000 shares to Mr. Becker;
o options to purchase 30,000 shares to Mr. Tytel;
o options to purchase 35,000 shares to Mr. Armstrong; and
o options to purchase 15,000 shares to Mr. Benson.
On May 27, 1998, SFX granted the following options to purchase shares of
SFX Class A common stock at $43.25 per share:
o options to purchase 250,000 shares to Mr. Sillerman;
o options to purchase 100,000 shares to Mr. Ferrel;
o options to purchase 50,000 shares to Mr. Becker;
o options to purchase 50,000 shares to Mr. Tytel;
o options to purchase 50,000 shares to Mr. Armstrong; and
o options to purchase 25,000 shares to Mr. Benson.
These options vest over five years, starting one year from their date of
grant.
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<PAGE>
MARQUEE MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the
executive officers and directors of Marquee:
<TABLE>
<CAPTION>
POSITION(S) HELD WITH AGE AS OF
NAME MARQUEE JANUARY 20, 1999
- ------------------------------- ------------------------------------------------- -----------------
<S> <C> <C>
Robert M. Gutkowski ........... President, Chief Executive Officer and Director 50
Robert F.X. Sillerman ......... Chairman 50
Arthur C. Kaminsky ............ Director and Executive Vice President 52
Michael Letis ................. Director and Executive Vice President 57
Louis J. Oppenheim ............ Director and Executive Vice President 41
Michael Trager ................ Director and Executive Vice President 56
William J. Allard ............. Director 38
Arthur R. Barron .............. Director 64
Donald L. Dell ................ Director 60
Myles W. Schumer .............. Director 52
Howard J. Tytel ............... Director 52
Jan E. Chason ................. Chief Financial Officer 53
</TABLE>
The following are brief descriptions of the executive officers and
directors of Marquee:
ROBERT M. GUTKOWSKI has served as President, Chief Executive Officer and a
director of Marquee since December 1995. Since March 1997, Mr. Gutkowski has
been a member of the Board of Directors of the Professional Bowlers
Association. Mr. Gutkowski has more than 20 years of experience in the
television, sports and entertainment industries. From September 1994 until
December 1995, Mr. Gutkowski was a consultant to sports-related businesses.
From November 1991 to September 1994, he served as President and Chief
Executive Officer of Madison Square Garden Corporation, where he oversaw the
operations of the New York Knicks, the New York Rangers, the MSG Entertainment
Group, the MSG Cable Network, Madison Square Garden and the Paramount Theater.
From July 1990 to November 1991, Mr. Gutkowski served as President of MSG
Entertainment Group, having served as Executive Vice President thereof from
September 1987 to July 1990. From October 1985 to September 1987, he served as
President of Madison Square Garden Network. Before his tenure at Madison Square
Garden, Mr. Gutkowski was Vice President-Sales for Paramount Television
Domestic Distribution. From February 1981 to September 1983, Mr. Gutkowski was
Vice President-Programming for ESPN. Mr. Gutkowski earned a B.A. from Hofstra
University.
ROBERT F.X. SILLERMAN has been Chairman of Marquee since July 1995. For
additional biographical information regarding Mr. Sillerman, see "SFX
Management--Directors and Executive Officers."
ARTHUR C. KAMINSKY has been a director of Marquee since March 1996 and an
Executive Vice President of Marquee since December 1996. Mr. Kaminsky has
served as President and Chief Executive Officer of Athletes and Artists, Inc.
since 1977. From 1974 to 1990, Mr. Kaminsky was a partner with the law firm of
Taft & Kaminsky. Mr. Kaminsky earned a B.A. from Cornell University and a J.D.
from Yale University.
MICHAEL LETIS became a director and an Executive Vice President of Marquee
in December 1996. Mr. Letis has served as President of Sports Management and
Television
170
<PAGE>
International, Inc. since 1984. Mr. Letis is a director of Thoroughbred Racing
Communications, Inc. and of the Thoroughbred Club of America. Mr. Letis earned
a B.A. from Dartmouth College.
LOUIS J. OPPENHEIM became a director and an Executive Vice President of
Marquee in December 1996. Mr. Oppenheim has served as Chief Operating Officer,
Vice President and Secretary of A&A since 1985. From 1981 to 1985, he served as
a talent representative for A&A. Mr. Oppenheim earned a B.A. from The
University of Pennsylvania and a J.D. from Fordham University.
MICHAEL TRAGER has been a director of Marquee since March 1996 and an
Executive Vice President of Marquee since December 1996. Mr. Trager has served
as Chairman of SMTI since 1984. From November 1994 to December 1995, Mr. Trager
served as a Director of Select Media Communications, Inc. Mr. Trager is a
member of the Board of Directors and the past President of the Greenwich
Old-timers Athletic Association, which provides college scholarships and
financial assistance to young athletes in the Greenwich community. Mr. Trager
earned a B.S. and M.B.A. from Bucknell University.
WILLIAM J. ALLARD has served as a director of Marquee since October 1997.
Mr. Allard has served as the Chief Operating Officer of ProServ, Inc. since
January 1993 and as President of ProServ, Inc. since December 1996. From
December 1990 to January 1993, Mr. Allard served as Managing Director of
ProServ Europe, S.A., a French subsidiary of ProServ, Inc. Mr. Allard earned a
B.S. from Babson College and an M.B.A. from Harvard University.
ARTHUR R. BARRON has served as a director of Marquee since December 1996.
From January 1995 through December 1997, Mr. Barron served as a non-exclusive
consultant to Callahan Associates International LLC, a company seeking to
finance, develop and acquire communication, entertainment and wireless projects
around the world. In May 1995, Mr. Barron retired from Time-Warner Inc., where
he served from February 1990 to May 1995 as Chairman of Time-Warner
International, which is engaged in international strategic development
activities in the media and entertainment industries, and as Chairman of
Time-Warner Enterprises, the strategic and business development unit of
Time-Warner Inc. From 1984 until July 1989, Mr. Barron served as President of
Paramount Communications Inc.'s entertainment group, which includes Paramount
Pictures, Madison Square Garden, the New York Knicks and the New York Rangers.
DONALD L. DELL has served as a director of Marquee since October 1997. Mr.
Dell founded, and since 1971 has been the Chairman and Chief Executive Officer
of, ProServ, Inc. In 1980, Mr. Dell founded and became the Chairman of the
Board of ProServ Television, Inc. Mr. Dell is also the Honorary Chairman of the
KidSports Foundation, the Co-Chairman of the D.C. Tennis Classic in Washington,
D.C. and the Vice Chairman of the International Tennis Hall of Fame in Newport,
Rhode Island. He also serves on the Advisory Committee of the Washington Tennis
Foundation. Mr. Dell earned a B.A. from Yale University and a J.D. from the
University of Virginia.
MYLES W. SCHUMER has served as a director of Marquee since December 1996.
For more than the past five years, Mr. Schumer has been a partner, specializing
in tax matters, of Cornick, Garber & Sandler, New York, independent public
accountants. From July 1993 until November 1996, Mr. Schumer served as a
director of Multi-Market Radio, Inc., a publicly-traded company controlled by
Mr. Sillerman engaged in the ownership and operation of radio stations.
171
<PAGE>
HOWARD J. TYTEL has served as a director of Marquee since July 1995. For
additional biographical information regarding Mr. Tytel, see "SFX Management--
Directors and Executive Officers."
JAN E. CHASON has been the Chief Financial Officer of Marquee since June
1997. From November 1996 to July 1997, Mr. Chason was the Chief Financial
Officer of Triathlon Broadcasting Company, a publicly-traded company that owns
and operates radio stations. In addition, from June 1996 through June 1997, Mr.
Chason was a consultant to SCMC and TSC and, through TSC, provided advisory
services to Marquee. Mr. Chason was the principal in JEC Consulting Associates,
which specialized in providing financial consulting and advisory services, from
October 1994 to June 1996. From 1982 until September 1994, Mr. Chason was a
Partner, specializing in auditing and accounting services, of Ernst & Young
LLP. Mr. Chason earned a B.B.A. from City College of New York and is a
Certified Public Accountant.
AUDIT COMMITTEE
The Audit Committee reviews, and reports to the Marquee Board on, various
auditing and accounting matters, including the selection, quality and
performance of Marquee'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 also reviews certain related-party
transactions and potential conflict-of-interest situations involving officers,
directors or stockholders of Marquee. The members of the Audit Committee are
Messrs. Barron, Schumer and Tytel.
COMPENSATION COMMITTEE
The Compensation Committee reviews and makes recommendations with respect
to certain of Marquee's compensation programs and compensation arrangements
with respect to certain officers, including Messrs. Gutkowski, Kaminsky, Letis,
Oppenheim and Trager. The members of the Compensation Committee are Messrs.
Sillerman, Barron and Schumer.
STOCK OPTION COMMITTEE
The Stock Option Committee grants options, determines which employees and
other individuals performing substantial services to Marquee may be granted
options and determines the rights and limitations of options granted under
Marquee's plans. The members of the Stock Option Committee are Messrs.
Sillerman, Barron and Schumer.
MANAGEMENT COMPENSATION
Marquee commenced operations in 1996. The table below sets forth
information regarding the compensation awarded to, earned by or paid to Robert
M. Gutkowski, the President and Chief Executive Officer of Marquee, and the
next four most highly compensated officers of Marquee (collectively, the
"Marquee Named Executive Officers") during the years ended December 31, 1996
and 1997 for services rendered in all capacities to Marquee and its
subsidiaries.
172
<PAGE>
SUMMARY COMPENSATION TABLE
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------- -------------------
SECURITIES
NAME AND PRINCIPAL FISCAL ANNUAL OTHER ANNUAL UNDERLYING OPTIONS
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) (1) (#)
- ---------------------- -------- --------------- ----------- ---------------------- -------------------
<S> <C> <C> <C> <C> <C>
Robert M. Gutkowski 1997 325,000 150,000 -- 0
President and Chief 1996 231,250 122,500 -- 20,000
Executive Officer
Arthur C. Kaminsky 1997 300,000 0 -- 0
Executive Vice 1996 12,500(2) 0 -- 20,000
President
Michael Letis 1997 300,000 0 -- 0
Executive Vice 1996 12,500(3) 0 -- 20,000
President
Louis J. Oppenheim 1997 175,000 0 -- 0
Executive Vice 1996 7,292(4) 0 -- 20,000
President and
Secretary
Michael Trager 1997 300,000 0 -- 0
Executive Vice 1996 12,500(5) 0 -- 20,000
President
</TABLE>
- ----------
(1) For each of 1996 and 1997, the aggregate amount of perquisites and other
personal benefits did not exceed the lesser of $50,000 or 10% of the
salary and bonus for each of the Marquee Named Executive Officers.
(2) Mr. Kaminsky became an Executive Vice President of Marquee effective
December 11, 1996, upon the acquisition of A&A by Marquee, and entered
into an employment agreement providing for an initial annual salary of
$300,000.
(3) Mr. Letis became an Executive Vice President of Marquee effective
December 11, 1996, upon the acquisition of SMTI by Marquee, and entered
into an employment agreement providing for an initial annual salary of
$300,000.
(4) Mr. Oppenheim became an Executive Vice President of Marquee effective
December 11, 1996, upon the consummation of the A&A acquisition, and
entered into an employment agreement providing for an initial annual
salary of $175,000.
(5) Mr. Trager became an Executive Vice President of Marquee effective
December 11, 1996, upon the consummation of the SMTI acquisition, and
entered into an employment agreement providing for an initial annual
salary of $300,000.
OPTION/SAR GRANTS IN 1997
Marquee did not grant any options to any of the Marquee Named Executive
Officers in 1997.
Marquee made the following grants of stock options and stock appreciation
rights to its directors and executive officers in 1997:
o Donald L. Dell, a director of Marquee, was granted 40,000 ten-year stock
options in connection with the execution by him of an employment agreement
with Marquee. These options are immediately exercisable and have an
exercise price of $5.94 per share. See "--Employment Agreements."
173
<PAGE>
o TSC, a corporation of which Robert F.X. Sillerman, the Chairman of Marquee,
is the Chairman and Chief Executive Officer, was granted 200,000 five-year
stock options in connection with its services relating to the Marquee
Tender Offer. These options are immediately exercisable and have an
exercise price of $7.00 per share.
o Mr. Sillerman was granted 10,000 five-year stock options in connection with
his services relating to the acquisition of ProServ. These options are
immediately exercisable and have an exercise price of $5.00 per share. See
"Certain Relationships and Related Transactions of Marquee--Consulting
Agreement" and "--ProServ Acquisition."
o Jan E. Chason, the Chief Financial Officer of Marquee, was granted 7,500
stock options in 1997 with an exercise price of $5.875 per share. These
options vest over three years.
In addition, Marquee has made the following grants of stock options and
stock appreciation rights to its directors and executive officers in 1998:
o Robert F.X. Sillerman received a grant of 85,000 stock options on February
19, 1998 that have an exercise price of $4.00 per share and vest over a
three-year period. In addition, Mr. Sillerman received a grant of 26,479
stock options on October 19, 1998 that have an exercise price of $2.50 per
share and vest over a three-year period.
o Robert M. Gutkowski received a grant of 57,000 stock options on February 19,
1998 that have an exercise price of $4.00 per share and vest over a
three-year period. In addition, Mr. Gutkowski received a grant of 18,691
stock options on October 19, 1998 that have an exercise price of $2.50 per
share and vest over a three-year period.
o Arthur Kaminsky, Michael Letis and Michael Trager each received a grant of
45,000 stock options on February 19, 1998 that have an exercise price of
$4.00 per share and vest over a three-year period. In addition, Messrs.
Kamisky, Letis and Trager each received a grant of 14,018 stock options on
October 19, 1998 that have an exercise price of $2.50 per share and vest
over a three-year period.
o Louis J. Oppenheim received a grant of 35,000 stock options on February 19,
1998 that have an exercise price of $4.00 per share and vest over a
three-year period. In addition, Mr. Oppenheim received a grant of 10,902
stock options on October 19, 1998 that have an exercise price of $2.50 per
share and vest over a three-year period.
o Howard J. Tytel received a grant of 15,000 stock options on February 19,
1998 that have an exercise price of $4.00 and vest over a three-year
period. Mr. Tytel also received a grant of 10,000 stock appreciation rights
that have a base price of $4.00 per underlying share of Marquee common
stock and vest over a three-year period. In addition, Mr. Tytel received a
grant of 4,672 stock options on October 19, 1998 that have an exercise
price of $2.50 per share and vest over a two-year period.
o Donald Dell and William Allard each received a grant of 10,000 stock options
on February 19, 1998 that have an exercise price of $4.00 per share and
vest over a three-year period. In addition, Messrs. Dell and Allard each
received a grant of 3,115 stock options on October 19, 1998 that have an
exercise price of $2.50 per share and vest over a three-year period.
o Jan E. Chason received a grant of 5,500 options on February 19, 1998 that
have an exercise price of $4.00 per share and vest over a three-year
period. In addition, Mr. Chason received a grant of 2,259 stock options on
October 19, 1998 that have an exercise price of $2.50 per share and vest
over a three-year period.
174
<PAGE>
o Arthur R. Barron and Myles W. Schumer each received a grant of 7,500 stock
appreciation rights on February 12, 1998, which have vested, and have a
base price of $4.25 per underlying share of Marquee common stock. In
addition, Messrs. Barron and Schumer each received a grant of 10,000 stock
appreciation rights on February 19, 1998 that have a base price of $4.00
per underlying share of Marquee common stock and vest over a three-year
period.
AGGREGATE OPTION/SAR EXERCISES IN 1997 AND FISCAL YEAR-END OPTION/SAR VALUES
The table below sets forth information with respect to the exercise of
stock options and stock appreciation rights by the Marquee Named Executive
Officers during the year ended December 31, 1997 and the value at December 31,
1997 of unexercised "in-the-money" options held by the Marquee Named Executive
Officers. The value of unexercised in-the-money options at December 31, 1997 is
the difference between the option exercise price and the fair market value of a
share of Marquee common stock at December 31, 1997, multiplied by the number of
options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE AT FY-END (#) AT FY-END ($) (1)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------ -------------- -------------- --------------------------- --------------------------
<S> <C> <C> <C> <C>
Robert M. Gutkowski 0 0 2,000/18,000 0
Arthur C. Kaminsky ..... 0 0 2,000/18,000 0
Michael Letis .......... 0 0 2,000/18,000 0
Louis J. Oppenheim ..... 0 0 1,000/9,000 0
Michael Trager ......... 0 0 2,000/18,000 0
</TABLE>
- ----------
(1) Based on $3.75, the closing price on December 31, 1997 of a share of
Marquee common stock.
EMPLOYMENT AGREEMENTS
Marquee has employment agreements with each of Messrs. Gutkowski,
Kaminsky, Letis, Oppeneheim, Trager, Dell and Allard.
MR. GUTKOWSKI
Marquee and Robert M. Gutkowski have entered into an employment agreement
dated as of March 21, 1996. In the agreement, Mr. Gutkowski agreed to serve as
Marquee's President and Chief Executive Officer for an initial term of five
years. The employment agreement provides Mr. Gutkowski with an annual base
salary of $325,000 plus an annual bonus of at least $150,000, which bonus may
be increased in the discretion of the board of directors of Marquee.
The employment agreement allows Marquee to terminate Mr. Gutkowski's
employment agreement before the expiration of its term if he dies, if he
becomes disabled for a period of 26 consecutive weeks or if Marquee has
"cause." For purposes of the employment agreement, "cause" means:
o the conviction of a felony;
o the commission of an act of fraud or embezzlement upon Marquee;
o a material breach by Mr. Gutkowski of his agreement not to compete with
Marquee; or
o the willful malfeasance or gross negligence by Mr. Gutkowski in the
performance of his duties under the employment agreement or his failure to
perform his duties thereunder, which malfeasance, negligence or failure has
a material adverse effect on the business of Marquee and which remains
uncured for 15 days after notice from Marquee.
175
<PAGE>
Pursuant to his employment agreement, Mr. Gutkowski agrees not to compete
with Marquee or solicit any of Marquee's clients or employees during the term
of the agreement. In addition, the employment agreement prohibits Mr. Gutkowski
from engaging in such activities for certain periods of time if he voluntarily
terminates his employment agreement, if Marquee terminates his employment
agreement or if the employment agreement is not extended on substantially
similar terms.
MESSRS. KAMINSKY, LETIS, OPPENHEIM AND TRAGER
Upon its acquisition of A&A and SMTI in December 1996, Marquee entered
into employment agreements with each of Messrs. Kaminsky, Letis, Oppenheim and
Trager on substantially the same terms and conditions as Mr. Gutkowski's
employment agreement with Marquee. In these agreements, each such person agreed
to serve as an Executive Vice President of Marquee for an initial term of five
years. The employment agreements provide each of Messrs. Kaminsky, Letis and
Trager with an annual base salary of $300,000, and provide Mr. Oppenheim with
an annual base salary of $175,000.
MR. DELL
In October 1997, Marquee entered into an employment agreement with Mr.
Dell. In the agreement, he agreed to serve for an initial term of four years as
the Chairman and Chief Executive Officer of ProServ and a director of Marquee
for a base salary of not less than $300,000 per year plus certain bonuses. Mr.
Dell may terminate the employment agreement after three years without any
further obligation on his part, except that he will be subject to a one-year
agreement not to compete with Marquee if he opts to receive options to purchase
40,000 shares of Marquee common stock. If he does not so terminate the
employment agreement, Marquee may extend the employment agreement for a fifth
year. In addition, Mr. Dell received at the consummation of the ProServ
acquisition, and he has the right to receive upon each anniversary thereof
during the term of his employment agreement, an option to purchase 40,000
shares of Marquee common stock at an exercise price per share based upon the
closing price of the Marquee common stock on the date of grant.
MR. ALLARD
In October 1997, Marquee entered into an employment agreement with Mr.
Allard. His employment agreement provides that he will serve as President,
Chief Operating Officer and Managing Director of ProServ through December 31,
2000 for an annual base salary of $300,000 plus certain incentive-based
bonuses.
AMENDMENTS
In connection with the merger, Messrs. Gutkowski, Kaminsky, Letis,
Oppenheim, Trager, Dell and Allard, among others, amended their employment
agreements, to be effective as of the effective time of the merger. Among other
things, these amendments will remove their rights to receive options to
purchase shares of Marquee common stock, and grant them the right to receive
options to purchase a certain number of shares of SFX Class A common stock.
These amendments will also modify certain of these individuals' non-competition
clauses.
DIRECTOR COMPENSATION
Each director who is not an employee of Marquee receives $1,500 for each
board of directors' meeting attended and $750 for each committee meeting
attended, in addition to reimbursement for travel expenses in attending such
meetings.
In February 1998, Messrs. Barron and Schumer were each awarded 7,500 stock
appreciation rights. These stock appreciation rights vest over two years and
have a strike price of $4.25 per share of Marquee common stock.
176
<PAGE>
SFX PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding ownership of SFX
common stock as of January 20, 1999, by each executive officer of SFX, each
director of SFX, the directors and executive officers of SFX as a group and
each person known by SFX to own beneficially more than 5% of any class of SFX
common stock.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK
AFTER THE MERGER AND
CLASS A THE CELLAR DOOR
COMMON STOCK ACQUISITION(1)
----------------------------- -----------------------------
NAME AND ADDRESS OF NUMBER OF PERCENT NUMBER PERCENT
BENEFICIAL OWNER(2) SHARES OF CLASS OF SHARES OF CLASS
- --------------------------------- ------------------ ---------- ------------------ ----------
<S> <C> <C> <C> <C>
Directors and Executive Officers:
Robert F.X. Sillerman ........... 2,653,005(3) 9.2% 2,761,893(4) 9.0%
Michael G. Ferrel ............... 145,303(5) * 145,303(5) *
Brian Becker .................... 29,402(6) * 29,402(6) *
David Falk ...................... 325,000(7) 1.1 325,000(7) 1.1
Howard J. Tytel ................. 454,604(8) 1.6 470,687(9) 1.5
Thomas P. Benson ................ 22,333(10) * 22,333(10) *
Richard A. Liese ................ 2,800(11) * 2,800(11) *
D. Geoffrey Armstrong ........... 175,133(12) * 175,133(12) *
James F. O'Grady, Jr. ........... 17,272(13) * 17,272(13) *
Paul Kramer ..................... 18,422(13) * 18,422(13) *
Edward F. Dugan ................. 8,422(13) * 8,422(13) *
All directors and executive
officers as a group (11 persons) 3,397,092 11.8% 3,506,258 11.4%
5% Stockholders:
Zweig-DiMenna International
Limited(14) and affiliated
companies ...................... 1,450,400 5.0% 1,450,400 4.8%
P.O. Box N-9932
Maritime House, Frederick
Street
Nassau, Bahamas
<CAPTION>
PERCENT OF
TOTAL PERCENT OF
VOTING TOTAL VOTING
CLASS B POWER POWER AFTER
COMMON STOCK BEFORE THE THE MERGER
----------------------------- MERGER AND THE AND THE
NAME AND ADDRESS OF NUMBER OF PERCENT CELLAR DOOR CELLAR DOOR
BENEFICIAL OWNER(2) SHARES OF CLASS ACQUISITION ACQUISITION(1)
- --------------------------------- ------------------ ---------- ---------------- ---------------
<S> <C> <C> <C> <C>
Directors and Executive Officers:
Robert F.X. Sillerman ........... 1,524,168(4) 89.8% 39.1% 37.8%
Michael G. Ferrel ............... 172,869(5) 10.2 4.1 3.9
Brian Becker .................... -- -- * *
David Falk ...................... -- -- * *
Howard J. Tytel ................. -- -- 1.0 1.0
Thomas P. Benson ................ -- -- * *
Richard A. Liese ................ -- -- * *
D. Geoffrey Armstrong ........... -- -- * *
James F. O'Grady, Jr. ........... -- -- * *
Paul Kramer ..................... -- -- * *
Edward F. Dugan ................. -- -- * *
All directors and executive
officers as a group (11 persons) 1,697,037 100.0% 44.5% 43.0
5% Stockholders:
Zweig-DiMenna International
Limited(14) and affiliated
companies ...................... -- -- 3.2% 3.1
P.O. Box N-9932
Maritime House, Frederick
Street
Nassau, Bahamas
</TABLE>
- ----------
* Less than 1%
(1) Assumes that the exchange ratio is 0.0833, based on an assumed SFX stock
price of $57.00, and that SFX will issue 350,877 shares of SFX Class A
common stock in connection with the Cellar Door acquisition. If SFX
issues 4,000,000 shares of SFX Class A common stock in the proposed
equity offering, Mr. Sillerman will have 34.9% of the combined voting
power of the SFX common stock, Mr. Ferrel will have 3.6%, and each of the
remaining directors and executive officers of SFX will have less than
1.0%. On this basis, as a group, the directors and executive officers of
SFX will have 39.7% of the combined voting power. Zweig DiMenna
International and its affiliates will have 2.8%.
(2) Unless otherwise set forth above, the address of each stockholder is the
address of SFX, 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, "beneficial ownership" means the sole or shared power to vote, or
to direct the disposition of, a security, and a person is deemed to have
"beneficial ownership" of any security that the person has the right to
acquire within 60 days of January 20, 1999. Unless noted otherwise,
information as to beneficial ownership is based on statements furnished
to SFX by the beneficial owners, and stockholders possess sole voting and
dispositive power with respect to shares listed on this table. As of
January 20, 1999, there were issued and outstanding 28,753,284 shares of
SFX Class A common stock and 1,697,037 shares of SFX Class B common
stock.
177
<PAGE>
(3) Includes 39,343 shares of SFX Class A common stock held by SCMC and
options to purchase an aggregate of 40,000 shares of Class A common stock
held by Mr. Sillerman which are, or will become, exercisable within 60
days of January 20, 1999. Also includes 446,271 shares of SFX Class A
common stock and 8,333 options held by Mr. Tytel that Mr. Sillerman has
the right to vote. Excludes options to purchase an aggregate of 580,000
shares of Class A common stock held by Mr. Sillerman which are not
exercisable within 60 days of January 20, 1999. If the 1,524,168 shares
of Class B common stock held by Mr. Sillerman were included in
calculating his ownership of the SFX Class A common stock, then Mr.
Sillerman would beneficially own 4,177,173 shares of SFX Class A common
stock, representing approximately 13.8% of the class. See "SFX
Management-- Employment Agreements and Arrangements with Certain Officers
and Directors."
(4) Includes 39,343 shares of SFX Class A common stock held by SCMC and
options to purchase an aggregate of 40,000 shares of SFX Class A common
stock held by Mr. Sillerman which are, or will become, exercisable within
60 days of January 20, 1999. Also includes 458,477 shares of SFX Class A
common stock, 2,915 options and 961 warrants held by Mr. Tytel that Mr.
Sillerman has the right to vote. Includes options to be received by Mr.
Sillerman in the merger to purchase an aggregate of 18,187 shares of SFX
Class A common stock and warrants to be received in the merger to
purchase an aggregate of 5,447 shares of SFX Class A common stock which
are, or will become, exercisable within 60 days of January 20, 1999.
Excludes options to be received in the merger to purchase 9,425 shares of
SFX Class A common stock and options previously issued to purchase an
aggregate of 580,000 shares of SFX Class A common stock which are not
exercisable within 60 days of January 20, 1999. If the 1,524,168 shares
of SFX Class B common stock held by Mr. Sillerman were included in
calculating his ownership of the SFX Class A common stock, then Mr.
Sillerman would beneficially own 4,286,061 shares of SFX Class A common
stock, representing approximately 11.9% of the class upon closing of the
merger, the Cellar Door acquisition and the proposed equity offering. See
"Marquee Principal Stockholders" and "SFX Management--Employment
Agreements and Arrangements with Certain Officers and Directors."
(5) Includes options to purchase an aggregate of 16,666 shares of Class A
common stock held by Mr. Ferrel which are, or will become, exercisable
within 60 days of January 20, 1999. Excludes options to purchase an
aggregate of 208,334 shares of SFX Class A common stock held by Mr.
Ferrel which are not exercisable within 60 days of January 20, 1999. If
the 172,869 shares of Class B common stock held by Mr. Ferrel were
included in calculating his ownership of Class A common stock, then Mr.
Ferrel would beneficially own 318,172 shares of Class A common stock,
representing less than 1% of the class upon closing of the Cellar Door
acquisition, the proposed equity offering and the merger. See "SFX
Management--Employment Agreements and Arrangements with Certain Officers
and Directors."
(6) Excludes options to purchase an aggregate of 75,000 shares of SFX Class A
common stock held by Mr. Becker which are not exercisable within 60 days
of January 20, 1999.
(7) Excludes options to purchase an aggregate of 100,000 shares of SFX Class
A common stock held by Mr. Falk which are not exercisable within 60 days
of January 20, 1999.
(8) Includes options to purchase an aggregate of 8,333 shares of Class A
common stock held by Mr. Tytel which are, or will become, exercisable
within 60 days of January 20, 1999. Excludes options to purchase an
aggregate of 96,667 shares of SFX Class A common stock held by Mr. Tytel
which are not exercisable within 60 days of January 20, 1999. Mr. Tytel
also has an economic interest in SCMC, which beneficially owns 39,343
shares of SFX Class A common stock, although he lacks voting or
dispositive power with respect to the shares beneficially held by SCMC.
Mr. Sillerman has the right to vote all of the shares of SFX Class A
common stock beneficially owned by Mr. Tytel.
(9) Includes option to purchase an aggregate of 8,333 shares of SFX Class A
common stock held by Mr. Tytel which are, or will become, exercisable
within 60 days of January 20, 1999. Also includes 2,915 options and 961
warrants that are, or will become, exercisable for shares of Class
178
<PAGE>
A common stock within 60 days of January 20, 1999. Excludes options to be
received in the merger to purchase 1,222 shares of SFX Class A common
stock and 556 stock appreciation rights to be received in the merger not
exercisable within 60 days of January 20, 1999. Also excludes options
previously issued to purchase an aggregate of 96,667 shares of SFX Class A
common stock held by Mr. Tytel which are not exercisable within 60 days of
January 20, 1999. Mr. Tytel also has an economic interest in SCMC, which
beneficially owns 39,343 shares of SFX Class A common stock, although he
lacks voting or dispositive power with respect to the shares beneficially
held by SCMC. Mr. Sillerman has the right to vote all of the shares of SFX
Class A common stock beneficially owned by Mr. Tytel.
(10) Includes options to purchase an aggregate of 3,333 shares of SFX Class A
common stock held by Mr. Benson which are, or will become, exercisable
within 60 days of January 20, 1999. Excludes options to purchase an
aggregate of 46,667 shares of SFX Class A common stock held by Mr. Benson
which are not exercisable within 60 days of January 20, 1999.
(11) Excludes options to purchase an aggregate of 10,000 shares of SFX Class A
common stock held by Mr. Liese which are not exercisable within 60 days
of January 20, 1999.
(12) Includes options to purchase an aggregate of 13,333 shares of SFX Class A
common stock held by Mr. Armstrong which are, or will become, exercisable
within 60 days of January 20, 1999. Excludes options to purchase an
aggregate of 111,667 shares of SFX Class A common stock held by Mr.
Armstrong which are not exercisable within 60 days of January 20, 1999.
(13) Includes options to purchase an aggregate of 2,500 shares of SFX Class A
common stock held by each of Messrs. Kramer, O'Grady and Dugan which are
currently exercisable. Excludes 5,455 shares credited to each of these
individuals' accounts in the deferred compensation plan for non-employee
directors.
(14) Based on information contained in a Schedule 13G filed with the SEC on
June 8, 1998. The aggregate number of shares is beneficially owned as
follows: 714,300 shares by Zweig-DiMenna International Limited, a British
Virgin Islands corporation; 328,200 by Zweig-DiMenna Partners, L.P., a
New York limited partnership; 197,500 shares by Zweig-DiMenna Special
Opportunities, L.P., a Delaware limited partnership; 124,000 shares by
Zweig-DiMenna International Managers, Inc., a Delaware corporation, on
behalf of a discretionary account; 83,400 shares by Gotham Advisors,
Inc., a Delaware corporation, on behalf of a discretionary account and
3,000 shares by Zweig-DiMenna Investors L.P., a Delaware partnership. The
principal business office for each of these entities, other than
Zweig-DiMenna International Limited, whose address is set forth in the
above table, is 900 Third Avenue, New York, New York 10022.
POSSIBLE CHANGE IN CONTROL
Mr. Sillerman has pledged an aggregate of 793,401 of his shares of SFX
Class B common stock as collateral for a line of credit, under which he
currently has no outstanding borrowings. He continues to be entitled to
exercise voting and consent rights with respect to the pledged shares, with
certain restrictions. However, if he defaults in the payment of any future
loans extended to him under the line of credit, the bank will be entitled to
sell the pledged shares. Although the SFX Class B common stock has 10 votes per
share in most matters, the pledged shares will automatically convert into
shares of SFX Class A common stock upon such a sale. Such a sale of the pledged
shares would reduce Mr. Sillerman's share of the voting power of the SFX common
stock, and would therefore be likely to result in a change of control of SFX.
See "Risk Factors--SFX will be required to make large payments upon a change of
control which may harm SFX's financial condition."
179
<PAGE>
MARQUEE PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding ownership of Marquee
common stock as of January 20, 1999, by each Marquee Named Executive Officer,
each director of Marquee, the executive officers and directors of Marquee as a
group and each person known by Marquee to own beneficially more than 5% of the
common stock.
<TABLE>
<CAPTION>
PERCENT OF
TOTAL VOTING
NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER OF SHARES POWER
- -------------------------------------------------------------------------- ------------------ -------------
<S> <C> <C>
Directors and Executive Officers:
Robert F.X. Sillerman (2)(3) ............................................. 1,114,101 6.1%
Robert Gutkowski (3)(4) .................................................. 748,076 4.1%
Arthur C. Kaminsky (3)(5) ................................................ 743,076 4.1%
Michael Letis (3)(6) ..................................................... 743,076 4.1%
Michael Trager (3)(7) .................................................... 743,076 4.1%
Louis J. Oppenheim (3)(8) ................................................ 375,702 2.1%
William J. Allard (9) .................................................... 38,333 *
Arthur R. Barron (10) .................................................... 20,000 *
Donald L. Dell (11) ...................................................... 358,333 2.0%
Myles W. Schumer (12) .................................................... 3,000 *
Howard J. Tytel (13) ..................................................... 193,076 1.1%
Jan E. Chason (14) ....................................................... 8,291 *
All executive officers and directors as a group (12 persons) (15) ........ 5,088,140 27.1%
5% Stockholders:
Kaufmann Fund, Inc. (16) ................................................. 3,500,000 19.4%
140 East 45th Street, 43rd Floor
New York, NY 10017
Franklin Resources, Inc. (17) ............................................ 1,500,000 8.3%
777 Mariners Island Blvd.
San Mateo, CA 94404
</TABLE>
- ----------
* Less than 1%
(1) Unless otherwise noted, the address of each beneficial owner is c/o The
Marquee Group, Inc., 888 Seventh Avenue, 37th Floor, New York, New York
10019. Unless otherwise noted, Marquee believes that all persons named in
the table have sole voting and investment power with respect to all
shares of Marquee common stock beneficially owned by them.
(2) Includes 190,000 shares of common stock issuable upon the exercise of
options that are, or will become, exercisable within 60 days of January
20, 1999 and 65,384 shares of common stock issuable upon exercise of
warrants. Excludes 113,146 shares of common stock issuable upon the
exercise of options that are not exercisable within 60 days of January
20, 1999. See "Certain Relationships and Related Transactions of
Marquee--Consulting Agreement."
(3) Marquee, TSC and Messrs. Gutkowski, Kaminsky, Letis, Trager and Oppenheim
have entered into an agreement with Marquee with respect to the voting of
shares of common stock held by them. See "Certain Relationships and
Related Transactions of Marquee--Stockholders' Agreement."
180
<PAGE>
(4) Includes 196,154 shares of common stock that Mr. Gutkowski placed in
escrow but with respect to which he retains voting power, 25,000 shares
of common stock issuable upon the exercise of options that are, or will
become, exercisable within 60 days of January 20, 1999 and 38,461 shares
of common stock issuable upon exercise of warrants. Excludes 73,691
shares of common stock issuable upon the exercise of options that are not
exercisable within 60 days of January 20, 1999.
(5) Includes 196,154 shares of common stock that Mr. Kaminsky placed in
escrow but with respect to which he retains voting power, 20,000 shares
of common stock issuable upon the exercise of options that are, or will
become, exercisable within 60 days of January 20, 1999 and 38,461 shares
of common stock issuable upon exercise of warrants. Excludes 59,018
shares of common stock issuable upon the exercise of options that are not
exercisable within 60 days of January 20, 1999.
(6) Includes 196,154 shares of common stock that Mr. Letis placed in escrow
but with respect to which he retains voting power, 20,000 shares of
common stock issuable upon the exercise of options that are, or will
become, exercisable within 60 days of January 20, 1999 and 38,461 shares
of common stock issuable upon exercise of warrants. Excludes 59,018
shares of common stock issuable upon the exercise of options that are not
exercisable within 60 days of January 20, 1999.
(7) Includes 196,154 shares of common stock that Mr. Trager placed in escrow
but with respect to which he retains voting power, 20,000 shares of
common stock issuable upon the exercise of options that are, or will
become, exercisable within 60 days of January 20, 1999 and 38,461 shares
of common stock issuable upon exercise of warrants. Excludes 59,018
shares of common stock issuable upon the exercise of options that are not
exercisable within 60 days of January 20, 1999.
(8) Includes 98,076 shares of common stock that Mr. Oppenheim placed in
escrow but with respect to which he retains voting power, 14,166 shares
of common stock issuable upon the exercise of options that are, or will
become, exercisable within 60 days of January 20, 1999 and 19,230 shares
of common stock issuable upon exercise of warrants. Excludes 41,736
shares of common stock issuable upon the exercise of options that are not
exercisable within 60 days of January 20, 1999.
(9) Includes 28,333 shares issuable upon exercise of options that are, or
will become, exercisable within 60 days of January 20, 1999. Excludes
9,782 shares issuable upon the exercise of options that are not
exercisable within 60 days of January 20, 1999.
(10) Excludes 17,500 stock appreciation rights, 7,083 of which are, or will
become, exercisable within 60 days of January 20, 1999. See "Marquee
Management--Director Compensation."
(11) Includes 43,333 shares issuable upon exercise of options that are, or
will become, exercisable within 60 days of January 20, 1999. Excludes
9,782 shares issuable upon the exercise of options that are not
exercisable within 60 days of January 20, 1999.
(12) Includes 1,500 shares of common stock issuable upon exercise of warrants
which are currently exercisable. Excludes 17,500 stock appreciation
rights, 7,083 of which are exercisable within 60 days of January 20,
1999. See "Marquee Management--Director Compensation."
(13) Includes 35,000 shares of common stock issuable upon the exercise of
options that are, or will become, exercisable within 60 days of January
20, 1999 and 11,538 shares
181
<PAGE>
of common stock issuable upon exercise of warrants. Excludes 14,762
shares issuable upon the exercise of options that are not exercisable
within 60 days of January 20, 1999 or 10,000 stock appreciation rights,
3,333 of which are exercisable within 60 days of January 20, 1999.
(14) Includes 2,000 shares issuable upon exercise of warrants which are
currently exercisable and 4,291 shares of common stock issuable upon the
exercise of options that are exercisable within 60 days of January 20,
1999. Excludes 12,718 shares of common stock issuable upon the exercise
of options that are not exercisable within 60 days of January 20, 1999.
(15) Includes 428,456 shares issuable upon the exercise of options that are,
or will become, exercisable within 60 days of January 20, 1999 and
253,496 shares issuable upon exercise of warrants. Excludes 452,581
shares of Marquee common stock issuable upon the exercise of options that
are not exercisable within 60 days of January 20, 1999.
(16) Based on information contained in a Schedule 13G filed with the SEC on
November 12, 1997 by Kaufmann Fund, Inc., an investment company
registered under the Investment Company Act of 1940, as amended.
(17) Based on information contained in a Schedule 13G filed with the SEC on
February 6, 1998 by Franklin Resources, Inc., Charles P. Johnson, Rupert
H. Johnson, Jr. and Franklin Advisors, Inc. Franklin Advisors, Inc. is a
subsidiary of Franklin Resources, Inc. and an investment advisor
registered under the Investment Advisers Act of 1940, as amended.
Franklin Advisors, Inc. has investment and/or voting power over
securities owned by its advisory clients. Charles P. Johnson and Rupert
H. Johnson each own in excess of 10% of the outstanding common stock of
Franklin Resources, Inc. and are the principal stockholders of Franklin
Resources, Inc.
ESCROW SHARES
IPO ESCROW SHARES
In connection with Marquee's initial public offering, TSC and Messrs.
Gutkowski, Kaminsky, Oppenheim, Letis and Trager deposited an aggregate of
1,275,000 shares of Marquee common stock into escrow. Each of them has waived
their rights to the Marquee escrow shares in connection with the merger, which
waiver becomes effective at the effective time, except that TSC's waiver was
effective immediately. See "Certain Relationships and Related Transactions of
Marquee--Escrow Agreement."
QBQ ESCROW SHARES
In connection with Marquee's acquisition of QBQ in October 1997, Marquee
deposited into escrow 78,702 shares of Marquee common stock. The escrowed
shares will be released from escrow if the Operating Income, as defined in the
agreement relating to the QBQ acquisition, derived from the purchased assets
exceeds $1.0 million in any of the three fiscal years, or $1.25 million in the
fourth fiscal year, following the consummation of the QBQ acquisition. In the
nine six months of 1998, Marquee recorded a charge to operations in recognition
of the probability that such financial thresholds will be reached and QBQ's
escrow shares will be released. In the merger, these escrowed shares will be
converted into shares of SFX Class A common stock.
182
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF SFX
POTENTIAL CONFLICTS OF INTEREST
Until the closing of the merger, Messrs. Sillerman and Tytel may have
conflicts of interest between Marquee and SFX. Mr. Sillerman has an aggregate
equity interest of approximately 6.1% in Marquee and is the Chairman of its
Board of Directors, and Mr. Tytel has an equity interest in Marquee of
approximately 1.1% and is one of its directors. However, Messrs. Sillerman and
Tytel did not represent the interests of Marquee in negotiations with SFX
relating to the merger. See "The Merger--Interests of Marquee's Management and
Directors in the Merger." SFX may directly compete with Marquee before the
consummation of the merger in obtaining representation agreements with
particular athletes and endorsement opportunities for its clients. In addition,
SFX anticipates that, from time to time, it will enter into transactions and
booking and other arrangements with Marquee and Marquee's clients. In addition,
TSC, an entity controlled by Mr. Sillerman and in which Mr. Tytel also has an
equity interest, has provided financial consulting services to Marquee and will
continue to do so until the closing of the merger. See "Certain Relationships
and Related Transactions of Marquee--Consulting Agreement." TSC's services are
provided by certain directors, officers and employees of SFX who are not
separately compensated for their services by TSC. In any transaction,
arrangement or competition with Marquee before the closing of the merger,
Messrs. Sillerman and Tytel are likely to have conflicts of interest between
their duties as officers and directors of SFX, on the one hand, and their
duties as directors of Marquee and their interests in TSC and Marquee, on the
other hand. See "--Triathlon Fees."
Pursuant to the employment agreement entered into between Brian Becker and
SFX in connection with the acquisition of PACE, Mr. Becker has the option,
exercisable within 15 days after February 25, 2000, to purchase SFX's motor
sports line of business -- or, if that line of business has been sold, SFX's
theatrical line of business -- at its then fair market value. Exercise of such
option would result in the termination of Mr. Becker's employment agreement.
Mr. Becker's option may present a conflict of interest in his role as a
director of SFX. See "Risk Factors--SFX may be forced to sell some of its
subsidiaries which may prevent SFX from realizing the full value of these
subsidiaries" and "SFX Management."
AGREEMENTS PRIOR TO THE SPIN-OFF
In January 1998, to retain the services of certain officers and directors
of SFX and, if necessary, facilitate Broadcasting's ability to pursue an
alternative transaction to the spin-off, as contemplated in the Broadcasting
merger agreement, SFX reached an agreement with such individuals to waive the
individuals' right to receive shares of SFX in the spin-off in return for the
right to receive one share of SFX common stock regardless of the number of
shares that were otherwise distributable in the spin-off or, in an alternative
transaction, receive $4.20 in value of stock of the acquiring company or $4.20
in cash depending on the circumstances for each share of Broadcasting common
stock held by them or were entitled to receive. The amount of $4.20 was based
on the value attributed to the SFX common stock in the fairness opinion
obtained by Broadcasting in connection with the Broadcasting merger. If the
spin-off was consummated, SFX was permitted to satisfy its obligations by
delivering shares in connection with the spin-off. The following table sets
forth the executive officers and directors who entered into such an agreement,
along with the number of shares of Broadcasting common stock that they held or
were entitled to receive:
183
<PAGE>
<TABLE>
<CAPTION>
NAME SHARES OF BROADCASTING
- ------------------------------- ----------------------------------
<S> <C>
Robert F. X. Sillerman 1,326,248 of Class A common stock
1,024,168 of Class B common stock
Michael G. Ferrel 98,637 of Class A common stock
22,869 of Class B common stock
Howard J. Tytel 248,615 of Class A common stock
Thomas P. Benson 9,000 of Class A common stock
Richard A. Liese 2,800 of Class A common stock
D. Geoffrey Armstrong 161,800 of Class A common stock
James F. O'Grady, Jr. 14,772 of Class A common stock
Paul Kramer 15,922 of Class A common stock
Edward F. Dugan 5,922 of Class A common stock
</TABLE>
In accordance with this agreement, SFX's obligations were deemed satisfied
upon delivery of the shares in connection with the spin-off. No cash payment
was made.
EMPLOYMENT AGREEMENTS
SFX has entered into employment agreements with each of its current
executive officers. The employment agreements provide for annual base salaries
of $500,000 for Mr. Sillerman, $350,000 for Mr. Ferrel, $315,000 for Mr. Falk,
$300,000 for Mr. Tytel and $235,000 for Mr. Benson. Mr. Becker's employment
agreement provides for an annual salary of $294,000 for the first year,
$313,760 for each of the second and third years and $334,310 for each of the
fourth and fifth years.
In connection with entering into the employment agreements, SFX sold the
following restricted shares of stock: 500,000 shares of its Class B common
stock to Mr. Sillerman; 150,000 shares of its Class B common stock to Mr.
Ferrel; 80,000 shares of its Class A common stock to Mr. Tytel; and 10,000
shares of its Class A common stock to Mr. Benson. The shares were sold to the
officers at a purchase price of $2.00 per share. In addition, the SFX Board, on
the recommendation of its compensation committee, also has approved the
issuance of stock options to its officers and directors exercisable for an
aggregate of 252,500 shares of SFX's Class A common stock. The options will
vest over three years and will have an exercise price of $5.50 per share. SFX
will record non-cash compensation charges over the three-year exercise period
to the extent that the fair value of the underlying Class A common stock
exceeds the exercise price. See "SFX Management--Employment Agreements and
Arrangements with Certain Officers and Directors."
ASSUMPTION OF EMPLOYMENT AGREEMENTS; CERTAIN CHANGE OF CONTROL PAYMENTS
Pursuant to the terms of the distribution agreement, at the time of the
consummation of the Broadcasting merger, SFX assumed all obligations under any
employment agreement or arrangement between Broadcasting or any of its
subsidiaries and any employee of SFX, including Messrs. Sillerman and Ferrel,
other than obligations relating to Messrs. Sillerman's and Ferrel's change of
control options and existing rights to indemnification. These assumed
obligations included the obligation to make cash payments aggregating
approximately $3.3 million to Mr. Sillerman, $1.5 million to Mr. Ferrel and
$200,000 to Mr. Benson, after the termination of their employment with
Broadcasting following the Broadcasting merger. SFX has paid these amounts. In
addition, SFX's assumed obligations include the duty to indemnify
184
<PAGE>
Messrs. Sillerman and Ferrel to the extent permitted by law for one-half of the
cost of any excise tax that may be assessed against them for any
change-of-control payments made to them by Broadcasting in connection with the
Broadcasting merger.
INDEMNIFICATION OF MR. SILLERMAN
On August 24, 1997, Mr. Sillerman entered into an agreement with
Broadcasting and the Broadcasting buyer to waive his right to receive
indemnification, except to the extent covered by directors' and officers'
insurance, from Broadcasting, its subsidiaries, the Broadcasting buyer and its
subsidiaries for claims and damages arising out of the Broadcasting merger and
related transactions. Mr. Sillerman's employment agreement with SFX provides
that SFX will indemnify Mr. Sillerman for these claims and damages to the
fullest extent permitted by applicable law.
RELATIONSHIP BETWEEN HOWARD J. TYTEL AND BAKER & MCKENZIE
Howard J. Tytel, who is the Executive Vice President, General Counsel,
Secretary, Member of the Office of the Chairman and a director of SFX, was "Of
Counsel" to the law firm of Baker & McKenzie from 1993 to May 31, 1998. Mr.
Tytel was also an executive vice president, the general counsel and a director
of Broadcasting. Baker & McKenzie served as counsel to Broadcasting and
currently serves as counsel to SFX, Marquee and certain other affiliates of Mr.
Sillerman. Baker & McKenzie formerly compensated Mr. Tytel based, in part, on
the fees it received from providing legal services to Broadcasting, SFX,
Marquee, other affiliates of Mr. Sillerman and other clients introduced to the
firm by Mr. Tytel. Baker & McKenzie has agreed to a severance arrangement with
Mr. Tytel, which is not based on fees received by Baker & McKenzie. From April
27, 1998, the date of the spin-off, until May 31, 1998, SFX incurred and paid
Baker & McKenzie approximately $1.5 million for legal services. SFX believes
that this arrangement was as fair to SFX as those that could have been obtained
from an unrelated party on an arms-length basis.
ARRANGEMENT BETWEEN ROBERT F.X. SILLERMAN AND HOWARD J. TYTEL
Since 1978, Messrs. Sillerman and Tytel have been jointly involved in
numerous business ventures, including SCMC, TSC, MMR, Triathlon, Marquee,
Broadcasting and SFX. In consideration for certain services provided by Mr.
Tytel in connection with those ventures, Mr. Tytel has generally 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
Broadcasting did not compensate Mr. Tytel directly, except for ordinary fees
paid to him in his capacity as a director, he receives compensation from TSC
and SCMC, companies controlled by Mr. Sillerman, as well as from Mr. Sillerman
personally, with respect to the services he provides to various entities
affiliated with Mr. Sillerman, including Broadcasting. In 1997, these cash fees
aggregated approximately $5.0 million. In connection with the consummation of
the Broadcasting merger and certain related transactions, Mr. Tytel received
308,374 shares of SFX's Class A common stock, with Mr. Sillerman retaining the
right to vote these shares, and cash fees from TSC, SCMC and Mr. Sillerman
personally. Mr Tytel has also granted Mr. Sillerman the right to vote all other
shares of SFX Class A common stock beneficially owned by him. In addition, Mr.
Tytel continues to have an economic interest in SCMC, which beneficially owns
39,343 shares of SFX's Class A common stock. See "--Assumption of Employment
Agreements; Certain Change of Control Payments" and "--Employment Agreements."
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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. Triathlon paid fees of $3,000,000 for the year ended December 31,
1996, fees of $1,794,000 for the year ended December 31, 1997, and fees of
$530,000 for the year ended December 31, 1998. These fees vary above the
minimum annual fee of $500,000 depending on the level of acquisition and
financing activities of Triathlon. SCMC previously assigned its rights to
receive fees payable under this agreement to Broadcasting. Pursuant to the
terms of the distribution agreement, Broadcasting assigned its rights to
receive these fees to SFX. All services provided by SCMC are provided by
employees of SFX. Triathlon has announced that it has agreed to be acquired by
a third party. Triathlon will pay a fee to SFX in connection with such
acquisition. When Triathlon is acquired, it will cease paying consulting fees
for SCMC's services.
AGREEMENTS WITH BROADCASTING
SFX and Broadcasting have entered into various agreements with respect to
the spin-off and related matters. For the terms of these agreements, see the
distribution agreement, tax sharing agreement and the employment benefits
agreement, each of which is an exhibit to the registration statement.
COMMON STOCK RECEIVED IN THE SPIN-OFF
In the spin-off, the holders of Broadcasting's Class A common stock,
Series D preferred stock and warrants, upon exercise, received shares of SFX's
Class A common stock, whereas Messrs. Sillerman and Ferrel, as the holders of
Broadcasting's Class B common stock, which is entitled to ten votes per share
on most matters, received shares of SFX's Class B common stock. SFX's Class A
common stock and Class B common stock have similar rights and privileges,
except that the Class B common stock has greater voting rights. See
"Description of Capital Stock of SFX." The issuance of SFX's Class B common
stock in the spin-off was intended to preserve Messrs. Sillerman's and Ferrel's
relative voting power after the spin-off. Assuming the completion of the
merger, the Cellar Door acquisition and the proposed equity offering, Mr.
Sillerman may be deemed to beneficially own approximately 34.9% of the combined
voting power of SFX, and Messrs. Sillerman and Ferrel may be deemed to
beneficially own approximately 38.5% of the combined voting power of SFX.
Accordingly, Mr. Sillerman, alone and together with SFX's current directors and
executive officers, will generally be able to control the outcome of the votes
of the stockholders of SFX on most matters. See "SFX Principal Stockholders."
In addition, in August 1997, the board of directors of Broadcasting
approved amendments to certain warrants to purchase an aggregate of 600,000
shares of Broadcasting's Class A common stock. The warrants were held by SCMC,
an entity controlled by Mr. Sillerman. The amendments memorialized the original
intent of the directors of Broadcasting that SCMC receive the aggregate number
of shares of SFX Class A common stock that it would have received if it had
exercised the warrants immediately before the spin-off. Because of these
amendments, SCMC received 600,000 shares of SFX Class A common stock in the
spin-off.
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ISSUANCE OF STOCK TO HOLDERS OF BROADCASTING'S OPTIONS AND SARS
On April 27, 1998, SFX issued 522,941 shares of its Class A common stock
to holders as of the spin-off record date of the stock options or SARs of
Broadcasting, whether or not vested. SFX also issued 325,000 to Mr. Sillerman
and 70,000 shares to Mr. Ferrel with respect to options issuable under their
employment agreements with Broadcasting. In addition, SFX issued 325,000 shares
of its Class A common stock to Mr. Sillerman and 30,000 shares of SFX Class A
common stock to Mr. Ferrel, which corresponded to change-of-control options of
Broadcasting that they waived in connection with the Broadcasting merger. The
issuances were made in consideration for past services to SFX and to allow
holders of such options and SARs to participate in the spin-off in a manner
similar to holders of Broadcasting's Class A common stock. Additionally, many
of the option and SAR holders are officers, directors or employees of SFX. The
members of the SFX Board, other than Messrs. Becker and Falk, received an
aggregate of 850,479 shares pursuant to such issuance.
MEADOWS REPURCHASE
In connection with the acquisition of Meadows Music Theater, Broadcasting
obtained an option, as subsequently amended, to repurchase 247,177 shares of
its Class A common stock (the "Meadows Shares") for an aggregate purchase price
of $8.2 million. However, Broadcasting was restricted from exercising the
Meadows Repurchase by certain loan covenants and other restrictions. Pursuant
to the terms of the Broadcasting merger agreement, since the Meadows Shares
were outstanding at the effective time of the Broadcasting merger, Working
Capital was decreased by approximately $10.3 million.
In January 1998, Mr. Sillerman committed to finance the $8.2 million
exercise price of the Meadows Repurchase to offset the $10.3 million reduction
to Working Capital. In consideration for his commitment, the board of directors
of Broadcasting agreed that Mr. Sillerman would receive approximately the
number of shares of SFX's Class A common stock to be issued in the spin-off
with respect to the Meadows Shares. At the time Broadcasting accepted Mr.
Sillerman's commitment, the board of directors of Broadcasting valued SFX's
Class A common stock to be issued in the spin-off at $4.20 per share, the value
attributed to such shares in the fairness opinion obtained by Broadcasting in
connection with the Broadcasting merger. The transaction was approved by
Broadcasting's board of directors, including the independent directors.
In April 1998, Broadcasting assigned the option for the Meadows Shares to
an unaffiliated third party and, in connection therewith, agreed to pay such
party a fee of $75,000. Mr. Sillerman subsequently advanced such party the $8.2
million exercise price for the Meadows Repurchase, the repayment of which
became due upon the Broadcasting merger. The third party has exercised the
option and transferred to Mr. Sillerman SFX's Class A common stock issued in
the spin-off with respect to the Meadows Shares. The Meadows Shares were
tendered in the Broadcasting merger by the third party in exchange for the per
share Broadcasting merger consideration of $75. The third party subsequently
repaid the advance from Mr. Sillerman and transferred $10.3 million, the
remainder of such consideration net of the third party fee, to SFX.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF MARQUEE
CONSULTING AGREEMENT
Marquee entered into a Financial Consulting Agreement with SCMC, dated as
of August 1, 1996. In March 1997, SCMC assigned its rights, obligations and
duties under the consulting agreement to TSC. In the consulting agreement, TSC,
a principal stockholder of Marquee, agreed to serve as Marquee's financial
consultant until August 1, 2002. Mr. Sillerman, the Chairman of Marquee, is the
Chairman, Chief Executive Officer and controlling stockholder of SCMC and TSC,
and Mr. Tytel, a director of Marquee, is the Executive Vice President and
General Counsel of SCMC and TSC. SCMC and/or TSC have entered into similar
agreements with other companies, including companies in which Mr. Sillerman or
his affiliates have substantial interests. Marquee had agreed to pay $30,000
per month commencing in September 1997 to TSC as compensation for its services
under the consulting agreement. In October 1997, TSC waived its rights to
future monthly payments under the consulting agreement. Under the consulting
agreement, TSC has agreed to perform, or assist Marquee in, among other things:
o production of financial reports and other data for Marquee's lenders and
investors and as required under the Securities Act and the Exchange Act;
o assistance with the preparation of Marquee's books and records;
o the maintenance of relationships with financial institutions participating
in Marquee's financings;
o the design and implementation of Marquee's accounting systems;
o the purchase, installation and implementation of computer hardware and
software for Marquee's accounting systems;
o the implementation of a cash management system;
o the establishment of regularized procedures for the accumulation of cash
balances available for interest and other required debt service payments;
o the engagement of bookkeeping, accounting and other personnel necessary for
the implementation of Marquee's accounting systems; and
o placement of financing.
The consulting agreement also provides for special advisory fees to be
paid to TSC in the event of any financings or mergers and acquisitions, whether
or not such transactions are originated by TSC, although such fees are subject
to the approval of Marquee's independent directors. Marquee did not, however,
make any such payment to SCMC or TSC in connection with Marquee's IPO, the A&A
acquisition, the SMTI acquisition or Marquee's private placement. In February
1997, Marquee advanced $400,000 to TSC as an advance against special advisory
fees to be earned by TSC. In connection with the ProServ acquisition and the
QBQ acquisition, TSC received special advisory fees of $450,000, of which
$400,000 was offset against the amount previously advanced to TSC. In
connection with the tender offer, commenced in July 1997 and consummated in
September 1997, by Marquee for its outstanding warrants (the "Marquee Tender
Offer"), TSC received an immediately exercisable option to purchase 200,000
shares of Marquee common stock at $7.00 per share. This option expires in 2002.
Although the special advisory fees paid in connection with these acquisitions
exceed those contemplated by the consulting agreement, Marquee's independent
directors have approved such fees as an affiliated transaction.
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Marquee has also agreed to reimburse TSC for all reasonable out-of-pocket
disbursements incurred by TSC in connection with the performance of services
under the consulting agreement and to indemnify TSC and its affiliates for
losses, claims, damages or liabilities arising out of TSC's performance of its
obligations under the consulting agreement. In 1997, Marquee reimbursed TSC's
expenses of $75,000.
In connection with the merger, TSC has agreed to terminate the consulting
agreement for no consideration, effective upon the closing of the merger. Until
the closing of the merger, employees of SFX will continue to provide the
above-described services to Marquee on behalf of TSC. See "Certain
Relationships and Related Transactions of SFX--Potential Conflicts of
Interest."
Mr. Tytel, a director of Marquee, was Of Counsel to the law firm of Baker
& McKenzie from 1993 to May 31, 1998. Baker & McKenzie is counsel in certain
matters to Marquee, SCMC, TSC and certain other affiliates of Mr. Sillerman.
See "Certain Relationships and Related Transactions of SFX--Relationship
Between Howard J. Tytel and Baker & McKenzie."
In January 1996, Marquee entered into a month-to-month lease with TSC
providing for a monthly rent of approximately $4,000, which lease was
terminated in September 1996.
PROSERV ACQUISITION
Marquee purchased ProServ for an aggregate purchase price of $10.8 million
in cash and the issuance of 250,000 shares of Marquee common stock. In
connection with the acquisition, Marquee repaid approximately $2.5 million of
the outstanding indebtedness of ProServ. Of the $10.8 million cash purchase
price, Donald Dell received $6.5 million and William J. Allard received
approximately $643,000. In addition, Mr. Dell received the 250,000 shares of
Marquee common stock issued in the ProServ acquisition. Messrs. Dell and Allard
became directors of Marquee upon the consummation of the ProServ acquisition.
Mr. Dell has agreed not to offer, sell or otherwise transfer or dispose of
50% of Dell's Marquee stock, with certain exceptions, until January 14, 2000.
Marquee has granted Mr. Dell certain demand and piggyback registration rights
with respect to Dell's Marquee stock, which, in certain situations, permit Mr.
Dell to sell 100% of his Marquee stock.
In addition, Marquee and Mr. Dell have agreed to indemnify each other for
any losses incurred by either party as a result of the inaccuracy of any
representation or warranty or the breach of any covenant or agreement; however,
in certain circumstances, if Mr. Dell breaches the agreement, and Marquee still
elects to purchase Mr. Dell's shares, then Marquee's remedy for such breach
will be limited to $900,000. Mr. Dell has also agreed to indemnify Marquee for
certain amounts by which ProServ's deficit in net working capital at the time
of the consummation of the purchase of Mr. Dell's shares exceeds certain
specified thresholds. The amount of such indemnity has not been finally
determined.
Marquee's stock purchase agreement with Mr. Dell provides that, at any
time between October 14, 1999 and December 13, 1999, Mr. Dell may elect to
transfer to Marquee up to all of the remaining Marquee stock held by Mr. Dell
at a price per share equal to $7.70, for a total purchase price of up to
approximately $1.9 million. If Marquee does not purchase the shares from Mr.
Dell, Mr. Dell has certain rights to require Marquee to issue more shares of
Marquee common stock to Mr. Dell. In addition, at any time between December 14,
1999 and January 12, 2000, Marquee may purchase up to 50% of Dell's Marquee
stock held by Mr. Dell at a price per share equal to $7.70, for a total
purchase price of up to $962,500. Marquee will record charges to operations
over the next two years related to Marquee's potential obligation to repurchase
Dell's Marquee stock.
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Upon the consummation of the ProServ acquisition, Marquee entered into
employment agreements with Messrs. Dell and Allard. See "Marquee
Management--Employment Agreements."
In connection with the ProServ acquisition, Mr. Sillerman provided a
$500,000 personal guarantee to secure Marquee's obligations. In consideration
for his guarantee, Marquee granted Mr. Sillerman an immediately exercisable,
five-year option to purchase 10,000 shares of Marquee common stock at an
exercise price per share of $5.00 and paid Mr. Sillerman $75,000, which
included $25,000 for his related legal fees and expenses.
STOCKHOLDERS' AGREEMENT
In March 1996, Marquee entered into a stockholders' agreement with each of
TSC and Messrs. Gutkowski, Kaminsky, Oppenheim, Trager and Letis. The
stockholders' agreement generally covers certain corporate governance matters.
The stockholders' agreement entitles TSC to nominate two directors to the
Marquee Board, entitles Messrs. Kaminsky and Oppenheim to nominate two
directors, entitles Messrs. Trager and Letis to nominate two directors and
entitles Mr. Gutkowski to nominate one director. Each party to the
stockholders' agreement has agreed to vote all of the shares of Marquee common
stock owned by him for the election of the directors so nominated and not to
take any action to remove any director so elected, except for the director(s)
nominated by him. In September 1997, the parties amended the stockholders'
agreement to provide for an increase in the size of the Marquee Board to permit
the addition of Messrs. Dell and Allard upon the consummation of the ProServ
acquisition.
The stockholders' agreement will terminate upon the mutual consent of the
parties' when there is only one party bound thereby or March 21, 2004. In
addition, the stockholders' agreement will terminate with respect to a party if
he dies or a guardian is appointed to oversee his affairs or he holds less than
65% of the shares of common stock beneficially owned by him on December 11,
1996, except that party will remain obligated to vote his shares of common
stock in accordance with the terms of the stockholders' agreement.
In connection with the merger, the parties to the stockholders' agreement
agreed to terminate the stockholders' agreement effective at the closing of the
merger.
POTENTIAL CONFLICTS OF INTEREST WITH SFX
Mr. Sillerman, the Chairman of Marquee, is the Executive Chairman of SFX,
and Mr. Tytel, a director of Marquee, is a director, Executive Vice President
and Secretary of SFX. Until the closing of the merger, Messrs. Sillerman and
Tytel may have conflicts between their responsibilities to Marquee and to SFX.
See "The Merger--Interests of Marquee's Management and Directors in the Merger"
and "Certain Relationships and Related Transactions of SFX--Potential Conflicts
of Interest."
FOUNDERS' STOCK
In connection with the organization of Marquee, in July 1995 Marquee sold
333 shares of its common stock to Mr. Gutkowski, Marquee's President and Chief
Executive Officer, and in August 1995 Marquee sold 666 shares of common stock
to TSC, which is controlled by Mr. Sillerman, Marquee's Chairman, for an
aggregate purchase price of $19,980 or approximately $.01 per share on a
post-stock split basis. In May 1996, Marquee sold one share of common stock to
Martin R. Ehrlich, the Senior Vice President of Programming of Marquee, for a
purchase price of $500 or $.01 per share on a post-stock split basis. In August
1996, Marquee increased
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the number of shares outstanding by means of a stock split, thereby increasing
the number of shares held by Mr. Gutkowski to 646,154 shares, TSC to 1,292,308
shares and Mr. Ehrlich to 50,000 shares.
ESCROW AGREEMENT
In connection with Marquee's IPO, TSC and Messrs. Gutkowski, Kaminsky,
Oppenheim, Letis and Trager deposited an aggregate of 1,275,000 shares of
Marquee common stock into escrow. The Marquee escrow shares are not assignable
or transferable. Of the Marquee escrow shares:
(1) 850,000 shares will be released from escrow if, for the fiscal year ending
December 31, 1998, Marquee's income before provision for taxes (the
"Minimum Pretax Income") equals or exceeds $2,400,000;
(2) 425,000 shares--or, if the condition set forth in (1) was not met, the
remaining escrowed shares--will be released if, for the fiscal year ending
December 31, 1999, the Minimum Pretax Income equals or exceeds $3,400,000;
and
(3) all of the escrowed shares will be released from escrow if one or more of
the following conditions is/are met: the Closing Price, as defined in the
escrow agreement, of the Marquee common stock averages in excess of $15.00
per share for any 20 consecutive trading days during the period from
December 5, 1998 until December 31, 1999; or Marquee is acquired by or
merged into another entity in a transaction in which the value of the per
share consideration received by the stockholders of Marquee on the date of
such transaction equals or exceeds $15.00 per share.
If the applicable Minimum Pretax Income levels or Closing Price level set
forth above have not been met by March 31, 2000, the escrowed shares, as well
as any dividends or other distributions made with respect thereto, will be
canceled and contributed to the capital of Marquee.
The Minimum Pretax Income amounts set forth above are:
o calculated exclusive of any extraordinary earnings or charges -- including
any charges incurred in connection with the release from escrow of the
escrowed shares and any Escrow Property, as defined below, in respect
thereof -- and any interest expense relating to the debentures previously
issued by Marquee in connection with Marquee's private placement;
o derived solely from the businesses owned and operated by Marquee following
completion of Marquee's 1996 acquisitions and do not give effect to any
operations relating to businesses or assets acquired after such date; and
o audited by Marquee's independent public accountants.
The Closing Price amount set forth above is subject to adjustment in the
event of any stock splits, reverse stock splits or other similar events.
Any money, securities, rights or property distributed on account of the
escrowed shares will be received by the escrow agent, including any property
distributed as dividends or pursuant to any stock split, merger,
recapitalization, dissolution or total on partial liquidation of Marquee.
However, with the exception of any securities of Marquee or any successor to
Marquee issued as a result of any of the foregoing, such property must be
delivered to the holders of the escrowed shares promptly upon the escrow
agent's receipt thereof. The Minimum Pretax Income and Closing Price levels set
forth above were determined by
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negotiation between Marquee and the underwriters in Marquee's IPO and should
not be construed to imply or predict any future earnings by Marquee or any
increase in the market price of its securities.
In connection with the merger, TSC and Messrs. Gutkowski, Kaminsky,
Oppenheim, Letis and Trager waived their rights to receive the escrowed shares.
Except for TSC, whose waiver became effective on July 23, 1998, the waivers
become effective upon the closing of the merger.
PRIVATE PLACEMENT AND CORPORATE INDEBTEDNESS
In August 1996, Marquee closed a private placement of $2,000,000 aggregate
principal amount of debentures. The debentures converted into an aggregate of
666,662 IPO units upon the consummation of Marquee's IPO in December 1996. Each
IPO unit was composed of one share of Marquee common stock and one warrant to
purchase Marquee stock.
From January 3, 1996 through September 30, 1996, Mr. Gutkowski made loans
to Marquee in the aggregate principal amount of $437,000, which loans accrued
interest at the rate of 12% per annum. Marquee used the funds that Mr.
Gutkowski advanced for working capital purposes. In August 1996, Marquee repaid
$125,000 of such amount to Mr. Gutkowski from the proceeds of Marquee's private
placement, and Mr. Gutkowski purchased $115,385 in principal amount of
debentures through the cancellation of an equal portion of such indebtedness.
These debentures automatically converted upon the consummation of Marquee's IPO
into 38,461 shares of common stock and 38,461 warrants. In September 1996,
Marquee repaid $76,000 of its indebtedness to Mr. Gutkowski from working
capital. Marquee repaid Mr. Gutkowski's remaining balance and accrued interest
in December 1997.
From May 15, 1996 through August 12, 1996, TSC incurred expenses and made
loans to Marquee in the aggregate principal amount of $196,385. This debt
accrued interest at the rate of 12% per annum, but TSC waived the interest.
Marquee used the borrowings for working capital purposes, including rent
payable to TSC. In August 1996, TSC purchased $230,768 in principal amount of
debentures through the payment of $34,383 and the cancellation of debt. Its
debentures automatically converted upon the consummation of Marquee's IPO into
76,924 shares of common stock and 76,924 warrants.
On May 30, 1996, Michael Trager, the Chairman of SMTI, and Michael Letis,
the President of SMTI, each of whom is currently an Executive Vice President
and a director of Marquee, made a loan to Marquee in the aggregate principal
amount of $100,000. The loan accrued interest at the rate of 12% per annum, but
Messrs. Trager and Letis waived the interest. The proceeds of the loan were
used by Marquee for working capital purposes. In August 1996, Messrs. Trager
and Letis each purchased $115,385 in principal amount of debentures through the
payment of an aggregate of $130,770 and the cancellation of the $100,000 loan.
Their debentures automatically converted upon the consummation of Marquee's IPO
into an aggregate of 76,924 shares of common stock and 76,924 warrants.
On August 6, 1996, Louis J. Oppenheim, the Vice President of A&A and an
Executive Vice President and a director of Marquee, made a loan to Marquee in
the aggregate principal amount of $33,334. The loan accrued interest at the
rate of 12% per annum, but Mr. Oppenheim waived the interest. The proceeds of
the loan were used by Marquee for working capital purposes. In August 1996, Mr.
Oppenheim purchased $57,692 in principal amount of debentures through the
payment of $24,358 and the cancellation of the $33,334 loan. His debentures
automatically converted upon the consummation of Marquee's IPO into 19,230
shares of common stock and 19,230 warrants.
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In August 1996, Arthur C. Kaminsky, the President and Chief Executive
Officer of A&A and an Executive Officer and a director of Marquee, purchased
$115,385 in principal amount of debentures. His debentures automatically
converted upon the closing of Marquee's IPO into 38,461 shares of common stock
and 38,461 warrants.
The investments by TSC and Messrs. Gutkowski, Trager, Letis, Oppenheim and
Kaminsky in the private placement were on the same terms as the investments by
the non-affiliated investors, except that they each agreed not to sell the
securities issuable upon conversion of the debentures until December 5, 1998.
SMTI ACQUISITION
Marquee, SMTI, Messrs. Trager, Letis, Gutkowski and TSC entered into an
acquisition agreement, amended and restated as of March 21, 1996, pursuant to
which Marquee acquired SMTI on December 11, 1996, simultaneously with the
closing of Marquee's initial public offering. The aggregate purchase price paid
by Marquee to Messrs. Trager and Letis, the sole stockholders of SMTI,
consisted of $8,000,000 in cash, of which $6,500,000 was paid at the closing
and an aggregate of $1,500,000 is payable in five equal annual installments
commencing April 1, 1997, and the issuance to each of Messrs. Trager and Letis
of 646,154 shares of Marquee common stock. Marquee also entered into five-year
employment agreements with each of Messrs. Trager and Letis. See "Marquee
Management-- Employment Agreements."
From its inception until immediately before the completion of the SMTI
acquisition, SMTI was treated as a closely-held corporation under Subchapter S
of the Code, and, therefore, did not pay federal income taxes on amounts earned
during such period. Accordingly, SMTI distributed through dividends to its
stockholders substantially all of its earnings during such period. Pursuant to
the SMTI acquisition agreement, immediately before the closing of the SMTI
acquisition, SMTI declared a dividend to Messrs. Trager and Letis of an amount
equal to 40% of the increase in SMTI's accumulated adjustments account, as
defined in the Code, which amount approximates the amount the stockholders of
SMTI expected to pay personally for income taxes based on such earnings. The
amount of such dividend was approximately $325,000 and was paid by Marquee in
1997.
Marquee provided services as a subcontractor for SMTI aggregating $724,000
during the period January 1, 1996 to December 12, 1996, which was recognized by
Marquee as revenues.
A&A ACQUISITION
Marquee, A&A, Messrs. Kaminsky, Oppenheim, Gutkowski and TSC entered into
an acquisition agreement, amended and restated as of March 21, 1996, pursuant
to which Marquee acquired A&A on December 11, 1996, simultaneously with the
closing of Marquee's initial public offering. The aggregate purchase price paid
by Marquee to Messrs. Kaminsky and Oppenheim, the sole stockholders of A&A,
consisted of $3,500,000 in cash, of which $2,500,000 was payable at the closing
and an aggregate of $1,000,000 which was payable in five equal annual
installments commencing April 1, 1997, and the issuance to Messrs. Kaminsky and
Oppenheim of an aggregate of 969,231 shares of common stock, 646,154 of which
were issued to Mr. Kaminsky and 323,076 of which were issued to Mr. Oppenheim.
Marquee also entered into five-year employment agreements with each of Messrs.
Kaminsky and Oppenheim. See "Marquee Management--Employment Agreements."
The A&A acquisition agreement permitted Messrs. Kaminsky and Oppenheim to
withdraw from A&A an amount of money equal to the amount that A&A recovers in
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pending lawsuits in which it is the plaintiff, up to $100,000. Messrs. Kaminsky
and Oppenheim have withdrawn an aggregate of approximately $80,000 from A&A
pursuant to this provision, and have waived their right to withdraw any
additional amount from A&A pursuant to this provision.
TRANSACTIONS AT ARM'S LENGTH
Marquee believes that the transactions between it and its officers,
directors and principal stockholders or affiliates thereof have been on terms
no less favorable to Marquee than could have been obtained from independent
third parties. Except for the fairness opinion Marquee obtained from its
financial advisor in connection with the merger, Marquee has not sought outside
advice with respect to such transactions and, in certain instances, has not
considered retaining any other provider of similar services. Since its IPO, all
transactions between Marquee and its officers, directors and principal
stockholders or affiliates thereof have been approved by Marquee's independent
directors.
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DESCRIPTION OF CAPITAL STOCK OF SFX
The authorized capital stock of SFX consists of 110,000,000 shares of
common stock, comprised of 100,000,000 shares of Class A common stock and
10,000,000 shares of Class B common stock, and 25,000,000 shares of preferred
stock, all with a par value of $.01 per share. The following descriptions of
the SFX common stock and preferred stock are summaries, and are qualified by
reference to the detailed provisions of the SFX Certificate of Incorporation
and the SFX Bylaws, each of which is filed as an exhibit to the registration
statement. See "The Merger," "SFX's Business" and "Marquee's Business."
COMMON STOCK
SHARES OUTSTANDING
As of the date of this proxy statement--prospectus, 28,753,284 shares of
SFX's Class A common stock and 1,697,037 shares of SFX's Class B common stock
are outstanding. All of these shares are validly issued, fully paid and
nonassessable. Upon the closing of the merger, the Cellar Door acquisition and
the proposed equity offering, 34,537,164 shares of SFX's Class A common stock,
not including shares to be issued upon the exercise of options and warrants,
and 1,697,037 shares of SFX's Class B common stock will be outstanding,
assuming an exchange ratio of 0.0833 and the issuance of 350,877 shares in the
Cellar Door acquisition and 4,000,000 shares in the proposed equity offering.
DIVIDENDS
Although SFX does not anticipate paying any dividends on the SFX common
stock in the foreseeable future, holders of common stock will have the right to
receive any dividends that are declared thereon by the SFX Board at any time
and from time to time out of funds legally available for that purpose. SFX may
not declare or pay any dividend in cash or property on either class of common
stock, unless it simultaneously declares or pays the same dividend on the other
class of common stock. If dividends are declared that are payable in shares of
common stock of SFX, 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 Class A
common stock to holders of SFX Class A common stock and in shares of SFX Class
B common stock to holders of SFX 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 SFX's Class A common stock and SFX's Class B common stock.
VOTING RIGHTS
Holders of SFX Class A common stock and SFX Class B common stock vote as a
single class on all matters submitted to a vote of the stockholders, with each
share of SFX Class A common stock entitled to one vote and each share of SFX
Class B common stock entitled to ten votes, except:
o for the election of directors;
o with respect to any "going private" transaction between SFX and Robert F.X.
Sillerman or any of his affiliates; and
o as otherwise provided by law.
In the election of directors, the holders of shares of SFX Class A common
stock, voting as a separate class, elect two sevenths of SFX's directors. Any
person nominated by the SFX
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Board for election by the holders of SFX Class A common stock as a director of
SFX must be qualified to be an "Independent Director," as defined in the SFX
Certificate of Incorporation. If a Class A director dies, is removed or resigns
before his term expires, then any person appointed by a majority of the
directors then in office, although less than a quorum, may fill that director's
vacancy on the SFX Board. Any person appointed to fill the vacancy must,
however, be qualified to be an Independent Director. The holders of SFX Class A
common stock and SFX Class B common stock, voting as a single class, with each
share of SFX Class A common stock entitled to one vote and each share of SFX
Class B common stock entitled to ten votes, have the right to elect the
remaining directors. The holders of common stock do not have any rights 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.
The holders of the SFX Class A common stock and SFX 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 Class A
common stock and SFX Class B common stock entitled to one vote.
Delaware law requires the affirmative vote of the holders of a majority of
the outstanding shares of any class of common stock in order 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, after distribution in
full of any preferential amounts required to be distributed to holders of
preferred stock, the holders of SFX Class A common stock will have the right to
share ratably with the holders of SFX Class B common stock all assets available
for distribution after payment in full of creditors.
CONVERSION
Each share of SFX Class B common stock is convertible at any time, at the
holder's option, into one share of SFX Class A common stock. Each share of SFX
Class B common stock converts automatically into one share of SFX Class A
common stock at the time of its sale or transfer to a party not affiliated with
SFX or at the time of Mr. Sillerman's death, in the case of his or his
affiliates' shares.
OTHER PROVISIONS
The holders of SFX common stock do not have any preemptive or subscription
rights. In any merger, consolidation or business combination, the consideration
holders of SFX Class A common stock receive must be identical to the
consideration per share that holders of SFX Class B common stock receive,
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 Class A common stock and the
SFX Class B common stock. SFX may not subdivide or combine the outstanding
shares of either class of SFX common stock unless it proportionately subdivides
or combines the outstanding shares of both classes.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for SFX's Class A and Class B common
stock is Chase Mellon Shareholder Services, L.L.C.
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PREFERRED STOCK
As of the date of this proxy statement--prospectus, no shares of SFX's
preferred stock are outstanding, and SFX has 25,000,000 shares of preferred
stock authorized.
The SFX Board, without further vote or action by the stockholders, has the
authority to issue SFX's 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. If SFX issues
shares of preferred stock with voting rights, then it could dilute the voting
rights of the holders of SFX common stock by increasing the number of
outstanding shares having voting rights, and by creating class or series voting
rights. If the SFX Board authorizes the issuance of shares of preferred stock
with conversion rights, then it could potentially increase the number of shares
of common stock outstanding up to the authorized amount. Also, the preferred
stock could have preferences over the common stock and over other series of
preferred stock with respect to dividend and liquidation rights.
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CERTAIN STATUTORY, CHARTER AND BYLAW PROVISIONS OF SFX
The following descriptions of the SFX Certificate of Incorporation and the
SFX Bylaws are summaries, and are qualified by reference to the SFX Certificate
of Incorporation and SFX Bylaws, each of which is filed as an exhibit to the
registration statement.
CHARTER AND BYLAW PROVISIONS
As allowed by Delaware law, the SFX Certificate of Incorporation states
that, to the fullest extent permitted by Delaware law, SFX's directors will not
be liable for monetary damages for breach of their fiduciary duty of care to
SFX and its stockholders. Delaware law provides that directors of a company
will not be personally liable for monetary damages for breach of their
fiduciary duties as directors, except for liability:
o for any breach of their duty of loyalty to SFX or its stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o under Section 174 of Delaware law, which relates to liability for unlawful
payments of dividends and stock repurchases and redemptions; or
o for any transaction from which the director derived an improper personal
benefit.
This provision also does not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.
The SFX Bylaws and certain of SFX's employment agreements also contain
provisions that require SFX to indemnify its directors, officers, employees or
other agents to the fullest extent permitted by Delaware law, and to advance
expenses to its officers and directors as incurred.
CERTAIN ANTI-TAKEOVER PROVISIONS
The provisions of the SFX Certificate of Incorporation summarized in the
succeeding paragraphs may have an anti-takeover effect and may delay, defer or
prevent a tender offer or takeover attempt that a stockholder might consider in
such stockholder's best interest, including attempts that might result in a
premium over the market price for the shares of SFX common stock held by
stockholders.
The SFX Certificate of Incorporation allows the SFX Board to establish one
or more additional series of SFX preferred stock, having such number of shares,
designation, relative voting rights, dividend rates, liquidation and other
rights, preferences and limitations as may be fixed by the SFX Board without
any further stockholder approval. These rights, preferences, privileges and
limitations could impede or discourage the acquisition of control of SFX. See
"Description of Capital Stock of SFX --Preferred Stock."
SFX is a Delaware corporation and is subject to Section 203 of Delaware's
general corporation law. The following summary of Section 203 does not purport
to be complete and is qualified in its entirety by reference thereto. In
general, Section 203 prevents an "interested stockholder" from engaging in a
"business combination" with a Delaware corporation for three years following
the date such person became an interested stockholder unless:
o before such person became an interested stockholder, the board of directors
of the corporation either approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination;
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o upon consummation of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding stock held by
directors who are also officers of the corporation and by employee stock
plans that do not provide employees with the rights to determine
confidentially whether shares held subject to the plan will be tendered in
a tender or exchange offer; or
o following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of directors
of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of two-thirds of the outstanding voting
stock of the corporation not owned by the interested stockholder.
Under Section 203, the above restrictions also do not apply to certain business
combinations proposed by an interested stockholder after the announcement or
notification of one of certain extraordinary transactions involving the
corporation and a person who had not been an interested stockholder during the
previous three years or who became an interested stockholder with the approval
of a majority of the corporation's directors, if such extraordinary transaction
is approved or not opposed by a majority of the directors who were directors
prior to any person becoming an interested stockholder during the previous
three years or were recommended for election or elected to succeed such
directors by a majority of such directors.
COMPARISON OF STOCKHOLDERS' RIGHTS
As a result of the merger, holders of Marquee stock will become
stockholders of SFX, and the rights of the former holders of Marquee stock will
thereafter be governed by the SFX Certificate of Incorporation, SFX Bylaws and
Delaware law. The rights of Marquee's stockholders currently are governed by
Marquee's Amended and Restated Certificate of Incorporation, Marquee's Amended
and Restated Bylaws and Delaware law. Because SFX and Marquee are both Delaware
corporations, the law governing the rights of Marquee stockholders will not
change. The following summary sets forth the material differences between the
certificates of incorporation and bylaws of SFX and Marquee.
The following discussions are not intended to be complete and are
qualified by reference to the SFX Certificate of Incorporation, the SFX Bylaws,
the Marquee Certificate of Incorporation and the Marquee Bylaws. See "Where You
Can Find More Information."
AUTHORIZED CAPITAL STOCK
The authorized capital stock of SFX consists of 100,000,000 shares of its
Class A common stock, of which there are 28,753,284 shares outstanding,
10,000,000 shares of its Class B common stock, of which there are 1,697,037
shares outstanding, and 25,000,000 shares of its preferred stock, of which no
shares are outstanding. The authorized capital stock of Marquee consists of
25,000,000 shares of common stock, of which there are 18,085,614 shares
outstanding, and 5,000,000 shares of preferred stock, of which no shares are
outstanding.
VOTING
Holders of SFX common stock vote as a single class on all matters
submitted to a vote of the SFX stockholders, with each share of SFX Class A
common stock entitled to one vote and each share of SFX Class B common stock
entitled to ten votes, except:
o for the election of directors;
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o with respect to any "going private" transaction between SFX and Robert F.X.
Sillerman or any of his affiliates; and
o as otherwise provided by law.
When electing SFX's directors, the SFX Class A common stockholders vote as a
single class to elect 2/7 of the SFX Board, rounded up. The SFX directors are
elected by the SFX Class A and SFX Class B common stockholders, voting together
as a single class, elect the remaining SFX directors. See "Description of
Capital Stock of SFX--Common Stock--Voting Rights." Each share of Marquee
common stock is entitled to one vote on all matters to be voted upon by the
Marquee stockholders.
CUMULATIVE VOTING
Neither the SFX Certificate of Incorporation nor the Marquee Certificate
of Incorporation provides for cumulative voting in the election of directors.
NO PREEMPTIVE RIGHTS
Stockholders of SFX and Marquee do not have any preemptive rights.
SPECIAL MEETINGS OF STOCKHOLDERS
The SFX Bylaws allow the Executive Chairman of the SFX Board, the
Vice-Chairman of the SFX Board, the President of SFX or a majority of the
directors of SFX to call special meetings of the stockholders at any time. No
other person may call a special meeting of the stockholders of SFX. The Marquee
Bylaws allow the Marquee Board, any officer of Marquee -- acting upon the
instruction of the Marquee Board -- or any stockholder of Marquee who holds at
least 10% of the outstanding shares entitled to vote at the meeting to call a
special meeting of the Marquee stockholders at any time.
LEGAL MATTERS
Baker & McKenzie, Houston, Texas, will pass upon the validity of the SFX
Class A common stock to be issued in connection with the merger for SFX.
SUBMISSION OF FUTURE STOCKHOLDER PROPOSALS
Marquee does not currently expect to hold a 1998 Annual Meeting of
Stockholders because, following the merger, Marquee will not be a publicly
traded company.
If the Marquee stockholders do no adopt the merger agreement, or if the
merger does not close for any reason, then Marquee will hold an annual meeting
of stockholders in August 1999, but will not hold an annual meeting of
stockholders in 1998. In such event, Marquee must receive proposals of
stockholders intended to be included in Marquee's proxy statement for the 1999
annual meeting pursuant to Rule 14a-8 under the Exchange Act no later than
February 1, 1999 -- which Marquee believes is a reasonable period of time
before July 1, 1999, the date on which Marquee intends to begin to print and
mail its proxy materials for the 1999 annual meeting -- to be considered for
inclusion in Marquee's proxy statement and proxy for the 1999 annual meeting.
Marquee must receive proposals of stockholders submitted outside the processes
of Rule 14a-8 of the Exchange Act in connection with the 1999 annual meeting by
April 1, 1999 or such proposals will be considered untimely. Marquee's proxy
will give discretionary authority to the proxy holders to vote with respect to
all non-Rule 14a-8 proposals received after April 1, 1999 in connection with
the 1999 annual meeting. Such proposals and notices should be mailed to Marquee
at its principal executive offices and addressed to the attention of the
Secretary of Marquee.
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EXPERTS
Ernst & Young LLP, independent auditors, have audited the following
financial statements which are included herein, as set forth in their reports:
o the consolidated financial statements of SFX as of and for the year ended
December 31, 1997;
o the consolidated financial statements of Delsener/Slater Enterprises, Ltd.
and Affiliated Companies (Predecessor) as of December 31, 1996 and for the
years ended December 31, 1995 and 1996;
o the consolidated financial statements of PACE Entertainment Corporation and
Subsidiaries as of September 30, 1996, and for the years ended September
30, 1996 and 1995;
o the combined financial statements of Contemporary Group as of December 31,
1996 and 1997, and for the years ended December 31, 1995, 1996, and 1997;
o 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;
o the consolidated financial statements of BG Presents, Inc. and Subsidiaries
as of January 31, 1997 and 1998 and for the years ended January 31, 1996,
1997, and 1998;
o the combined financial statements of Concert/Southern Promotions and
Affiliated Companies as of December 31, 1997, and for the year ended
December 31, 1997;
o the combined financial statements of Falk Associates Management
Enterprises, Inc. as of December 31, 1996 and 1997, and for the years ended
December 31, 1996 and 1997;
o the combined financial statements of Blackstone Entertainment LLC as of
December 31, 1996 and 1997 and for the years ended December 31, 1996 and
1997;
o the consolidated financial statements of The Marquee Group, Inc. as of
December 31, 1997 and for the years ended December 31, 1996 and 1997;
o the combined financial statements of Alphabet City Sports Records, Inc. and
Alphabet City Industries, Inc. as of December 31, 1997 and for the period
from April 11, 1996 (inception) to December 31, 1996 and for the year ended
December 31, 1997;
o the consolidated financial statements of Cambridge Holding Corporation,
Inc. as of December 31, 1997 and for the year ended December 31, 1997; and
o the combined financial statements of Tollin-Robbins Entertainment as of
December 31, 1997 and for the years ended December 31, 1997 and 1996.
These financial statements are included herein in reliance on their
reports, given on their authority as experts in accounting and auditing.
Arthur Andersen LLP, independent auditors, have audited the following
financial statements which are included herein, as set forth in their reports:
o the combined financial statements of Connecticut Performing Arts, Inc. and
Connecticut Performing Arts Partners as of December 31, 1995 and 1996, and
for the years ended December 31, 1995 and 1996;
o the combined financial statements of Deer Creek Partners, L.P. and Murat
Centre, L.P. as of December 31, 1995 and 1996, and for the years ended
December 31, 1995 and 1996;
o the consolidated financial statements of PACE Entertainment Corporation and
Subsidiaries as of September 30, 1997, and for the year ended September 30,
1997;
o the consolidated financial statements of Pavilion Partners as of September
30, 1997 and for the year ended September 30, 1997;
o the financial statements of Riverport Performing Arts Centre, Joint Venture
as of
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December 31, 1997 and 1996 and for the years ended December 31, 1997 and
1996; and
o the consolidated financial statements of Magicworks Entertainment
Incorporated as of December 31, 1996 and 1997, and for the years ended
December 31, 1996 and 1997.
These financial statements are included herein in reliance on their
reports, given on their authority as experts in accounting and auditing.
PricewaterhouseCoopers LLP, independent accountants, have audited 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.
These financial statements are included herein in reliance on their report,
given on their authority as experts in auditing and accounting.
Grant Thornton, independent auditors, have audited the financial
statements of Park Associates Limited as of December 31, 1997 and for the year
ended December 31, 1997. These financial statements are included herein in
reliance on their reports, given on their authority as experts in accounting
and auditing.
Richard E. Woodhall, independent auditors, have audited the financial
statements of Tony Stephens Associates Limited as of April 30, 1998 and for the
year ended April 30, 1998. These financial statements are included herein in
reliance on their report, given on their authority as experts in accounting and
auditing.
PricewaterhouseCoopers LLP, independent auditors, have audited the
financial statements of ProServ, Inc. as of December 31, 1996 and for the years
ended December 31, 1996 and 1995. These financial statements are included
herein in reliance on their reports, given on their authority as experts in
accounting and auditing.
David Berdon & Co., LLP, independent auditors, have audited the financial
statements of QBQ Entertainment, Inc. as of December 31, 1995 and 1996. These
financial statements are included herein in reliance on their reports, given on
their authority as experts in accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
SFX and Marquee file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may inspect and copy such material at the public reference facilities
maintained by the Securities and Exchange Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the Securities and Exchange
Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
You may also obtain copies of such material from the Securities and Exchange
Commission at prescribed rates by writing to the Public Reference Section of
the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
more information on the public reference rooms. You can also find our
Securities and Exchange Commission filings at the commission's website at
http://www.sec.gov.
In addition, SFX filed a registration statement on Form S-4 to register
with the Securities and Exchange Commission the SFX Class A common stock to be
issued to Marquee stockholders in the merger. SFX has provided information
regarding SFX and its subsidiaries, and Marquee has provided information with
respect to Marquee and its subsidiaries, in the registration statement. This
proxy statement--prospectus is a part of the registration statement on Form S-4
and constitutes a prospectus of SFX, in addition to being a proxy statement of
Marquee for the special meeting. This proxy statement--prospectus does not
contain all the information you can find in the registration statement on Form
S-4 or the exhibits to the registration statement on Form S-4. You may read and
copy the registration statement on Form S-4 and any of its amendments,
including exhibits, at the Securities and Exchange Commission's public
reference rooms, or request copies by writing or calling the Securities
Exchange Commission or downloading it from the Securities and Exchange
Commission's website.
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SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
SFX and Marquee believe that certain statements contained in this proxy
statement--prospectus are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 and are considered
prospective. These include statements contained under "Summary," "Risk
Factors," "The Merger," "SFX Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Marquee Management's Discussion and
Analysis of Financial Condition and Results of Operations," "SFX's Business"
and "Marquee's Business." The following statements are or may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995:
o statements about benefits that SFX or Marquee may achieve as a result of
the merger, about the future development of SFX's business or about other
effects of the merger;
o statements before, after or including the words "may," "will," "could,"
"should," "believe," "expect," "future," "potential," "anticipate,"
"intend," "plan," "estimate" or "continue" or the negative or other
variations of these words; and
o other statements about matters that are not historical facts.
SFX and Marquee may be unable to achieve future results covered by the
forward-looking statements. The statements are subject to risks, uncertainties
and other factors that could cause actual results to differ materially from the
future results that the statements express or imply. Please do not put undue
reliance on these forward-looking statements, which speak only as of the date
of this proxy statement--prospectus.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
SFX ENTERTAINMENT: PAGE
----
SFX ENTERTAINMENT, INC.
Consolidated Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997 F-6
Consolidated Statements of Operations for the three months ended September 30, 1998 and
1997 (unaudited) ..................................................................... F-7
Consolidated Statements of Operations for the nine months ended September 30, 1998
and 1997 (unaudited) ................................................................. F-8
Consolidated Statements of Shareholders' Equity for the nine months ended September 30,
1998 and 1997 (unaudited) ............................................................ F-9
Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and
1997 (unaudited) ..................................................................... F-10
Notes to Consolidated Financial Statements (unaudited) ................................ F-11
Reports of Independent Auditors ....................................................... F-22
Consolidated Balance Sheets as of December 31, 1997 and 1996 (Predecessor) ............ F-24
Consolidated Statements of Operations for the years ended December 31, 1997, 1996
(Predecessor) and 1995 (Predecessor) ................................................. F-25
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996
(Predecessor) and 1995 (Predecessor) ................................................. F-26
Notes to Consolidated Financial Statements ............................................ F-27
CONNECTICUT PERFORMING ARTS, INC. AND CONNECTICUT PERFORMING
ARTS PARTNERS
Report of Independent Public Accountants .............................................. F-42
Combined Balance Sheets as of December 31, 1995 and 1996 .............................. F-43
Combined Statements of Operations for the years ended December 31, 1995 and 1996 ...... F-44
Combined Statements of Shareholders' and Partners' Equity (Deficit) for the years ended
December 31, 1995 and 1996 ........................................................... F-45
Combined Statements of Cash Flows for the years ended December 31, 1995 and 1996 ...... F-46
Notes to Combined Financial Statements ................................................ F-47
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
Report of Independent Public Accountants .............................................. F-55
Combined Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (unaudited) F-56
Combined Statements of Operations and Partners' Equity (Deficit) for the years ended
December 31, 1995 and 1996 and the three months ended March 31, 1996 and 1997
(unaudited) .......................................................................... F-58
Combined Statements of Cash Flows for the years ended December 31, 1995 and 1996 and
the three months ended March 31, 1996 and 1997 (unaudited) ........................... F-59
Notes to Combined Financial Statements ................................................ F-60
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants .............................................. F-66
Report of Independent Auditors ........................................................ F-67
Consolidated Balance Sheets as of September 30, 1996 and 1997 and December 31, 1997
(unaudited) .......................................................................... F-68
Consolidated Statements of Operations for the years ended September 30, 1995, 1996 and
1997 and the three months ended December 31, 1996 and 1997 (unaudited) ............... F-69
Consolidated Statements of Shareholders' Equity for the years ended September 30, 1995,
1996 and 1997 and the three months ended December 31, 1997 (unaudited) ............... F-70
Consolidated Statements of Cash Flows for the years ended September 30, 1995, 1996 and
1997 and the three months ended December 31, 1996 and 1997 (unaudited) ............... F-71
</TABLE>
F-1
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INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
Notes to Consolidated Financial Statements .............................................. F-72
PAVILION PARTNERS
Report of Independent Public Accountants ................................................ F-86
Report of Independent Accountants ....................................................... F-87
Consolidated Balance Sheets as of September 30, 1996 and 1997 and December 31, 1997
(unaudited) ............................................................................ F-88
Consolidated Statements of Income for the year ended October 31, 1995, eleven months
ended September 30, 1996, the year ended September 30, 1997 and the three months ended
December 31, 1996 and 1997 (unaudited) ................................................. F-89
Consolidated Statements of Partners' Capital for the year ended October 31, 1995, eleven
months ended September 30, 1996, the year ended September 30, 1997 and the three
months ended December 31, 1997 (unaudited) ............................................. F-90
Consolidated Statements of Cash Flows for the year ended October 31, 1995, eleven months
ended September 30, 1996, the year ended September 30, 1997 and the three months ended
December 31, 1996 and 1997 (unaudited) ................................................. F-91
Notes to Consolidated Financial Statements .............................................. F-92
CONTEMPORARY GROUP
Report of Independent Auditors .......................................................... F-101
Combined Balance Sheets as of December 31, 1996 and 1997 ................................ F-102
Combined Statements of Operations for the years ended December 31, 1995, 1996 and 1997 .. F-103
Combined Statements of Cash Flows for the years ended December 31, 1996 and 1997 ........ F-104
Combined Statements of Stockholders' Equity for the years ended December 31, 1996 and
1997 ................................................................................... F-105
Notes to Combined Financial Statements .................................................. F-106
RIVERPORT PERFORMING ART CENTRE, JOINT VENTURE
Report of Independent Public Accountants ................................................ F-110
Balance Sheets as of December 31, 1997 and 1996 ......................................... F-111
Statements of Income and Changes in Partners' Equity for the years ended December 31,
1997 and 1996 .......................................................................... F-112
Statements of Cash Flows for the years ended December 31, 1997 and 1996 ................. F-113
Notes to Financial Statements ........................................................... F-114
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
Report of Independent Auditors .......................................................... F-117
Combined Balance Sheets as of September 30, 1996 and 1997 ............................... F-118
Combined Balance Sheets as of December 31, 1997 (unaudited) ............................. F-119
Combined Statements of Operations and Stockholders' Deficit for the years ended September
30, 1996 and 1997 ...................................................................... F-120
Combined Statements of Operations and Stockholders' Deficit for the three months ended
December 31, 1997 (unaudited) .......................................................... F-121
Combined Statements of Cash Flows for the years ended September 30, 1996 and 1997 ....... F-122
Combined Statements of Cash Flows for the three months ended December 31, 1997
(unaudited) ............................................................................ F-123
Notes to Combined Financial Statements .................................................. F-124
BG PRESENTS, INC. AND SUBSIDIARIES
Report of Independent Auditors .......................................................... F-129
Consolidated Balance Sheets as of January 31, 1997 and 1998 ............................. F-130
Consolidated Income Statements for the years ended January 31, 1996, 1997 and 1998 ...... F-131
</TABLE>
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INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
Consolidated Statements of Cash Flows for the years ended January 31, 1996, 1997 and 1998 F-132
Consolidated Statements of Stockholders' Equity for the years ended January 31, 1996, 1997
and 1998 ................................................................................ F-133
Notes to Consolidated Financial Statements .............................................. F-134
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
Report of Independent Auditors ........................................................... F-140
Combined Balance Sheet as of December 31, 1997 ........................................... F-141
Combined Statement of Operations for the year ended December 31, 1997 .................... F-142
Combined Statement of Cash Flows for the year ended December 31, 1997 .................... F-143
Combined Statements of Stockholders' Equity for the year ended December 31, 1997 ......... F-144
Notes to Combined Financial Statements ................................................... F-145
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
Report of Independent Auditors ........................................................... F-148
Combined Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited) . F-149
Combined Statements of Operations and Stockholders' Equity (Deficit) for the years ended
December 31, 1996 and 1997 and the three months ended March 31, 1997 and 1998
(unaudited) ............................................................................. F-150
Combined Statements of Cash Flows for the years ended December 31, 1996 and 1997 and
the three months ended March 31, 1997 and 1998 (unaudited) .............................. F-151
Notes to Combined Financial Statements ................................................... F-152
BLACKSTONE ENTERTAINMENT LLC
Report of Independent Auditors ........................................................... F-157
Combined Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998 (unaudited) ... F-158
Combined Statements of Income for the years ended December 31, 1996 and 1997 and the six
months ended June 30, 1997 and 1998 (unaudited) ......................................... F-159
Combined Statements of Cash Flows for the years ended December 31, 1996 and 1997 and
the six months ended June 30, 1997 and 1998 (unaudited) ................................. F-160
Combined Statement of Members' Equity for the years ended December 31, 1996 and 1997
and the six months ended June 30, 1998 (unaudited) ...................................... F-161
Notes to Combined Financial Statements ................................................... F-162
MAGICWORKS ENTERTAINMENT INCORPORATED
Report of Independent Certified Public Accountants ....................................... F-169
Consolidated Balance Sheets as of December 31, 1997 and 1996 and June 30, 1998
(unaudited) ............................................................................. F-170
Consolidated Statements of Income for the years ended December 31, 1997 and 1996 and the
six months ended June 30, 1998 and 1997 (unaudited) ..................................... F-171
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997 and
1996 .................................................................................... F-172
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996 and
the six months ended June 30, 1998 and 1997 (unaudited) ................................. F-173
Notes to Consolidated Financial Statements ............................................... F-174
THE MARQUEE GROUP, INC.:
THE MARQUEE GROUP, INC.
Consolidated Balance Sheets at September 30, 1998 (unaudited) and December 31, 1997 ...... F-187
Consolidated Statements of Operations for the three and nine months ended September 30,
1998 and 1997 (unaudited) ............................................................... F-188
</TABLE>
F-3
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
Consolidated Statements of Cash Flows for the three and nine months ended September 30,
1998 and 1997 (unaudited) .............................................................. F-189
Consolidated Statements of Stockholders' Equity for the nine months ended September 30,
1998 (unaudited) ....................................................................... F-190
Notes to Consolidated Financial Statements .............................................. F-191
Report of Independent Auditors .......................................................... F-195
Consolidated Balance Sheet as of December 31, 1997 ...................................... F-196
Consolidated Statements of Operations for the years ended December 31, 1996 and 1997 .... F-197
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996
and 1997 ............................................................................... F-198
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1997 .... F-199
Notes to Consolidated Financial Statements .............................................. F-200
ALPHABET CITY SPORTS RECORDS, INC. AND ALPHABET CITY
INDUSTRIES, INC.
Report of Independent Auditors .......................................................... F-211
Combined Balance Sheet as of December 31, 1997 and June 30, 1998 (unaudited) ............ F-212
Combined Statements of Income for the period from April 11, 1996 (inception) to
December 31, 1996 and for the year ended December 31, 1997 and for the six months
ended June 30, 1997 and 1998 (unaudited) ............................................... F-213
Combined Statements of Cash Flows for the period from April 11, 1996 (inception) to
December 31, 1996 and for the year ended December 31, 1997 and for the six months
ended June 30, 1997 and 1998 (unaudited) ............................................... F-214
Notes to Combined Financial Statements .................................................. F-215
CAMBRIDGE HOLDING CORPORATION, INC. AND SUBSIDIARY
Report of Independent Auditors .......................................................... F-219
Consolidated Balance Sheet as of December 31, 1997 and June 30, 1998 (unaudited) ........ F-220
Consolidated Statement of Operations for the year ended December 31, 1997 and for the six
months ended June 30, 1997 and 1998 (unaudited) ........................................ F-221
Consolidated Statement of Cash Flows for the year ended December 31, 1997 and for the six
months ended June 30, 1997 and 1998 (unaudited) ........................................ F-222
Notes to Consolidated Financial Statements .............................................. F-223
PARK ASSOCIATES LIMITED
Report of Independent Auditors .......................................................... F-225
Balance Sheet as of December 31, 1997 ................................................... F-226
Statement of Profit and Loss Account for the year ended December 31, 1997 ............... F-227
Statement of Cash Flows for the year ended December 31, 1997 ............................ F-228
Notes to Financial Statements ........................................................... F-229
Balance Sheet as of June 30, 1998 (unaudited) ........................................... F-237
Statements of profit and loss account for the six months ended June 30, 1997 and 1998
(unaudited) ............................................................................ F-238
Statements of cash flows for the six months ended June 30, 1997 and 1998 (unaudited) .... F-239
Notes to Financial Statements ........................................................... F-240
TOLLIN-ROBBINS ENTERTAINMENT
Report of Independent Auditors .......................................................... F-243
Combined Balance Sheets as of December 31, 1997 and 1996 and June 30, 1998 (unaudited) .. F-244
Combined statements of operations for the years ended December 31, 1997 and 1996 and for
the six months ended June 30, 1997 and 1998 (unaudited) ................................ F-245
</TABLE>
F-4
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
Combined Statements of Stockholders' Equity and for the years ended December 31, 1996
and 1997 and for the six months ended June 30, 1998 (unaudited) ......................... F-246
Combined Statements of Cash Flows for the years ended December 31, 1996 and 1997 and for
the six months ended June 30, 1997 and 1998 (unaudited) ................................. F-247
Notes to Combined Financial Statements ................................................... F-248
TONY STEPHENS ASSOCIATES LIMITED
Report of Independent Auditors ........................................................... F-253
Balance Sheet as of April 30, 1998 ....................................................... F-254
Statement of Profit and Loss Account for the year ended April 30, 1998 ................... F-255
Statement of Cash Flows for the year ended April 30, 1998 ................................ F-256
Notes to Financial statements ............................................................ F-257
Balance Sheet as of June 30, 1998 (unaudited) ............................................ F-260
Statements of Profit and Loss Accounts for the six months ended June 30, 1997 and 1998
(unaudited) ............................................................................. F-261
Statements of Cash Flows for the six months ended June 30, 1997 and 1998 (unaudited) ..... F-262
Notes to Financial Statements ............................................................ F-263
PROSERV, INC. AND SUBSIDIARIES
Report of Independent Accountants ........................................................ F-267
Consolidated Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited) ........ F-268
Consolidated Statements of Operations for the years ended December 31, 1996 and 1995
and for the six months ended June 30, 1997 (unaudited) and 1996 (unaudited) ............. F-269
Consolidated Statements of Stockholders' Equity/(Deficit) for the years ended December 31,
1996 and 1995 and for the six months ended June 30, 1997 (unaudited) .................... F-270
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995
and for the six months ended June 30, 1997 (unaudited) and 1996 (unaudited) ............. F-271
Notes to Consolidated Financial Statements ............................................... F-272
QBQ ENTERTAINMENT, INC.
Report of Independent Auditors ........................................................... F-285
Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited) ..................... F-286
Statements of Operations for the years ended December 31, 1996 and 1995 and for the
six months ended June 30, 1997 and 1996 (unaudited) ..................................... F-287
Statements of Stockholders' Equity (Deficiency) for the years ended December 31, 1996
and 1995 and the six months ended June 30, 1997 (unaudited) ............................. F-288
Statements of Cash Flows for the years ended December 31, 1996 and 1995 and for the
six months ended June 30, 1997 and 1996 (unaudited) ..................................... F-289
Notes to Financial Statements ............................................................ F-290
</TABLE>
F-5
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<S> <C> <C>
September 30, December 31,
1998 1997
---------- --------
ASSETS ..................................................................... (Unaudited)
Current assets:
Cash and cash equivalents ................................................. $ 65,589 $ 5,979
Accounts receivable ....................................................... 68,042 3,831
Prepaid expenses .......................................................... 27,375 --
Receivables from equity investees ......................................... 974 --
Other current assets ...................................................... 3,747 1,410
---------- --------
Total current assets ....................................................... 165,727 11,220
Property and equipment, net of accumulated depreciation of $12,144 at
September 30, 1998 and $2,610 at December 31, 1998 ........................ 275,000 59,685
Deferred acquisition costs ................................................. 551 6,213
Goodwill and other intangible assets, net of accumulated amortization of
$28,551 at September 30, 1998 and $2,745 at December 31, 1998 ............. 904,929 60,306
Investment in and receivables from equity investees, less current portion... 22,406 937
Note receivable from related parties and employees ......................... 12,610 --
Other assets ............................................................... 10,325 8,581
---------- --------
TOTAL ASSETS ............................................................... $1,391,548 $146,942
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ..................................... $ 66,202 $ 2,715
Deferred revenue .......................................................... 73,608 3,603
Income taxes payable ...................................................... 480 1,707
Due to SFX Broadcasting ................................................... 26,250 11,539
Current portion of long-term debt ......................................... 4,238 755
Current portion of capital lease obligations .............................. 674 168
Current portion of deferred purchase consideration ........................ 2,313 1,950
---------- --------
Total current liabilities .................................................. 173,765 22,437
Long-term debt, less current portion ....................................... 714,884 14,929
Capital lease obligations, less current portion ............................ 12,248 326
Deferred purchase consideration, less current portion ...................... 8,117 4,289
Deferred income taxes ...................................................... 60,601 2,817
Other ...................................................................... 5,354 --
---------- --------
TOTAL LIABILITIES .......................................................... 974,969 44,798
Minority interest .......................................................... 3,868 --
Temporary equity - stock subject to redemption ............................. 16,500 --
Shareholders' equity:
Preferred Stock, $.01 par value, 25,000,000 shares authorized, none
issued and outstanding as of September 30, 1998 and December 31,
1997 .................................................................... -- --
Class A common stock, $.01 par value, 100,000,000 shares authorized;
28,753,194 and 13,579,024 shares issued and outstanding as of
September 30, 1998 and December 31, 1997, respectively .................. 288 136
Class B common stock, $.01 par value, 10,000,000 shares authorized;
1,697,037 and 1,047,037 shares issued and outstanding as of
September 30, 1998 and December 31, 1997, respectively .................. 17 10
Additional paid in capital ................................................. 431,617 98,184
Deferred compensation ...................................................... (7,397) --
Accumulated (deficit) earnings ............................................. (28,314) 3,814
---------- --------
Total shareholders' equity ................................................. 396,211 102,144
---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................. $1,391,548 $146,942
========== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<S> <C> <C>
Three Months Ended September
------------------------------
30,
-----------
1998 1997
------------ ----
Revenue ....................................................... $ 388,034 $ 43,425
Operating expenses:
Cost of revenue .............................................. 331,857 35,569
Depreciation and amortization, including $1,014 of integration
costs in 1998 .............................................. 21,207 2,345
Corporate expenses, net of Triathlon fees .................... 2,510 259
Non-cash compensation and other non-cash charges ............. 843 --
------------ -----------
356,417 38,173
------------ -----------
Income from operations ........................................ 31,617 5,252
Income from equity investments ................................ (2,139) (1,344)
Interest expense .............................................. 13,488 378
Investment income ............................................. (967) (95)
Minority interest ............................................. 916 --
------------ -----------
Income before provision for income taxes ...................... 20,319 6,313
Provision for income taxes .................................... 1,983 295
------------ -----------
Net income .................................................... 18,336 6,018
Accretion on stock subject to redemption ...................... (825) -
------------ -----------
Net income applicable to common shares ........................ $ 17,511 $ 6,018
============ ===========
Basic Earnings per common share ............................... $ 0.58 $ 0.41
============ ===========
Dilutive earnings per common share ............................ $ 0.57 $ 0.41
============ ===========
Weighted average basic common shares outstanding .............. 30,420,883 14,626,061
Weighted average dilutive common shares outstanding ........... 30,881,777 14,626,061
Pro Forma:
Income before provision for income taxes ...................... $ 20,319 $ 6,313
Pro forma provision for income taxes .......................... 1,983 2,952
------------ -----------
Pro forma net income .......................................... 18,336 3,361
Accretion on stock subject to redemption ...................... (825) --
------------ -----------
Pro forma net income applicable to common stock ............... $ 17,511 $ 3,361
============ ===========
Pro forma earnings per share:
Basic ........................................................ $ 0.58 $ 0.23
============ ===========
Diluted ...................................................... $ 0.57 $ 0.23
============ ===========
</TABLE>
See accompanying notes.
F-7
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<S> <C> <C>
Nine Months Ended September 30,
--------------------------------
1998 1997
------------ -----------
Revenue ............................................................... $ 680,376 $ 74,396
Operating expenses:
Cost of revenue ...................................................... 602,538 63,045
Depreciation and amortization, including $1,264 of integration
costs in 1998 ...................................................... 40,381 4,041
Corporate expenses, net of Triathlon fees ............................ 5,839 1,307
Non-cash compensation and other non-cash charges ..................... 32,895 --
------------ -----------
681,653 68,393
------------ -----------
Income (loss) from operations ......................................... (1,277) 6,003
Income from equity investments ........................................ (3,964) (1,344)
Interest expense ...................................................... 31,709 956
Investment income ..................................................... (3,466) (213)
Minority interest ..................................................... 1,314 --
------------ -----------
Income (loss) before provision for income taxes ....................... (26,870) 6,604
Provision for income taxes ............................................ 3,333 2,952
------------ -----------
Net income (loss) ..................................................... (30,203) 3,652
Accretion on stock subject to redemption .............................. (1,925) --
------------ -----------
Net income (loss) applicable to common shares ......................... $ (32,128) $ 3,652
============ ===========
Basic and dilutive net income (loss) per common share ................. $ (1.38) $ 0.25
============ ===========
Weighted average basic and dilutive common shares outstanding ......... 23,262,122 14,382,778
Pro Forma:
Income (loss) before provision for income taxes ....................... $ (26,870) $ 6,604
Pro forma provision for income taxes .................................. 3,333 2,956
------------ -----------
Pro forma net income (loss) ........................................... (30,203) 3,652
Accretion on stock subject to redemption .............................. (1,925) --
------------ -----------
Pro forma net income (loss) applicable to common stock ................ $ (32,128) $ 3,652
============ ===========
Pro forma earnings (loss) per share ................................... $ (1.38) $ 0.25
============ ===========
</TABLE>
See accompanying notes.
F-8
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C> <C>
Nine Months Ended
--------------------------
September 30,
--------------------------
1998 1997
-------- --------
Balances at January 1, ................................................... $ 102,144 $ --
Net assets contributed by SFX Broadcasting .............................. -- 97,726
Liabilities in excess of assets of SFX Broadcasting, Inc. assumed in
the Spin-Off, principally federal income taxes of $105.0 million......... (129,237) --
Sale of 8,050,000 Shares of Class A Common Stock ......................... 329,004 --
Issuance of 5,837,874 shares of Class A Common Stock for
acquisitions ............................................................ 97,466 --
Issuance of 190,000 shares of Class A Common Stock pursuant to
employment agreements ................................................... 8,511 --
Issuance of 650,000 shares of Class B Common Stock pursuant to
employment agreements ................................................... 18,526 --
Net income (loss) ........................................................ (30,203) 6,309
----------- ---------
Balances at September 30 ................................................. $ 396,211 $104,035
=========== =========
</TABLE>
See accompanying notes.
F-9
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C> <C>
Nine Months Ended
--------------------------
September 30,
--------------------------
1998 1997
-------- -------
Operating activities:
Net (loss) income ........................................................ $ (30,203) $ 6,309
Adjustment to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization, including $1,264 of integration
costs ................................................................. 40,381 4,041
Pretax income of equity investees, net of distributionsreceived ......... 1,030 458
Non-cash charges ........................................................ 32,895 --
Minority interest ....................................................... 1,314 --
Changes in operating assets and liabilities, net of amounts
acquired:
Accounts receivable ..................................................... (9,620) (1,019)
Prepaid expenses ........................................................ (6,296) (2,419)
Other current assets .................................................... (1,744) --
Other assets ............................................................ (3,191) (275)
Receivable from related parties and employees ........................... (2,162) --
Accounts payable and accrued expenses ................................... (14,475) (16)
Accrued interest and dividends .......................................... 7,595 --
Deferred revenue ........................................................ 6,783 (6,290)
----------- ----------
Net cash provided by operating activities ................................ 22,307 789
----------- ----------
Investing activities:
Purchases of businesses, net of cash acquired ........................... (807,135) (69,645)
Deposits and other payments for pending acquisitions .................... (551) --
Purchases of property and equipment ..................................... (44,554) (2,352)
----------- ----------
Net cash used in investing activities .................................... (852,240) (71,997)
----------- ----------
Financing activities:
Capital contributed by SFX Broadcasting ................................. -- 78,855
Proceedsfrom issuance of senior subordinated debt and
borrowings under the credit agreement ................................. 723,500 --
Proceeds from sale of common stock ...................................... 330,683 --
Repayment of debt and capital lease obligation .......................... (33,049) (553)
Payments made to SFX Broadcasting pursuant to the Spin-Off .............. (113,876) --
Other, principally debt issuance costs .................................. (17,715) --
----------- ----------
Net cash provided by financing activities ................................ 889,543 78,302
----------- ----------
Net increase in cash and cash equivalents ................................ 59,610 7,094
Cash and cash equivalents at beginning of period ......................... 5,979 --
=========== ==========
Cash and cash equivalents at end of period ............................... $ 65,589 $ 7,094
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest ................................................... $ 22,807 $ 897
=========== ==========
Cash paid for income taxes ............................................... $ 17,217 $ --
=========== ==========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
o Issuance of equity securities, including deferred equity security issuance
and assumption of debt in connection with certain acquisitions (see Note
1).
o Agreements to pay future cash consideration in connection with certain
acquisitions (see Note 1).
o The balance sheet includes certain assets and liabilities that have been
contributed to the Company by SFX Broadcasting.
See accompanying notes.
F-10
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
SFX Entertainment, Inc. ("SFX" or the "Company") is a leading promoter,
producer and venue operator for live entertainment events. In addition, the
Company is a leading full-service marketing and management company specializing
in the representation of team sports athletes, primarily in professional
basketball.
The Company owns and/or operates the largest network of venues in the country
used principally for music concerts and other live entertainment events. Upon
completion of all pending acquisitions, it will have 68 venues either directly
owned or operated under lease or exclusive arrangements, including 13
amphitheaters in 9 of the top 10 markets. The Company also develops and manages
touring Broadway shows, selling subscriptions series in 38 of the markets that
maintain active touring schedules with approximately 240,000 subscribers last
year. Through its large number of venues and the long operating histories of
the businesses it has acquired, SFX operates an integrated franchise that
promotes and produces a broad variety of live entertainment events locally,
regionally and nationally. Pro forma for all completed acquisitions, during
1997, approximately 30 million people attended 11,300 events promoted and/or
produced by SFX, including approximately 5,400 music concerts, 5,600 theatrical
shows and over 200 specialized motor sports events.
SFX was formed as a wholly-owned subsidiary of SFX Broadcasting, Inc. in
December 1997 and as the parent company of SFX Concerts, Inc ("Concerts").
Concerts was formed in January 1997 to acquire and hold SFX Broadcasting's live
entertainment operations. The Company had no substantive operations until its
acquisition of Delsener/Slater Enterprises, Ltd. and affiliated companies
("Delsener/Slater") in January 1997.
In August 1997, SFX Broadcasting agreed to the merger (the "Broadcasting Merger
Agreement") among SBI Holdings, Inc. (the "Buyer"), SBI Radio Acquisition
Corporation, a wholly owned subsidiary of the Buyer, and SFX Broadcasting (the
"Broadcasting Merger") and to the spin-off of the Company to the shareholders
of SFX Broadcasting (the "Spin-Off"). The Spin-Off was completed on April 27,
1998 and the Broadcasting Merger was completed on May 29, 1998.
Information with respect to the three and nine months ended September 30, 1998
and 1997 is unaudited. The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, the unaudited interim financial statements contain
all adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the financial position, results of operations and cash flows of
the Company, for the periods presented.
In 1998 the Company's income taxes are calculated on a stand alone basis
including the period through April 27, 1998 in which the Company was a member
of the SFX Broadcasting's Consolidated federal income tax return. In 1997, the
Company's income taxes reflected the federal benefit for the operating losses
of SFX Broadcasting.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131
("SFAS 131"), "Disclosure About Segments of an Enterprise and Related
Information," which establishes new standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that these enterprises report selected information
about operating segments in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. SFAS 131 is effective for financial statements for fiscal
years beginning after December 31, 1997, and therefore the Company will adopt
the new requirements in 1998. Management has completed its review of SFAS 131
and as such has preliminarily determined that its reportable segments will be
music, theatrical, sports and other.
F-11
<PAGE>
In June 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), which is effective for fiscal years beginning after December 15,
1998. Under SOP 98-5, the costs of start-up activities, including
organizational costs, would be expensed as incurred. SOP 98-5 broadly defines
start-up activities as those one-time activities related to opening a new
facility, introducing a new product or service, conducting business in a new
territory, conducting business with a new class of customer or beneficiary,
initiating a new process in an existing facility or beginning a new operation.
SOP 98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998. Earlier application is encouraged. The initial application
of SOP 98-5 is to be reported as a cumulative
effect of a change in accounting principle. Management has preliminarily
determined that SOP 98-5 will not have a material effect on its financial
position.
The Company's operations and revenues are largely seasonal in nature, with
generally higher revenue generated in the second and third quarters of the
year. The Company's outdoor venues are primarily utilized in the summer months
and do not generate substantial revenue in the late fall, winter and early
spring. Similarly, the musical concerts that the Company promotes largely occur
in the second and third quarters. To the extent that the Company's
entertainment marketing and consulting relate to musical concerts, they also
predominantly generate revenues in the second and third quarters. However, this
seasonality is somewhat offset by typically non-summer seasonal businesses such
as touring Broadway Shows (which typically tour between September and May) and
motor sports (which produces revenue predominantly in the first quarter).
2. ACQUISITIONS
1997 Acquisitions
In January 1997, SFX Broadcasting acquired Delsener/Slater, a concert promotion
company which has long-term leases or is the exclusive promoter for seven of
the major concert venues in the New York City metropolitan area. Total
aggregate consideration was 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 over five years and $1,000,000 to be paid without interest over ten years.
In March 1997, the Company acquired the stock of certain companies which own
and operate the Meadows Music Theater (the "Meadows"), an indoor/outdoor
complex located in Hartford, Connecticut for $900,000 in cash, 250,838 shares
of SFX Broadcasting Class A Common Stock with a value of approximately
$7,500,000 and the assumption of approximately $15,400,000 in debt. In June
1997, the Company acquired the stock of Sunshine Promotions, Inc. and certain
other related companies ("Sunshine Promotions"), an owner-operator of venues
and a concert promoter in the Midwest for $53,900,000 in cash, of which
$2,000,000 is payable over five years, 62,792 shares of SFX Broadcasting Class
A Common Stock issued with a value of approximately $2,000,000, shares of SFX
Broadcasting stock issuable over a two year period with a value of
approximately $2,000,000 and the assumption of approximately $1,600,000 in
debt.
The Delsener/Slater, Meadows, and Sunshine Promotions acquisitions are
collectively referred to herein as the "1997 Acquisitions." The 1997
Acquisitions were financed through capital contributions from SFX Broadcasting
and were accounted for under the purchase method of accounting.
1998 Acquisitions
Westbury
On January 8, 1998, the Company acquired certain companies which hold a
long-term lease for Westbury Music Fair, located in Westbury, New York, (the
"Westbury Acquisition") for an aggregate consideration of approximately $3.0
million in cash and 75,019 shares of the Company's Class A Common Stock. During
the period between the closing and January 8, 2000, the Company has the right
to repurchase all of such shares for an aggregate consideration of $2.0 million
and the seller has the right to require the Company to purchase all of such
shares for an aggregate consideration of $750,000.
F-12
<PAGE>
BGP
On February 24, 1998, the Company acquired all of the outstanding capital stock
of BG Presents ("BGP"), an owner-operator of venues for live entertainment and
a promoter in the San Francisco Bay area (the "BGP Acquisition"), for total
consideration of approximately $80.3 million (including the repayment of $12.0
million in BGP debt and the issuance upon the Spin-Off of 562,640 shares of
Class A Common Stock of the Company valued by the parties at $7.5 million). The
sellers of BGP provided net working capital (as defined in the acquisition
agreement) at the closing in an amount equal to or greater than long-term debt.
PACE
On February 25, 1998, the Company acquired all of the outstanding capital stock
of PACE Entertainment Corporation ("PACE"), a diversified producer and promoter
of live entertainment in the United States (the "PACE Acquisition"), for total
consideration of approximately $150.1 million (including issuance upon the
Spin-Off of 1,500,000 shares of the Company's Class A Common Stock valued by
the parties at $20.0 million and assumption of approximately $20.6 million of
debt). In related transactions, the Company acquired, for total consideration
of $90.6 million comprised of $41.4 million in cash, the repayment of
approximately $43.1 million of debt and the assumption of approximately $6.1
million of debt related to a capital lease, the 66 2/3% ownership interests of
Blockbuster Entertainment Corporation and Sony Music Entertainment, Inc. in
Amphitheater Entertainment Partnership, a partner of PACE in the Pavilion
Partners venue partnership. As a result, the Company owns 100% of Pavilion
Partners.
The PACE Acquisition agreement further provides that each seller of PACE shall
have an option, exercisable during a period beginning on the fifth anniversary
of the closing of the PACE Acquisition and ending 90 days thereafter, to
require the Company to purchase up to one-third of the PACE consideration stock
received by such PACE seller for a cash purchase price of $33.00 per share.
With certain limited exceptions, these option rights are not assignable by the
PACE sellers. The stock, which is subject to redemption, has been recorded as
temporary equity on the accompanying consolidated balance sheet and is being
accreted over a five-year period.
Under the terms of an employment agreement entered into by the Company with an
officer of PACE, the officer will have the right, two years from the date of
the acquisition, to purchase PACE's motor sports division at fair value. If the
motor sports division has been sold by the Company, the officer would be
entitled to purchase PACE's theatrical division for its fair value. In
addition, on March 25, 1998, PACE paid $4.0 million to acquire a 67% interest
in certain assets and liabilities of USA Motor Sports, a producer and promoter
of motor sports events. The remaining 33% interest is owned by the Contemporary
Group.
Contemporary
On February 27, 1998, the Company acquired the Contemporary Group
("Contemporary"), a fully-integrated live entertainment and special event
promoter and producer, venue owner and operator and consumer marketer, for
total consideration of approximately $101.4 million comprised of $72.8 million
in cash, a payment for working capital of approximately $9.9 million and the
issuance of preferred stock of the Company valued by the parties at $18.7
million which, upon the Spin-Off, was converted into 1,402,850 shares of Class
A Common Stock of the Company (the "Contemporary Acquisition"). The
Contemporary Acquisition involved the merger of Contemporary International
Productions Corporation with and into the Company, the acquisition by a wholly
owned subsidiary of the Company of substantially all of the assets, excluding
certain cash and receivables, of the remaining members of Contemporary and the
acquisition by Contemporary of the 50% interest in the Riverport Amphitheater
Joint Venture not owned by Contemporary. If any of the Contemporary sellers
owns any shares of the Company's Class A Common Stock received in the
Contemporary Acquisition on the second anniversary of the closing date and the
average trading price of such stock over the 20-day period ending on such
anniversary date is less than $13.33 per share, then the Company will make a
one-time cash payment to each individual holding such shares that is equal to
the product of (i) the
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<PAGE>
quotient of the difference between (A) the actual average trading price per
share over such 20-day period and (B) $13.33 divided by two, multiplied by (ii)
the number of shares of Class A Common Stock of the Company's received by such
individual in the Contemporary Acquisition and owned as of such anniversary
date. In May 1998 the Company placed 140,000 of the shares issued in connection
with the Contemporary Acquisition into an escrow account. The Company may, at
its sole discretion, cancel such shares at any time.
Network
On February 27, 1998, the Company acquired the Network Magazine Group ("Network
Magazine"), a publisher of trade magazines for the radio broadcasting industry,
and SJS Entertainment Corporation ("SJS"), an independent creator, producer and
distributor of music-related radio programming, services and research which it
exchanges with radio broadcasters for commercial air-time which, in turn, is
sold to national network advertisers (the "Network Acquisition"), for total
consideration of approximately $66.8 million comprised of $52.0 million in
cash, a payment for working capital of approximately $1.8 million, reimbursed
sellers costs of $500,000, the purchase of an office building and property for
$2.5 million and the issuance upon the Spin-Off of approximately 750,000 shares
of Class A Common Stock of the Company valued by the parties at $10.0 million.
The $2.5 million purchase of the office building and property is comprised of
cash of approximately $700,000 and the assumption of debt of approximately $1.8
million. The Company is also obligated to pay the sellers an additional payment
in Class A Common Stock or, at the Company's option, cash based on future
operating results, as defined, generated on a combined basis by Network
Magazine and SJS in 1998, up to a maximum of $14.0 million. In the Network
Acquisition, the Company, through a wholly owned subsidiary, acquired all of
the outstanding capital stock of each of The Album Network, Inc. and SJS
Entertainment Corporation and purchased substantially all of the assets and
properties and assumed substantially all of the liabilities and obligations of
The Network 40, Inc.
Concert/Southern
On March 4, 1998, the Company acquired Concert/Southern Promotions
("Concert/Southern"), a promoter of live music events in the Atlanta, Georgia
metropolitan area (the "Concert/Southern Acquisition"), for total cash
consideration of approximately $16.9 million, which includes a $300,000 payment
for working capital.
Avalon
On May 14, 1998, the Company acquired all of the outstanding equity interests
of Irvine Meadows Amphitheater, New Avalon, Inc., TBA Media, Inc. and West
Coast Amphitheater (collectively, "Avalon") for a cash purchase price of $26.8
million (subject to upward adjustment), including approximately $300,000 that
the Company paid to reimburse the Avalon sellers for certain third party out of
pocket expenses incurred in the development of the Camarillo Creek Amphitheatre
(the "Avalon Acquisition"). Avalon is a concert promoter and producer that
operates predominantly in the Los Angeles area.
Oakdale
On June 3, 1998, the Company acquired certain assets of Oakdale Concerts, LLC
and Oakdale Development Limited Partnership (collectively, "Oakdale"), a
promoter and producer of concerts in Connecticut and the owner of the 4,800
seat Oakdale Music Theater, for a purchase price of $9.4 million in cash and
the assumption of $2.5 million in liabilities (the "Oakdale Acquisition"). The
Company also made a non-recourse loan to the Oakdale sellers in the amount of
$11.4 million. In addition, pursuant the Oakdale Agreement, if the future
operating results (as defined in the Oakdale Agreement) of the Oakdale Theater
and the Meadows exceeds $5.5 million in 1999, the Company will be obligated to
pay between 5.0 to 5.8 times the amount of such excess to the Oakdale sellers.
FAME
On June 4, 1998, the Company acquired Falk Associates Management Enterprises,
Inc. and Financial Advisory Management Enterprises, Inc. (collectively,
"FAME"), a full-service marketing and
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<PAGE>
management company which specializes in the representation of team sports
athletes, primarily in professional basketball. The aggregate purchase price
for FAME was approximately $82.2 million in cash (including approximately $7.9
million which the Company paid in connection with certain taxes incurred by
FAME and the FAME sellers and excluding $4.7 million of taxes paid on behalf of
the sellers which will be refunded to the Company in 1999) and 1.0 million
shares of Class A Common Stock, valued at approximately $36.0 million (the
"FAME Acquisition"). The agreement also provides for payments by the Company to
the FAME sellers of additional amounts up to an aggregate of $15.0 million in
equal annual installments over 5 years contingent on the achievement of certain
operating performance targets. The agreement also provides for additional
payments by the Company if FAME's operating performance exceed the targets by
certain amounts.
Don Law
On July 2, 1998, the Company acquired certain assets of Blackstone
Entertainment, LLC ("Don Law"), a concert and theater promoter in New England,
for an aggregate consideration of approximately $92.2 million, including the
repayment of approximately $7.0 million in debt. Don Law currently owns and/or
operates three venues in New England with an aggregate seating capacity of
27,400. Don Law also acts as the sole ticket operator for all of its own venues
as well as several third party venues.
Magicworks
On September 11, 1998, the Company purchased all of the outstanding shares of
common stock of Magicworks Entertainment Incorporated ("Magicworks"), a
producer and promoter of theatrical shows, musical concerts, ice skating shows
and other live entertainment events. The total consideration was $118.9 million
in cash, including approximately $3.2 million in fees and expenses and the
repayment of $2.4 million in convertible notes which the Company is required to
repay upon presentation for conversion into Magicworks stock (the "Magicworks
Acquisition"). The acquisition was consummated by means of a tender offer (in
which approximately 98.7% of Magicworks shares were purchased) followed by a
merger (in which the remaining shares were converted into cash consideration).
Other Acquisitions
During the third quarter of 1998, the Company completed the acquisition of
seven companies in the theatrical and music segments, principally in the areas
of programming, touring and merchandising (collectively the "Other
Acquisitions"). The aggregate purchase price was $104.7 million in cash,
approximately $10.0 million in stock (300,000 shares of the Company's Class A
Common Stock) and $10.0 million of deferred payments. In addition, the Company
is required to make a loan to certain sellers in an amount equal to taxes
incurred by the sellers in connection with one of the transactions. The Company
expects that the amount of the loan will be approximately $750,000.
The Westbury Acquisition, the BGP Acquisition, the PACE Acquisition, the
Contemporary Acquisition, the Network Acquisition, the Concert/Southern
Acquisition, the Avalon Acquisition, the Oakdale Acquisition, the FAME
Acquisition, the Don Law Acquisition, the Magicworks Acquisition and the Other
Acquisitions are collectively referred to herein as the "1998 Acquisitions."
The 1998 Acquisitions were accounted for under the purchase method of
accounting and funded with the proceeds of the Note Offering, the Equity
Offering, the Credit Agreement (each as defined herein) and available cash. The
purchase prices of the 1998 Acquisitions have been preliminarily allocated to
the assets acquired and liabilities assumed and are subject to change.
Operating results for the 1997 Acquisitions and the 1998 Acquisitions are
included herein from their respective acquisition dates. Operating results
associated with the assets and liabilities contributed by SFX Broadcasting are
also included herein. Prior to the Spin-Off, SFX Broadcasting provided various
administrative services to the Company. SFX Broadcasting allocated these
expenses on the basis of direct usage. In the opinion of management, this
method of allocation was reasonable and allocated expenses approximated what
the Company would have incurred on a stand-alone basis. Intercompany
transactions and balances have been eliminated in consolidation.
F-15
<PAGE>
The following pro forma summary represents the consolidated results for the
nine months ended September 30, 1998 and the year ended December 31, 1997 as if
the 1997 Acquisitions and the 1998 Acquisitions had occurred at January 1,
1997, after giving effect to certain adjustments, including amortization of
intangible assets and interest expense on the acquisition debt. These pro forma
results have been included for comparative purposes only and do not purport to
be indicative of what would have occurred had the acquisitions been made as of
that date or of results which may occur in the future (in thousands).
<TABLE>
<CAPTION>
PRO FORMA
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
-------------------- ------------------
<S> <C> <C>
Revenues $ 925,094 $ 883,901
Net loss applicable to common shares $ (38,486) $ (52,714)
Loss applicable to common shares $ (1.29) $ (1.76)
</TABLE>
3. FINANCING
Note Offering and Guarantees by Subsidiaries
On February 11, 1998, the Company completed an offering of $350.0 million 9
1/8% Senior Subordinated Notes (the "Notes" and "Note Offering") due 2008.
Interest is payable on the Notes on February 1 and August 1 of each year. On
July 15, 1998, the Company consummated the exchange of substantially identical
publicly registered notes (the "Exchange Notes") for all outstanding Notes. All
Notes were tendered for exchange and were cancelled upon the issuance of the
same principal amount of Exchange Notes.
The Company is a holding company that has no operating assets or operations of
its own. Substantially all of the Company's subsidiaries are wholly owned and
have jointly and severally guaranteed the Company's indebtedness represented by
the Exchange Notes (the "Guarantors"). Certain subsidiaries which are not
wholly owned (the "Non-Guarantor Subsidiaries"), do not guarantee such
indebtedness.
Full financial statements of the Guarantors and Non-Guarantor Subsidiaries have
not been included because, pursuant to their respective guarantees, the
Guarantors are jointly and severally liable with respect to the Exchange Notes
and management believes that the Non-Guarantor Subsidiaries are not material to
the Company on a consolidated basis. Accordingly, the Company does not believe
that the information contained in separate full financial statements of the
Guarantors or Non-Guarantor Subsidiaries would be material to investors. The
following are summarized unaudited statements setting forth certain financial
information concerning the Guarantors and Non-Guarantor Subsidiaries as of and
for the nine months ended September 30, 1998 (in thousands).
F-16
<PAGE>
<TABLE>
<CAPTION>
SFX SFX
Entertainment Non-Guarantor Entertainment
Inc. Guarantors Subsidiaries Eliminations Consolidated
--------------- -------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Current assets $ 8,910 $ 148,522 $ 8,295 $ -- $ 165,727
Property and equipment, net 8,905 256,182 9,913 -- 275,000
Goodwill and other intangible assets,
net 29,972 853,660 21,297 -- 904,929
Investment in subsidiaries 1,111,914 22,406 -- (1,111,914) 22,406
Other assets 3,648 16,768 3,070 -- 23,486
---------- ---------- ------- ------------ ----------
Total assets $1,163,349 $1,297,538 $42,575 $ (1,111,914) $1,391,548
========== ========== ======= ============ ==========
Current liabilities $ 42,455 $ 127,678 $ 3,632 $ -- $ 173,765
Long-term debt, less current portion 697,753 29,379 12,767 (12,767) 727,132
Other liabilities 10,430 63,179 463 -- 74,072
Minority interest -- 2,579 1,289 -- 3,868
Temporary equity 16,500 -- -- -- 16,500
Shareholders' equity 396,211 1,074,723 24,424 (1,099,147) 396,211
---------- ---------- ------- ------------ ----------
Total liabilities and shareholders'
equity $1,163,349 $1,297,538 $42,575 $ (1,111,914) $1,391,548
========== ========== ======= ============ ==========
Revenue $ -- $ 659,858 $20,518 $ -- $ 680,376
Operating expenses 48,047 615,916 17,690 -- 681,653
Interest expense, net 27,669 591 507 (524) 28,243
Minority interest -- 392 922 -- 1,314
Income from equity investments -- (3,964) -- -- (3,964)
Provision for income taxes -- 3,333 -- -- 3,333
---------- ---------- ------- ------------ ----------
Net (loss) income $ (75,716) $ 43,590 $ 1,399 $ 524 $ (30,203)
========== ========== ======= ============ ==========
Cash flow from operations $ (45,994) $ 70,023 $(1,722) $ -- $ 22,307
Cash flow used in investing activities (844,051) (7,816) (373) -- (852,240)
Cash flow from financing activities 891,252 (1,704) (5) -- 889,543
Cash at the beginning of the period -- 2,916 3,063 -- 5,979
---------- ---------- --------- ------------ ----------
Cash at the end of the period $ 1,207 $ 63,419 $ 963 $ -- $ 65,589
========== ========== ========= ============ ==========
</TABLE>
The following are summarized unaudited statements setting forth certain
financial information concerning the Guarantors and Non-Guarantor Subsidiaries
as of and for the three months ended September 30, 1998 (in thousands).
<TABLE>
<CAPTION>
SFX SFX
Entertainment Non-Guarantor Entertainment
Inc. Guarantors Subsidiaries Eliminations Consolidated
--------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue $ -- $372,039 $15,995 $ -- $388,034
Operating expenses 7,745 335,722 12,950 -- 356,417
Interest expense, net 12,361 119 208 (167) 12,521
Minority interest -- (7) 923 -- 916
Income from equity investments -- (2,139) -- -- (2,139)
Provision for income taxes -- 1,983 -- -- 1,983
--------- --------- ------- ------ --------
Net (loss) income $ (20,106) $36,361 $ 1,914 $ 167 $ 18,336
========= ========= ======= ====== ========
</TABLE>
Credit Agreement
On February 26, 1998, the Company executed a Credit and Guarantee Agreement
(the "Credit Agreement" or "Credit Facility") which established a $300.0
million senior secured credit facility comprised of (i) a $150.0 million
eight-year term loan (the "Term Loan") and (ii) a $150.0 million seven-year
reducing revolving credit facility (the "Revolver"). In addition, in September
1998, the Company received an increase in its borrowing availability under the
Revolver by $50.0 million, which increased the Company's availability under the
Credit Agreement to $350.0 million. Loans outstanding under the Credit Facility
bear interest, at the Company's option, at 1.875 to 2.375 percentage points
over LIBOR or the greater of the Federal Funds rate plus 0.50% or the Bank of
New York's prime rate. The interest rate spreads on the Term Loan and the
Revolver are adjusted based on the Company's Total Leverage Ratio (as defined
in the Credit Agreement). The Company pays a per annum commitment fee on unused
availability under the Revolver of 0.50% to the extent that the
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<PAGE>
Company's Leverage Ratio is greater than or equal to 4.0 to 1.0, and 0.375% if
such ratio is less than 4.0 to 1.0 and a per annum letter of credit fee equal
to the Applicable LIBOR Margin (as defined in the Credit Agreement) for the
Revolver then in effect. Borrowings under the Credit Agreement are secured by
substantially all of the assets of the Company, including a pledge of the
outstanding stock of substantially all of its subsidiaries and guaranteed by
all of the Company's subsidiaries. As of November 13, 1998, the Company had
borrowed $346.0 million under the Credit Agreement to consummate certain of the
1998 Acquisitions.
In addition, the Company has received a commitment letter from its lenders to
replace its existing credit facility with a new $600.0 million credit facility.
The new facility is subject to the execution of a definitive agreement and will
differ from the current credit facility in several respects including
applicable financial ratios, interest rate margins and term of repayment. The
Company and its lenders are presently reviewing the pending commitment in light
of recent developments in the credit markets. The Company may renegotiate the
existing commitment, which renegotiations may significantly alter the principal
terms, or the Company may consider alternative forms of debt financing. If a
new credit facility is consummated and the terms of the agreement are
substantially different than the terms of the existing credit facility, the
Company may be required to write off the remaining deferred financing costs
related to the current credit facility in the form of an extraordinary loss.
Equity Offering
On May 27, 1998, the Company consummated an offering of 8,050,000 shares of
Class A Common Stock at an offering price of $43.25 per share (the "Equity
Offering"). The proceeds received by the Company, after deducting the
underwriting discount and offering expenses, were approximately $329.0 million.
The proceeds were used to (i) repay certain indebtedness and consummate certain
of the 1998 Acquisitions and (ii) pay $93.7 million of the tax indemnification
obligation related to the Spin-Off (see Note 6).
4. CAPITAL STOCK
In order to facilitate the Spin-Off, the Company revised its capital structure
to increase its authorized capital stock and to effect a stock split. The
authorized capital stock of the Company consists of 110,000,000 shares of
Common Stock (comprised of 100,000,000 shares of Class A Common Stock and
10,000,000 shares of Class B Common Stock), and 25,000,000 shares of preferred
stock, par value $.01 per share.
In the Spin-Off, (a) 13,579,024 shares of Class A Common Stock were distributed
to holders on the Spin-Off record date of SFX Broadcasting's Class A Common
Stock, Series D preferred stock and interests in SFX Broadcasting's director
deferred stock ownership plan, including 609,856 shares of Class A Common Stock
issued upon the exercise of certain warrants of SFX Broadcasting and (b)
1,047,037 shares of Class B Common Stock were distributed to holders on the
Spin-Off record date of SFX Broadcasting Class B Common Stock. The financial
statements have been retroactively adjusted to reflect this transaction.
Holders of Class A Common Stock and Class B Common Stock vote as a single class
on all matters submitted to a vote of the stockholders, with each share of
Class A Common Stock entitled to one vote and each share of Class B Common
Stock entitled to ten votes, except (a) for the election of directors, (b) with
respect to any "going private" transaction between the Company and Mr.
Sillerman or any of his affiliates and (c) as otherwise provided by law.
The Board of Directors has the authority to issue preferred stock and will
assign the designations and rights at the time of issuance.
During January 1998, the Board of Directors and SFX Broadcasting, as sole
stockholder, approved and adopted a stock option and restricted stock plan
providing for the issuance of restricted shares of the Company's Class A Common
Stock and options to purchase shares of the Company's Class A Common Stock
totaling up to 2,000,000 shares. In January 1998, the Company granted options
exercisable for an aggregate of 345,000 shares of the Company's Class A Common
Stock at an
F-18
<PAGE>
exercise price of $5.50 which will vest over three years and 7,500 shares of
the Company's Class A Common Stock at an exercise price of $5.50 which vests
over one year. The Company will record non-cash compensation charges over the
three-year vesting period of approximately $3.3 million annually. Between April
and August 1998, the Company granted options exercisable for an aggregate of
1,629,666 shares of Class A Common Stock at exercise prices ranging from
$29.125 to $45.875.
During January 1998, in connection with the expectation of certain executive
officers entering into employment agreements with the Company, the Board of
Directors, upon recommendation of the Compensation Committee, approved the sale
of an aggregate of 650,000 shares of the Company's Class B Common Stock and
190,000 shares of the Company's Class A Common Stock to certain officers for a
purchase price of $2.00 per share. Such shares were issued in April 1998. A
non-cash charge to earnings was recorded by the Company in the second quarter
of approximately $23.9 million associated with the sale.
The Board of Directors also approved the issuance of shares of the Company's
Class A Common Stock to holders of stock options or stock appreciation rights
("SARs") of SFX Broadcasting as of the Spin-Off record date, whether or not
vested. The issuance was approved to allow such holders of these options or
SARs to participate in the Spin-Off in a similar manner to holders of SFX
Broadcasting's Class A Common Stock. Additionally, many of the option holders
will become officers, directors and employees of the Company.
5. NON-CASH CHARGES
Non-cash charges recorded in the second and third quarters of 1998 of $32.9
million consisted of (a) $23.9 million of compensation related to the sale of
650,000 shares of Class B Common Stock and 190,000 shares of Class A Common
Stock at a purchase price of $2.00 per share to certain executive officers
pursuant to employment agreements, (b) $7.5 million associated with the
issuance of 247,177 shares of Class A Common Stock to Mr. Robert F.X.
Sillerman, Executive Chairman of the Company, in connection with the repurchase
of shares of SFX Broadcasting issued to the sellers of the Meadows and (c) $1.5
million related to the issuance of stock options to certain executive officers
pursuant to employment agreements exercisable for an aggregate of 352,500
shares of Class A Common Stock.
In addition, a $2.7 million write down of the remaining balance of the deferred
expense relating to the Triathlon Broadcasting Company ("Triathlon") agreement
was recorded in the second quarter of 1998 as a result of Triathlon's recent
agreement to be acquired by a third party. If a third party acquires Triathlon,
the consulting fee agreement would be terminated. The write down was recorded
as a charge to amortization expense.
6. SPIN-OFF
Pursuant to the terms of the Spin-Off, SFX Broadcasting contributed to the
Company all of the assets relating to its live entertainment businesses and the
Company assumed all of SFX Broadcasting's liabilities pertaining to the live
entertainment businesses, as well as certain other liabilities including the
obligation to make change of control payments to certain employees of SFX
Broadcasting of approximately $5.0 million, as well as the obligation to
indemnify one-half of certain of these employees' excise tax. At the time of
the Broadcasting Merger, the Company preliminarily received $2.0 million of net
Working Capital (as defined in the Broadcasting Merger Agreement). Any
additional payments which may be payable upon the final determination of the
Working Capital will be reflected as an increase or decrease, as the case may
be, to equity.
In connection with the Spin-Off, the Company entered into a tax sharing
agreement with SFX Broadcasting. Pursuant to the tax sharing agreement, as
amended, the Company is responsible for certain taxes incurred by SFX
Broadcasting, including income taxes imposed with respect to income generated
by the Company for periods prior to the Spin-Off and taxes resulting from gain
recognized by SFX Broadcasting in the Spin-Off. The Company believes that the
amount of taxes it will be required to pay in connection with the Spin-Off will
be approximately $108.0 million, of which $93.7 million was paid on or before
September 30, 1998. The remaining $14.3 million portion of the tax
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<PAGE>
indemnity payment is payable on December 31, 1998. Management's estimates of
the amount of the indemnity payment are based on assumptions which management
believes are reasonable. However, upon the completion of all final tax returns,
including any potential tax audits, such assumptions could be modified in a
manner that would result in a significant variance in the actual amount of the
tax indemnity.
7. DILUTIVE EARNINGS PER SHARE
A reconciliation of the number of shares used for calculating basic earnings
per common share and diluted earnings per common share for the three months
ended September 30, 1998 follows:
<TABLE>
<S> <C>
Average number of common shares outstanding 30,420,883
Effect of stock options 460,894
----------
30,881,777
==========
</TABLE>
Options to purchase 1,117,666 shares of common stock at prices ranging from
$43.25 to $45.88 were outstanding at September 30, 1998, but were not included
in the computation of diluted earnings per common share because the options'
exercise price was greater than the average market price of the Company's
common stock during the three months ended September 30, 1998. In addition,
diluted earnings per share was not adjusted for the impact of common stock
issued to the PACE sellers, which is subject to redemption by the Company,
because to do so would have been antidilutive.
Outstanding stock options at September 30, 1998 had no dilutive effect on basic
earnings per share during the nine months ended September 30, 1998 due to the
Company's net loss position. The Company did not have any dilutive securities
outstanding during the nine-months and three-months ended September 30, 1997.
8. COMMITMENTS AND CONTINGENCIES
Pursuant to a real estate purchase agreement with the sellers of Oakdale, the
Company has agreed to purchase the land, building and improvements of the
Oakdale Theater at the end of the Company's fifteen-year lease of the premises
in June 2013 for $15.4 million. In June 1998, the Company extended an $11.4
million note receivable to the sellers which is secured by the property.
While the Company is involved in several law suits and claims arising in the
ordinary course of business, the Company is not currently a party to any legal
proceeding that the Company believes would have a material adverse effect on
its business, financial position or results of operations.
9. SUBSEQUENT EVENTS
Pending Acquisitions
Marquee
The Company has entered into an agreement and plan of merger (the "Marquee
Merger Agreement"), dated as of July 23, 1998, as amended, with The Marquee
Group, Inc. ("Marquee"), pursuant to which Marquee will become a wholly-owned
subsidiary of the Company. Pursuant to the Marquee Merger Agreement, at the
effective time of the merger, for each outstanding share of common stock of
Marquee: (i) if the Company's stock price is $42.75 or less, Marquee
shareholders will receive 0.1111 shares of the Company's Class A Common Stock;
(ii) if the Company's stock price is over $42.75 but no more than $60.00,
Marquee shareholders will receive $4.75 worth of the Company's Class A Common
Stock; (iii) if the Company's stock price is over $60.00, but no more than
$66.00, Marquee shareholders will receive between $4.75 and $5.35 worth of the
Company's common stock; or (iv) if the Company's stock price is over $66.00,
Marquee shareholders will receive $5.35 worth of the Company's Class A Common
Stock. Marquee is a publicly traded company that provides integrated event
management, television production, marketing and consulting services in the
sports, news and entertainment industries. The Company expects to incur
approximately $6.0 million in fees and expenses related to the transaction.
F-20
<PAGE>
Cellar Door
On August 13, 1998, the Company and the beneficial owner of all of the
outstanding equity interests of the entities comprising the Cellar Door Group
of Companies (collectively, "Cellar Door") entered into a letter of intent with
respect to the Company's acquisition of all of the outstanding capital stock of
Cellar Door (the "Cellar Door Acquisition"). Pursuant to the letter of intent,
the aggregate purchase price for Cellar Door will be $70.0 million in cash
payable at closing, Class A Common Stock with a value of $20.0 million (based
upon the average closing price of the Class A Common Stock for the twenty
business day period ending on the business day prior to the closing) and $8.5
million payable in five equal annual installments beginning on the first
anniversary of the closing date. In addition, the Company will issue to the
seller options to purchase 100,000 shares of the Company's Class A Common
Stock. The closing will be subject to customary closing conditions, including
the entry into a definitive acquisition agreement and obtaining the required
approval under the HSR Act (as defined herein). If the Company is unable to
complete the Cellar Door Acquisition, it may be required to pay the seller
$10.0 million as liquidated damages. Cellar Door is a leading promoter and
producer of live entertainment events. The Company expects to incur
approximately $1.5 million in fees and expenses related to the transaction.
The Marquee merger and the Cellar Door Acquisition are collectively referred to
herein as the "Pending Acquisitions." The Company expects to complete the
Pending Acquisitions during the first quarter of 1999. However, the timing and
completion of the Pending Acquisitions are subject to a number of conditions,
including the approval of the stockholders of Marquee, the expiration or
termination of any applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 for the Cellar Door Acquisition, and the
receipt of all applicable consents from third parties and regulatory agencies.
Certain of these conditions are beyond the Company's control and there can be
no assurance that each of the Pending Acquisitions will be consummated during
the first quarter of 1999, on the terms described herein, or at all. In
connection with the HSR Act filing for the Marquee merger, the Company received
notice of a preliminary inquiry from the Antitrust Division of the U.S.
Department of Justice relating to the Cellar Door Acquisition and seeking
information on the overall scope of the Company's operations. The Company
intends to cooperate with the Department of Justice inquiry. While the Company
believes that the Cellar Door Acquisition, along with the Company's overall
business and plan of acquisitions, are in compliance with applicable antitrust
laws, there can be no assurance that the results of such inquiry will not have
a material adverse impact on the Company's ability to consummate the Cellar
Door Acquisition or its business, results of operations and financial
conditions.
Stock Incentive Plan
Following a recommendation of the Company's compensation committee, the Company
has, subject to stockholder approval, adopted a new incentive stock option plan
covering options to acquire up to three million shares of the Company's Class A
Common Stock. The plan will be designed to broaden the equity ownership of the
Company's employees at all levels. The Company anticipates that the proposed
stock plan will be submitted to a vote of the stockholders at the Company's
first annual meeting scheduled to be held in the spring of 1999.
Common Stock Offering
In January 1999 the Company filed a registration statement on Form S-1 with the
Securities and Exchange Commission for the registration of 4,600,000 shares of
its Class A Common Stock.
F-21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SFX Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of SFX
Entertainment, Inc. as of December 31, 1997, and the related consolidated
statements of operations and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of SFX Entertainment, Inc. at December 31, 1997, and the consolidated results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
March 5, 1998, except
for Notes 1 and 11, as to
which the date is April 27, 1998
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Delsener/Slater Enterprises, Ltd.
We have audited the accompanying consolidated balance sheet of
Delsener/Slater Enterprises, Ltd. and Affiliated Companies as of December 31,
1996, and the related consolidated statements of operations and cash flows for
each of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Delsener/Slater Enterprises, Ltd. and Affiliated Companies at December 31,
1996, and the consolidated results of their operations and their cash flows for
each of the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
October 2, 1997
F-23
<PAGE>
SFX ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
PREDECESSOR
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 5,979 $5,253
Accounts receivable ......................................................... 3,831 159
Prepaid expenses and other current assets ................................... 1,410 779
-------- ------
Total current assets ......................................................... 11,220 6,191
Property and equipment, net .................................................. 59,685 2,231
Deferred acquisition costs ................................................... 6,213 --
Goodwill, net ................................................................ 60,306 --
Investment in unconsolidated subsidiaries .................................... 937 458
Note receivable from employee ................................................ 900 --
Other assets ................................................................. 7,681 --
-------- ------
Total assets ................................................................. $146,942 $8,880
======== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses ....................................... $ 2,715 $6,078
Deferred revenue ............................................................ 3,603 18
Income taxes payable ........................................................ 1,707 --
Due to stockholder .......................................................... -- 1,877
Due to SFX Broadcasting ..................................................... 11,539 --
Current portion of long-term debt ........................................... 923 --
Current portion of deferred purchase consideration .......................... 1,950 --
-------- ------
Total current liabilities .................................................... 22,437 7,973
Long-term debt, less current portion ......................................... 15,255 --
Deferred purchase consideration, less current portion ........................ 4,289 --
Deferred income taxes ........................................................ 2,817 --
Commitment and contingencies .................................................
Shareholder's equity (Note 11):
Capital contributed by SFX Broadcasting ...................................... 98,184 --
Preferred Stock, $.01 par value, 25,000,000 shares authorized, none issued and
outstanding ................................................................. -- --
Class A common stock, $.01 par value, 100,000,000 shares authorized,
13,579,024 issued and outstanding ........................................... 136 --
Class B common stock, $.01 par value, 10,000,000 shares authorized, 1,047,037
issued and outstanding ...................................................... 10 --
Combined stockholder's equity--predecessor ................................... -- 907
Retained earnings ............................................................ 3,814 --
-------- ------
Total shareholder's equity ................................................... 102,144 907
-------- ------
Total Liabilities and shareholder's Equity ................................... $146,942 $8,880
======== ======
</TABLE>
See accompanying notes.
F-24
<PAGE>
SFX ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
PREDECESSOR PREDECESSOR
1997 1996 1995
-------------- ------------- ------------
<S> <C> <C> <C>
Concert revenue ................................................ $ 96,144 $ 50,362 $47,566
Operating expenses:
Cost of concerts .............................................. 83,417 50,686 47,178
Depreciation and amortization ................................. 5,431 747 750
Corporate expenses, net of Triathlon fees of $1,794 in
1997 ......................................................... 2,206 -- --
----------- -------- -------
$ 91,054 $ 51,433 $47,928
----------- -------- -------
Income (loss) from operations .................................. 5,090 (1,071) (362)
Investment income .............................................. 295 198 178
Interest expense ............................................... (1,590) (60) (144)
Equity in pretax income of unconsolidated subsidiaries ......... 509 524 488
----------- -------- -------
Income (loss) before provision for income taxes ................ $ 4,304 $ (409) $ 160
Provision for income taxes ..................................... 490 106 13
----------- -------- -------
Basic and diluted net income (loss) ............................ $ 3,814 $ (515) $ 147
=========== ======== =======
Net income (loss) per common share ............................. $ 0.26
===========
Weighted average basic and dilutive common shares
outstanding ................................................... 14,445,061
===========
Pro Forma:
Income (loss) before provision for income taxes ................ $ 4,304 $ (409) $ 160
Pro forma provision for income taxes ........................... 2,540 106 13
----------- -------- -------
Pro forma net income (loss) .................................... $ 1,764 $ (515) $ 147
=========== ======== =======
Pro forma earnings per share ................................... $ 0.12
===========
</TABLE>
See accompanying notes.
F-25
<PAGE>
SFX ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
PREDECESSOR PREDECESSOR
1997 1996 1995
----------- ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ........................................... $ 3,814 $ (515) $ 147
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property and equipment ..................... 2,686 746 750
Amortization of goodwill ................................... 2,745 -- --
Equity in pretax income of unconsolidated subsidiaries,
net of distributions received ............................ (479) 16 2
Deferred income taxes .................................... (427) -- --
Changes in operating assets and liabilities, net of
amounts acquired:
Accounts receivable ...................................... (923) (159) 384
Prepaid expenses and other current assets ................ 419 (649) 374
Other assets ............................................. (275) -- --
Accounts payable and accrued expenses .................... (325) 4,759 (1,326)
Income taxes payable ..................................... 917 -- --
Deferred revenue ......................................... (7,147) 16 (784)
--------- -------- --------
Net cash provided by (used in) operating activities ......... 1,005 4,214 (453)
INVESTING ACTIVITIES:
Purchase of concert promotion businesses, net of cash
acquired ................................................. (71,213) -- --
Investment in GSAC Partnership ............................. -- (435) --
Purchase of property and equipment ......................... (2,083) -- --
--------- -------- --------
Net cash used in investing activities ....................... (73,296) (435) --
--------- -------- --------
FINANCING ACTIVITIES:
Capital contributed by SFX Broadcasting .................... 79,093 -- --
Payment of debt ............................................ (823) -- --
Proceeds from issuance of common stock and capital
contributions ............................................ -- 152 --
Loan from stockholder ...................................... -- 47 --
Distributions paid ......................................... -- (1,630) (216)
--------- -------- --------
Net cash provided by (used in) financing activities ......... 78,270 (1,431) (216)
Net increase in cash and cash equivalents ................... 5,979 2,348 (669)
Cash and cash equivalents at beginning of period ............ -- 2,905 3,574
--------- -------- --------
Cash and cash equivalents at end of period .................. $ 5,979 $ 5,253 $ 2,905
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ...................................... $ 1,504 $ 60 $ 144
========= ======== ========
Cash paid for income taxes .................................. $ -- $ 106 $ 13
========= ======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
o Issuance of equity securities, including deferred equity security issuance
and assumption of debt in connection with certain acquisitions (see Note 1).
o Agreements to pay future cash consideration in connection with certain
acquisitions (see Note 1).
o The balance sheet includes certain assets and liabilities which have been
contributed by SFX Broadcasting to the Company in connection with the
Spin-Off.
See accompanying notes.
F-26
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
SFX Entertainment, Inc. ("SFX" or the "Company") was formed as a
wholly-owned subsidiary of SFX Broadcasting, Inc. ("SFX Broadcasting") in
December 1997 and as the parent company of SFX Concerts, Inc ("Concerts").
Concerts was formed in January of 1997 to acquire and hold SFX Broadcasting's
live entertainment operations. During 1997, the Company made several
acquisitions as described below. The Company had no substantive operations
until its acquisition of Delsener/Slater Enterprises, Ltd. and Affiliated
Companies ("Delsener/Slater" or the "Predecessor") in January 1997, and
Delsener/Slater is considered the Company's predecessor for financial reporting
purposes.
Delsener/Slater
In January 1997, SFX Broadcasting acquired Delsener/Slater, a leading
concert promotion company, for an aggregate consideration of approximately
$27,600,000, including $2,900,000 for working capital and the present value of
deferred payments of $3,000,000 to be paid without interest over five years and
$1,000,000 to be paid without interest over ten years. Delsener/Slater has
long-term leases or is the exclusive promoter for seven of the major concert
venues in the New York City metropolitan area, including the Jones Beach
Amphitheater, a 14,000-seat complex located in Wantagh, New York, and the PNC
Bank Arts Center (formerly known as the Garden State Arts Center), a
17,500-seat complex located in Holmdel, New Jersey.
Meadows
In March 1997, the Company acquired the stock of certain companies which
own and operate the Meadows Music Theater (the "Meadows"), a 25,000-seat
indoor/outdoor complex located in Hartford, Connecticut for $900,000 in cash,
250,838 shares of SFX Broadcasting Class A Common Stock with a value of
approximately $7,500,000 and the assumption of approximately $15,400,000 in
debt.
Sunshine Promotions
In June 1997, the Company acquired the stock of Sunshine Promotions, Inc.
and certain other related Companies ("Sunshine Promotions"), one of the largest
concert promoters in the Midwest, for $53,900,000 in cash, of which $2,000,000
is payable over five years, 62,792 shares of SFX Broadcasting Class A Common
Stock issued with a value of approximately $2,000,000, shares of SFX
Broadcasting stock issuable over a two year period with a value of
approximately $2,000,000 and the assumption of approximately $1,600,000 of
debt. The shares of stock to be issued in the future are classified as deferred
purchase consideration on the balance sheet. Sunshine Promotions owns the Deer
Creek Music Theater, a 21,000-seat complex located in Indianapolis, Indiana,
and the Polaris Amphitheater, a 20,000-seat complex located in Columbus, Ohio,
and has a long-term lease to operate the Murat Centre (the "Murat"), a
2,700-seat theater and 2,200-seat ballroom located in Indianapolis, Indiana.
Pursuant to the Broadcasting Merger Agreement, the Company is responsible for
the payments owing under the Sunshine note, which by its terms accelerates upon
the change in control of SFX Broadcasting resulting from the consummation of
the Broadcasting Merger.
The Delsener/Slater, Meadows, and Sunshine Promotions acquisitions are
collectively referred to herein as the "Completed Acquisitions." The cash
portion of the Completed Acquisitions were financed through capital
contributions from SFX Broadcasting and were accounted for under the purchase
method of accounting. The purchase prices have been preliminarily allocated to
the assets acquired and are subject to change.
The accompanying consolidated financial statements as of December 31, 1997
include the accounts of Delsener/Slater, Sunshine Promotions, the Meadows, and
certain assets and liabilities which have been contributed by SFX Broadcasting
to the Company in connection with the Spin-Off
F-27
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(as defined herein) under the terms of the Broadcasting Merger (as defined
herein) Agreement. Operating results for the Completed Acquisitions are
included herein from their respective acquisition dates. Operating results
associated with the assets and liabilities to be contributed are included
herein. SFX Broadcasting provides various administrative services to the
Company. It is SFX Broadcasting's policy to allocate these expenses on the
basis of direct usage. In the opinion of management, this method of allocation
is reasonable and allocated expenses approximate what the Company would have
incurred on a stand-alone basis. Intercompany transactions and balances among
these companies have been eliminated in consolidation.
The following unaudited pro forma summary represents the consolidated
results for the years ended December 31, 1997 and 1996 as if the Completed
Acquisitions had occurred at the beginning of such year after giving effect to
certain adjustments, including amortization of goodwill and interest expense on
the acquisition debt. These pro forma results have been included for
comparative purposes only and do not purport to be indicative of what would
have occurred had the acquisition been made as of that date or of results which
may occur in the future (in thousands).
<TABLE>
<CAPTION>
PRO FORMA
(UNAUDITED)
----------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- ------------------
<S> <C> <C>
Revenues ................ $110,387 $104,784
Net income .............. $ 734 $ 2,668
</TABLE>
Spin-Off
In August 1997, SFX Broadcasting agreed to the merger (the "Broadcasting
Merger Agreement") among SBI Holdings, Inc. (the "Buyer"), SBI Radio
Acquisition Corporation, a wholly-owned subsidiary of the Buyer, and SFX
Broadcasting (the "Broadcasting Merger") and to the spin-off of the Company to
the shareholders of SFX Broadcasting (the "Spin-Off"). The Spin-Off was
completed on April 27, 1998 and the Broadcasting Merger is expected to be
completed in the second quarter of 1998.
Pursuant to the terms of the Spin-Off, SFX Broadcasting contributed to the
Company all of its concert and other live entertainment assets along with an
allocation of working capital in an amount estimated by management of SFX
Broadcasting to be consistent with the proper operation of SFX Broadcasting,
and the Company assumed all of SFX Broadcasting's liabilities pertaining to the
live entertainment businesses, as well as certain other liabilities including
the obligation to make change of control payments to certain employees of SFX
Broadcasting of approximately $5,000,000 as well as the obligation to indemnify
one-half of certain of these employees' excise tax. At the time of the
Broadcasting Merger, SFX Broadcasting will contribute its positive Working
Capital (as defined in the Broadcasting Merger Agreement) to the Company. If
Working Capital is negative, the Company must pay the amount of the shortfall
to SFX Broadcasting. As of December 31, 1997, SFX Broadcasting had advanced
approximately $11,539,000 to the Company for use in connection with certain
acquisitions and capital expenditures. This obligation and other costs
subsequently incurred in connection with the Spin-Off were reimbursed with the
proceeds from the Senior Subordinated Notes and the Credit Agreement (see Note
2). SFX Broadcasting advanced additional amounts to the Company prior to the
consummation of the Spin-Off which were reimbursed in April 1998.
SFX Broadcasting and the Company entered into a tax sharing agreement.
Under the tax sharing agreement, the Company will agree to pay to SFX
Broadcasting the amount of the tax liability of SFX Broadcasting and the
Company combined, to the extent properly attributable to the Company for the
period up to and including the Spin-Off, and will indemnify SFX Broadcasting
for any tax adjustment made in subsequent years that relates to taxes properly
attributable to the Company during the period prior to and including the
Spin-Off. SFX Broadcasting, in turn, will indemnify the Company for any
F-28
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
tax adjustment made in years subsequent to the Spin-Off that relates to taxes
properly attributable to the SFX Broadcasting during the period prior to and
including the Spin-Off. The Company also will be responsible for any taxes of
SFX Broadcasting resulting from the Spin-Off, including any income taxes but
only to the extent that the income taxes result from the gain on the
distribution that exceeds the net operating losses of SFX Broadcasting and the
Company available to offset such gain including net operating losses generated
in the current year prior to the Spin-Off.
The actual amount of the gain will be based on the excess of the value of
the Company's Common Stock on the date of the Spin-Off over the tax basis of
that stock. The Company believes that the value of the Company's Common Stock
for tax purposes will be determined by no later than the first trading day
following the date on which the Company's Common Stock is distributed in the
Spin-Off. Increases or decreases in the value of the Company's Common Stock
subsequent to such date will not effect the tax liability. The Company expects
that such indemnity payment will be due on or about June 15, 1998.
2. RECENT ACQUISITIONS AND FINANCING
On February 11, 1998, SFX completed the private placement of $350.0
million of 9 1/8% Senior Subordinated Notes (the "Notes") due 2008. Interest is
payable on the Notes on February 1 and August 1 of each year.
On February 26, 1998 the Company executed a Credit and Guarantee Agreement
(the "Credit Agreement") which established a $300.0 million senior secured
credit facility comprised of (i) a $150.0 million eight-year term loan (the
"Term Loan") and (ii) a $150.0 million seven-year reducing revolving credit
facility. Loans outstanding under the Credit Facility bear interest, at the
Company's option, at 1.875 to 2.375 percentage points over LIBOR or the greater
of the Federal Funds rate plus 0.50% or BNY's prime rate. The interest rate
spreads on the Term Loan and the Revolver will be adjusted based on the
Company's Total Leverage Ratio (as defined in the Credit Agreement). The
Company will pay a per annum commitment fee on unused availability under the
Revolver of 0.50% to the extent that the Company's Leverage Ratio is greater
than or equal to 4.0 to 1.0, and 0.375% if such ratio is less than 4.0 to 1.0
and a per annum letter of credit fee equal to the Applicable LIBOR Margin (as
defined in the Credit Agreement) for the Revolver then in effect. The Revolver
and Term Loan contain provisions providing that, at its option and subject to
certain conditions, the Company may increase the amount of either the Revolver
or Term Loan by $50.0 million. Borrowings under the Credit Agreement are
secured by substantially all of the assets of the Company, including a pledge
of the outstanding stock of substantially all of its subsidiaries and
guaranteed by all of the Company's subsidiaries. On February 27, 1998, the
Company borrowed $150.0 million under the Term Loan. Together with the proceeds
from the Notes, the proceeds from the Term Loan were used to finance the Recent
Acquisitions (as defined below.)
On February 24, 1998, the Company acquired all of the outstanding capital
stock of BG Presents ("BGP"), one of the oldest promoters of, and
owner-operators of venues for, live entertainment in the United States, and a
leading promoter in the San Francisco Bay area (the "BGP Acquisition"), for
total consideration of approximately $80,300,000 (including the repayment of
$12,000,000 in BGP debt and the issuance upon the Spin-Off of 562,640 shares of
common stock of the Company valued by the parties at $7,500,000). The sellers
of BGP provided net working capital (as defined in the acquisition agreement)
at the closing in an amount equal to or greater than long-term debt.
On February 25, 1998, the Company acquired all of the outstanding capital
stock of PACE Entertainment Corporation ("PACE"), one of the largest
diversified producers and promoters of live entertainment in the United States,
having what the Company believes to be the largest distribution network in the
United States in each of its music, theater and specialized motor sports
businesses (the "PACE Acquisition"), for total consideration of approximately
$150,100,000 (including issuance upon
F-29
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Spin-Off of 1,500,000 shares of the Company's common stock valued by the
parties at $20,000,000 and assumption of approximately $20,600,000 of debt).
Under the terms of the agreement, additional cash consideration would be
required if the deemed value of the Company's common stock was less than $13.33
per share as a result of changes in the consummation of acquisitions. In
related transactions, the Company acquired, for total consideration of
$90,600,000 comprised of $41,400,000 in cash, the repayment of approximately
$43,100,000 of debt and the assumption of approximately $6,100,000 of debt
related to a capital lease, the 66 2/3% ownership interests of Blockbuster
Entertainment Corporation and Sony Music Entertainment, Inc. in Amphitheater
Entertainment Partnership, a partner of PACE in the Pavilion Partners venue
partnership. As a result, the Company owns 100% of Pavilion Partners.
The PACE acquisition agreement further provides that each seller of PACE
shall have an option, exercisable during a period beginning on the fifth
anniversary of the closing of the PACE acquisition and ending 90 days
thereafter, to require the Company to purchase up to one-third of the PACE
consideration stock received by such PACE seller for a cash purchase price of
$33.00 per share. With certain limited exceptions, these option rights are not
assignable by the PACE sellers.
Under the terms of an employment agreement to be entered into by the
Company with an officer of PACE, the officer will have the right, two years
from the date of the acquisition, to purchase PACE's motor sports division at
fair value. If the motor sports division has been sold by the Company, the
officer would be entitled to purchase PACE's theatrical division for the fair
value.
On February 27, 1998, the Company acquired the Contemporary Group
("Contemporary"), a fully-integrated live entertainment and special event
promoter and producer, venue owner and operator and consumer marketer, for
total consideration of approximately $101,400,000 comprised of $72,800,000 in
cash, a payment for working capital of approximately $9,900,000 and the
issuance upon the Spin-Off of 1,402,850 shares of common stock of the Company
valued by the parties at $18,700,000. (the "Contemporary Acquisition"). The
Contemporary Acquisition involved the merger of Contemporary International
Productions Corporation with and into the Company, the acquisition by a wholly
owned subsidiary of the Company of substantially all of the assets, excluding
certain cash and receivables, of the remaining members of Contemporary and the
acquisition by Contemporary of the 50% interest in the Riverport Amphitheater
Joint Venture not owned by Contemporary. If any of the Contemporary sellers
owns any shares of the Company's Class A Common Stock received in the
Contemporary Acquisition on the second anniversary of the closing date and the
average trading price of such stock over the 20-day period ending on such
anniversary date is less than $13.33 per share, then the Company will make a
one-time cash payment to each individual holding any such shares that is equal
to the product of (i) the quotient of the difference between (A) the actual
average trading price per share over such 20-day period and (B) $13.33 divided
by two, multiplied by (ii) the number of shares of Class A Common Stock of the
Company received by such individual in the Contemporary Acquisition and owned
as of such anniversary date.
On February 27, 1998, the Company acquired the Network Magazine Group
("Network Magazine"), a publisher of trade magazines for the radio broadcasting
industry, and SJS Entertainment Corporation ("SJS"), an independent creator,
producer and distributor of music-related radio programming, services and
research which it exchanges with radio broadcasters for commercial air-time
sold, in turn, to national network advertisers (the "Network Acquisition"), for
total consideration of approximately $66,800,000 comprised of $52,000,000 in
cash, a payment for working capital of approximately $1,800,000, reimbursed
sellers costs of $500,000, the purchase of an office building and property for
$2,500,000 and the issuance upon the Spin-Off of 750,188 shares of common stock
of the Company valued by the parties at $10,000,000. The $2,500,000 purchase of
the office building and property is comprised of cash of approximately $700,000
and the assumption of debt of approximately $1,800,000. The Company is also
obligated to pay the sellers an additional payment in
F-30
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
common stock or, at the Company's option, cash based on future operating
results, as defined, generated on a combined basis by Network Magazine and SJS
in 1998, up to a maximum of $14,000,000. In the Network Acquisition, the
Company, through a wholly owned subsidiary, acquired all of the outstanding
capital stock of each of The Album Network, Inc. and SJS Entertainment
Corporation and purchased substantially all of the assets and properties and
assumed substantially all of the liabilities and obligations of the Network 40,
Inc.
On March 4, 1998, the Company acquired Concert/Southern Promotions
("Concert/Southern"), a promoter of live music events in the Atlanta, Georgia
metropolitan area (the "Concert/Southern Acquisition"), for total cash
consideration of approximately $16,900,000, which includes a $300,000 payment
for working capital.
The PACE Acquisition, the Contemporary Acquisition, the Network
Acquisition, the BGP Acquisition and the Concert/Southern Acquisition are
collectively referred to herein as the "Recent Acquisitions."
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Cash and Cash Equivalents
The Company considers all investments purchased with a maturity of three
months or less to be cash equivalents. Included in cash and cash equivalents at
December 31, 1997 is $1,235,000 of cash which has been deposited in a separate
account and will be used to fund committed capital expenditures at PNC Bank
Arts Center.
Property and Equipment
Land, buildings and improvements and furniture and equipment are stated at
cost. Depreciation is provided on a straight-line basis over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings and improvements ......... 7-40 years
Furniture and equipment ............ 5-7 years
</TABLE>
Leasehold improvements represent the capitalized costs to renovate the
Jones Beach Theatre. The costs to renovate the theatre included permanent
seats, a new stage and lavatory facilities. These costs are being amortized
over the term of the lease.
Goodwill
Goodwill represents the excess of the purchase price over the fair market
value of the assets purchased in the Completed Acquisitions and is net of
accumulated amortization of $2,745,000. Goodwill is being amortized using the
straight-line method over 15 years. Management reviews the carrying value of
goodwill against anticipated cash flows on a non-discounted basis to determine
whether the carrying amount will be recoverable.
Other Assets
Other assets includes $4,928,000 of costs associated with acquiring the
right to receive fees from Triathlon Broadcasting Company ("Triathlon"), an
affiliate, for certain financial consulting, marketing and administrative
services provided by the Company to Triathlon. Under the terms of the
agreement, the Company has agreed to provide consulting and marketing services
to Triathlon for an annual fee of $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
F-31
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
financing activity of Triathlon. The cost of acquiring the fees is being
amortized over the term of the agreement which expires on June 1, 2005.
Triathlon has announced its intention to enhance shareholder value through a
sale. The Company's management believes that the capitalized cost of acquiring
the right to receive fees from Triathlon is recoverable.
Revenue Recognition
The Company's operations and revenues are largely seasonal in nature, with
generally higher revenue generated in the second and third quarters of the
year. The Company's outdoor venues are primarily utilized in the summer months
and do not generate substantial revenue in the late fall, winter and early
spring. Similarly, the musical concerts that the Company promotes largely occur
in the second and third quarters. To the extent that the Company's
entertainment marketing and consulting relate to musical concerts, they also
predominantly generate revenues in the second and third quarters.
Revenue from ticket sales is recognized upon occurrence of the event.
Advance ticket sales are recorded as deferred revenue until the event occurs.
Risks and Uncertainties
Accounts receivable are due principally from ticket companies and venue
box offices. These amounts are typically collected within 20 days of a
performance. Generally, management considers these accounts receivable to be
fully collectible; accordingly, no allowance for doubtful accounts is required.
Certain other accounts receivable, arising from the normal course of business,
are reviewed for collectibility and allowances for doubtful accounts are
recorded as required. Management believes that no allowance for doubtful
accounts is required at December 31, 1996 or 1997.
The agreement governing the partnership through which PACE holds its
interest in the Lakewood Amphitheater in Atlanta, Georgia contains a provision
that purports to restrict PACE and its affiliates from directly or indirectly
owning or operating another amphitheater in Atlanta. In management's view, this
provision will not materially affect the business or prospects of the Company.
However, the Company acquired an interest in the Chastain Park Amphitheater,
also in Atlanta, in the Concert/Southern acquisition. The Company intends to
seek a waiver.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Advertising Costs
Advertising costs are expensed as incurred and approximated $7,109,000,
$4,896,000 and $2,687,000 in 1997, 1996, and 1995, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". This
statement requires a company to recognize deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
a company's financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statement carrying amounts and the tax bases of assets and
liabilities.
In 1998, the Company's income taxes are calculated on a stand alone basis
involving the period through April 27, 1998 in which the Company was a member
of SFX Broadcasting's Consolidated federal income tax return. In 1998, the
Company's income taxes reflected the federal benefit for the operating losses
of SFX Broadcasting.
F-32
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company calculates its tax provision on a separate company basis.
Loss Per Common Share
Basic loss per common share is based upon the net loss applicable to
common shares after preferred dividend requirements and upon the weighted
average of common shares outstanding during the period. Diluted loss per common
share adjusts for the effect of convertible securities and stock options only
in the periods presented in which such effect would have been dilutive. There
were no dilutive securities during the year ended December 31, 1997.
Earnings per share for the years ended December 31, 1996 and 1995 have not
been presented herein since the operations for those years relate to the
predecessor of the Company and such information would not be meaningful.
Reclassification
Certain amounts in 1995 and 1996 have been reclassified to conform to the
1997 presentation.
4. CONNECTICUT DEVELOPMENT AUTHORITY ASSISTANCE AGREEMENT
On September 12, 1994, the Connecticut Development Authority ("CDA")
entered into a non-recourse assistance agreement with the Meadows whereby the
CDA provided grant funds for the construction and development of the Meadows
through the issuance of State of Connecticut General Fund Obligation Bonds
("GFO Bonds"). The Meadows received bond proceeds of $8,863,000. Pursuant to
such agreement, the annual tax revenues derived from the operation of the
amphitheater are utilized to satisfy the annual service requirements under the
GFO Bonds. In the event that annual tax revenues derived from the operation of
the amphitheater do not equal annual service requirements under the GFO Bonds,
the Company must deposit the lesser of the operating shortfall, as defined, or
10% of the annual service under the GFO Bonds. An operating shortfall has not
existed since the inception of the CDA. The GFO Bonds mature on October 15,
2024 and have an average coupon rate of 6.33%. Annual service requirements,
including interest, on the GFO Bonds for each of the next five years and
thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1998 ............... $ 739
1999 ............... 737
2000 ............... 739
2001 ............... 740
2002 ............... 741
Thereafter ......... 16,399
-------
$20,095
=======
</TABLE>
The assistance agreement requires an annual Meadows attendance of at least
400,000 for each of the first three years of operations. It will not be
considered an event of default if the annual Meadows attendance is less than
400,000 provided that no operating shortfall exists for that year or if an
operating shortfall exists such amount has been deposited by the Company. If
there is an event of default, the CDA may foreclose on the construction
mortgage loan (see Note 5). If the amphitheater's operations are relocated
outside of Connecticut during the ten year period subsequent to the beginning
of the assistance agreement or during the period of the construction mortgage
loan, the full amount of the grant funds plus a penalty of 5% must be repaid to
the State of Connecticut.
F-33
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
The Predecessor did not have any long-term debt as of December 31, 1996.
As of December 31, 1997, the company's long-term debt, which is recorded at
present value, consisted of the following (in thousands):
<TABLE>
<S> <C>
Meadows CDA Mortgage Loan .................. $ 7,411
Meadows Concession Agreement Loans ......... 5,872
Meadows CDA Construction Loan .............. 700
Murat notes payable ........................ 790
Meadows note payable ....................... 694
Polaris note payable ....................... 221
Capital lease obligations .................. 490
-------
16,178
Less current portion ....................... 923
-------
$15,255
=======
</TABLE>
Meadows CDA Mortgage Loan
On September 12, 1994, the CDA entered into a construction mortgage loan
agreement for $7,685,000 with the Meadows. The purpose of the loan was to
finance a portion of the construction and development of the Meadows. The loan
agreement contains substantially the same covenants as the CDA assistance
agreement (see Note 4). The mortgage loan bears interest at 8.73% and is
payable in monthly installments of principal and interest. The mortgage loan
matures on October 15, 2019.
The loan is collateralized by a lien on the Meadows' assets. The loan is
secured by an irrevocable standby letter of credit issued by the Company in the
amount of $785,000.
Meadows Concession Agreement Loans
In connection with the Meadows' concession agreement, the concessionaire
loaned the Meadows $4,500,000 in 1995 to facilitate the construction of the
amphitheater. Principal and interest at the rate of 7.5% per annum on the note
is payable via withholdings of the first $31,299 from each monthly concession
commission payment. As of December 31, 1997, the outstanding balance was
$4,343,000.
During 1995, the concessionaire loaned the Meadows an additional
$1,000,000. This loan bears interest at a rate of 9.75% per annum and is
payable via withholdings of an additional $11,900 of principal, plus interest,
from each monthly concession commission payment through December 20, 2002. As
of December 31, 1997, the outstanding balance was $679,000.
The concession agreement also required the Company to supply certain
equipment to the concessionaire at the Company's expense. The cost of the
equipment purchased by the concessionaire was converted to a note payable for
$884,000. The note bears interest at the rate of 9.25% per annum and provides
for monthly principal and interest payments of $10,185. However, the Company is
not required to make any principal or interest payments to the extent that 5%
of receipts, as defined, in any month are less than the amount of the payment
due. As of December 31, 1997, the outstanding balance was $850,000.
Meadows CDA Construction Loan
In March 1997, the Meadows entered into a $1,500,000 loan agreement with
the CDA of which $1,000,000 was funded in March 1997. Principal payments of
$150,000 are due on July 1 and October 1 of each year commencing July 1, 1997
through October 1, 2001. The note bears interest at the rate of
F-34
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.9% per annum through February 1, 1998, and thereafter at the index rate, as
defined, plus 2.5%. In addition, the Meadows is required to make principal
payments in an amount equal to 10% of the annual gross revenue, as defined, in
excess of $13,000,000 on or before the March 1 following each calendar year
commencing March 1, 1998. In 1997, gross revenues did not exceed the defined
threshold and thus no principal payment was made on March 1, 1998.
Murat Notes Payable
The Company has two loans payable to the Massachusetts Avenue Community
Development Corporation (MAC), an $800,000 non-interest bearing note and a
$1,000,000 note. Principal payments on the non-interest bearing note are the
lesser of $0.15 per Murat ticket sold during fiscal year or remaining net cash
flow, as defined. Interest on the other note is calculated annually and is
equal to the lesser of (1) $0.10 per Murat ticket sold during the fiscal year,
(2) prime plus 1% or (3) remaining net cash flow, as defined. Interest and
principal on the $1,000,000 note is payable at the lesser of $0.10 per Murat
ticket sold during fiscal year or remaining net cash flow, as defined.
Provisions of the $800,000 note payable requires the Murat to continue
making payments after the principal has been paid down equal to the lesser of
$0.15 per Murat ticket sold during the fiscal year or remaining cash flow.
These payments are to be made to a not-for-profit foundation and will be
designated for remodeling and upkeep of the theatre.
Meadows Note Payable
Under the terms of a Meadows ticket and sales agreement, a vendor loaned
the Company $824,500 and pays the Company an annual fee of $140,000 for nine
years commencing in March 1996. Proceeds from the annual fee are used by the
Company to make the annual principal and interest payments.
Polaris Note Payable
In 1994, a concessionaire advanced Sunshine Promotions $500,000 to be used
in the construction of the Polaris Amphitheater. The advance is interest free
and is payable in annual installments of $25,000 beginning in 1994 for a period
of 20 years.
Capital Lease Obligations
The Company has entered into various equipment leases. Interest on the
leases range from 6.5% to 18.67%.
Principal maturities of the long-term debt, notes payable and capital
lease obligations over the next five years as of December 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
LONG-TERM DEBT AND CAPITAL LEASE
NOTES PAYABLE OBLIGATIONS
-------------------- --------------
<S> <C> <C>
1998 ................. $756 $167
1999 ................. 782 157
2000 ................. 611 113
2001 ................. 541 53
2002 ................. $537 --
</TABLE>
F-35
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY AND EQUIPMENT
The Company's property and equipment as of December 31, 1997 and 1996
consisted of the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
1997 1996
----------- ------------
<S> <C> <C>
Land .............................. $ 8,752 --
Building and improvements ......... 44,364 --
Furniture and equipment ........... 6,503 $ 131
Leasehold improvements ............ 2,676 6,726
-------- --------
62,295 6,857
Accumulated depreciation .......... (2,610) (4,626)
-------- --------
$ 59,685 $ 2,231
======== ========
</TABLE>
7. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
The Company is a 49% partner in a general partnership which subleases a
theater located in New York City. Income associated with the promotion of
concerts at this theater is recorded as concert revenue. Any such promotion
revenue recognized reduces the Company's share of the partnership's profits.
The Company is also a one-third partner in GSAC Partners, a general partnership
through which it shares in the income or loss of the PNC Bank Arts Center at
varying percentages based on the partnership agreement. The Company records
these investments on the equity method. In connection with the PACE
Acquisition, the Company agreed to purchase the interest in GSAC Partners that
it did not already own and in 1998 completed the purchase. Thus, the financial
position and operations of GSAC Partners will be consolidated into those of the
Company beginning in 1998.
The following is a summary of the unaudited financial position and results
of operations of the Company's equity investees (GSAC Partners in 1997 and 1996
only) as of and for the years ended December 31, 1997, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR
1997 1996 1995
--------- ------------- ------------
<S> <C> <C> <C>
Current assets .................................. $ 2,818 $ 756 $ 214
Property, plant and equipment ................... 1,427 239 122
Other assets .................................... 239 819 --
------- ------- ------
Total assets .................................... $ 4,484 $ 1,814 $ 336
======= ======= ======
Current liabilities ............................. $ 1,621 $ 1,534 $ 264
Partners' capital ............................... 2,863 280 72
------- ------- ------
Total liabilities and partners' capital ......... $ 4,484 $ 1,814 $ 336
======= ======= ======
Revenue ......................................... $20,047 $16,037 $4,058
Expenses ........................................ 17,074 14,624 2,954
------- ------- ------
Net income ...................................... $ 2,973 1,413 $1,104
======= ======= ======
</TABLE>
The equity income recognized by the Company represents the appropriate
percentage of investment income less amounts reported in concert revenues for
shows promoted by the Company at these theaters. Such concert revenues of
unconsolidated subsidiaries was approximately $97,000, $205,000 and $110,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
F-36
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The provisions for income taxes for the years ended December 31, 1997,
1996 and 1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR
1997 1996 1995
------ ------------- ------------
<S> <C> <C> <C>
CURRENT:
Federal .............. -- -- --
State ................ $420 $106 $13
DEFERRED:
Federal .............. -- -- --
State ................ 70 -- --
---- ---- ---
Total ................ $490 $106 $13
==== ==== ===
</TABLE>
No Federal income taxes were provided in 1997 as a result of the Company's
inclusion in the consolidated federal income tax return with SFX Broadcasting.
If the Company had filed on a stand alone basis, its federal tax provision
would have been approximately $2,050,000, consisting of $1,760,000 in current
taxes and approximately $290,000 of deferred taxes. The Predecessor had no
Federal tax provision in 1996 or 1995 by virtue of the status of its profitable
included companies as S Corporations. State income taxes were provided to the
extent that S Corporation status was not recognized.
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax asset and liabilities as of December
31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Deferred compensation ........................ $ 783
Deferred tax liabilities:
Depreciable assets ........................... $3,600
------
Net deferred tax liability ................... $2,817
======
</TABLE>
The Predecessor had no deferred tax liabilities as of December 31, 1996.
The acquisition of the Meadows resulted in the recognition of deferred tax
liabilities of approximately $3,200,000 under the purchase method of
accounting. These amounts were based upon the excess of the financial statement
basis over the tax basis in assets, principally fixed assets. The acquisition
of Delsener/Slater resulted in the recognition of deferred tax assets of
approximately $1,200,000 under the purchase method of accounting. These amounts
were based upon the excess of the financial statements basis over the tax basis
in assets, principally deferred compensation.
F-37
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997, 1996, and 1995 the effective rate varies from the
statutory Federal income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
---------------------
1997 1996 1995
----------- ---------- --------
<S> <C> <C> <C>
Income taxes at the statutory rate ........................ $ 1,463 $ (139) $ 54
Effect of Subchapter S status ............................. -- 139 (54)
Nondeductible amortization ................................ 800 -- --
Travel and entertainment .................................. 20 -- --
Effect of consolidated return loss ........................ (2,283) -- --
State and local income taxes (net of Federal benefit) ..... 490 106 13
-------- ------ -----
Total provision ........................................... $ 490 $ 106 $ 13
======== ====== =====
</TABLE>
9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Pursuant to the terms of the Spin-Off, upon the consummation of the
Broadcasting Merger, the Company will assume all obligations under any
employment agreements or arrangements between SFX Broadcasting and any employee
of the Company.
While the Company is involved in several suits and claims in the ordinary
course of business, the Company is not now a party to any legal proceeding that
the Company believes would have a material adverse effect on its business.
The Company's operating leases includes primarily leases with respect to
venues, office space and land. Total rent expense was $2,753,000 , $875,000 and
$835,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The lease terms range from 3 to 37 years. Prior to the Spin-Off, the Company
will enter into contracts with certain officers and other key employees. No
such contracts existed in 1997. The future minimum payments for all
noncancelable operating leases and employee agreements with initial terms of
one year or more are as follows (in thousands):
<TABLE>
<CAPTION>
EMPLOYMENT
OPERATING LEASES AGREEMENTS
------------------ -----------
<S> <C> <C>
1998 ................................ $ 3,366 $1,900
1999 ................................ 3,823 1,864
2000 ................................ 1,648 1,624
2001 ................................ 1,666 1,534
2002 ................................ 1,678 300
2003 and thereafter ................. 14,117 --
------- ------
$26,298 $7,222
======= ======
</TABLE>
The Company has committed to expansion projects at the Jones Beach Theater
and PNC Bank Arts Center and, in connection with the BGP Acquisition, for the
construction of a new amphitheater in the Seattle, Washington market. The Jones
Beach Theater and PNC Bank Arts Center expansions are expected to be completed
in June 1998 and to cost approximately $15,000,000 and $10,500,000,
respectively. As of December 31, 1997, approximately $1,018,000 and $1,500,000,
respectively, of these costs have been incurred. The new amphitheater in
Seattle is expected to cost $10,000,000 and is expected to be completed in the
spring of 1999.
As of December 31, 1997 and 1996, outstanding letters of credit for
$1,110,000 and $400,000, respectively, were issued by banks on behalf of the
Company as security for loans and the rental of theaters.
In connection with the acquisition of Delsener/Slater, SFX Broadcasting
entered into an employment agreement with each of Ron Delsener and Mitch Slater
pursuant to which each of Messrs. Delsener and Slater serve as Co-President and
Co-Chief Executive Officer of Delsener/Slater. Each of the employment
agreements continues until December 31, 2001 unless terminated earlier by the
Company for cause or voluntarily by Mr. Delsener or Mr. Slater.
F-38
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In certain cases, Messrs. Delsener and Slater have rights to purchase the
outstanding capital stock of Delsener/Slater for fair market value as defined
in their employment agreements.
Additionally, in the case of a return event, as defined, which may be
deemed to include the Spin-Off, the Broadcasting Merger and related
transactions, Messrs. Delsener and Slater have the right to receive a portion
of the excess of the proceeds of the return event over a fixed amount
determined in reference to the original purchase price for Delsener/Slater, all
as calculated pursuant to the Delsener and Slater employment agreements.
Management believes that, with respect to the Spin-Off, the Broadcasting Merger
and related transactions, no payment will accrue to Mr. Delsener or Mr. Slater
pursuant to their employment agreements.
The employment agreements further provide that Messrs. Delsener and Slater
shall be paid annual bonuses determined with reference to Delsener/Slater
profits, as defined, for the immediately preceding year. Management believes
that no such bonus was earned for the year ended December 31, 1997.
Messrs. Delsener and Slater and the Company are in the process of
negotiating amendments to their employment agreements to reflect, among other
things, the changes to the business of the Company as a result of the Recent
Acquisitions and the Spin-Off, and each of Messrs. Delsener and Slater have
agreed in principle to waive any rights which may accrue in connection with the
Broadcasting Merger or the Spin-Off. The Company also expects, in connection
with the foregoing, to negotiate mutually satisfactory amendments to certain of
Messrs. Delsener's and Slater's compensation arrangements, including bonus and
profit sharing provisions.
10. RELATED PARTY TRANSACTIONS
The Company's Executive Vice President, General Counsel and Director is Of
Counsel to the law firm of Baker & McKenzie. Baker & McKenzie serves as counsel
to the Company in certain matters. Baker & McKenzie compensates the executive
based, in part, on the fees it receives from providing legal services to the
Company and other clients originated by the executive. In 1997, the Company
incurred fees of approximately $2,948,000 for legal services related to the
Recent Acquisitions. Such fees were funded by SFX Broadcasting on behalf of the
Company. In February 1998, the Company reimbursed SFX Broadcasting for these
fees.
Due to stockholder represents the balance due to Mr. Delsener on his
advances to renovate the Jones Beach Theatre (the "Jones Beach Loan") and the
PNC Bank Arts Center (the "PNC Loan"). Delsener /Slater paid interest at 8% per
annum on the Jones Beach Loan, which was repaid in May 1996. The PNC Loan,
which was originated in 1996 was repaid in connection with the acquisition of
Delsener/Slater by SFX Broadcasting in 1997 (See Note 1).
11. CAPITAL STOCK
In order to facilitate the Spin-Off, the Company recently revised its
capital structure to increase its authorized capital stock and to effect a
stock split. The authorized capital stock of the Company consists of
110,000,000 shares of Common Stock (comprised of 100,000,000 shares of Class A
Common Stock and 10,000,000 shares of Class B Common Stock), and 25,000,000
shares of preferred stock, par value $.01 per share.
In the Spin-Off, (a) 13,579,024 shares of Class A Common Stock were
distributed to holders on the Spin-Off record date of SFX Broadcasting's Class
A common stock, Series D preferred stock and interests in SFX Broadcasting's
director deferred stock ownership plan, (b) 1,047,037 shares of Class B Common
Stock were distributed to holders on the Spin-Off record date of SFX
Broadcasting Class B common stock and (c) 609,856 shares of Class A Common
Stock were placed in escrow to be issued upon the exercise of certain warrants
of SFX Broadcasting. The financial statements have been retroactively adjusted
to reflect this transaction.
Holders of the Company's Class A Common Stock are entitled to one vote and
holders of the Company's Class B Common Stock are entitled to ten votes on all
matters submitted to a vote of
F-39
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 issue preferred stock and will
assign the designations and rights at the time of issuance.
12. DEFINED CONTRIBUTION PLAN
The Company sponsors a 401(k) defined contribution plan in which most
full-time employees are eligible to participate. The Plan presently provides
for discretionary employer contributions. There were no contributions in 1997.
13. SUBSEQUENT EVENTS (UNAUDITED)
During January 1998, the Board of Directors and SFX Broadcasting, as sole
stockholder, approved and adopted a stock option and restricted stock plan
providing for the issuance of restricted shares of the Company's Class A Common
Stock and options to purchase shares of the Company's Class A Common Stock
totaling up to 2,000,000 shares.
During January 1998, in connection with certain executive officers
entering into employment agreements with the Company, the Board of Directors,
upon recommendation of the Compensation Committee, approved the sale of an
aggregate of 650,000 shares of the Company's Class B Common Stock and 90,000
shares of the Company's Class A Common Stock to certain executive officers for
a purchase price of $2.00 per share. Such shares will be issued on or about the
effective date of the Spin-Off. A substantial non-cash charge to earnings will
be recorded by the Company at the time of the Spin-Off based on then fair value
of such shares.
In addition, the Board, upon recommendation of the Compensation Committee,
has approved the issuance of stock options exercisable for 1,002,500 shares of
the Company's Class A Common Stock. Of these options, 252,500 will vest over
three years and will have an exercise price of $5.50 per share, and the
remainder will vest over five years and will have an exercise price of $30.50.
The Company will record non-cash compensation charges over the three-year
period with respect to the 252,000 options to be issued to the extent that the
fair value of the Company's Class A Common Stock exceeds the exercise price of
such options.
Further, the Board of Directors has approved the issuance of shares of the
Company's Class A Common Stock to holders of stock options or stock
appreciation rights ("SARs") of SFX Broadcasting as of the Spin-Off record
date, whether or not vested. The issuance was approved to allow such holders of
these options or SARs to participate in the Spin-Off in a similar manner to
holders of SFX Broadcasting's Class A Common Stock. Additionally, many of the
option holders will become officers, directors and employees of the Company.
In connection with the acquisition of Meadows Music Theater, Broadcasting
obtained an option, as subsequently amended, to repurchase 247,177 shares of
its Class A common stock (the "Meadows Shares") for an aggregate purchase price
of $8.2 million (the "Meadow Repurchase"). However, Broadcasting was restricted
from exercising the Meadows Repurchase by certain loan covenants and other
restrictions. Pursuant to the terms of the Broadcasting Merger agreement, since
the Meadows Shares were outstanding at the effective time of the Broadcasting
Merger, Working Capital was decreased by approximately $10.3 Million.
In January 1998, Mr. Sillerman committed to finance the $8.2 million
exercise price of the Meadows Repurchase in order to offset the $10.3 million
reduction to Working Capital. In consideration for his commitment, the board of
directors of Broadcasting agreed that Mr. Sillerman would receive approximately
the number of shares of SFX's Class A common stock to be issued in the Spin-Off
with respect to the Meadows Shares. At the time Broadcasting accepted Mr.
Sillerman's commitment, the board of directors of Broadcasting valued SFX's
Class A common stock to be issued
F-40
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in the Spin-Off at $4.20 per share, the value attributed to such shares in the
fairness opinion obtained by Broadcasting in connection with the Broadcasting
Merger. The transaction was approved by Broadcasting's board of directors,
including the independent directors.
In April 1998, Broadcasting assigned the option for the Meadows Shares to
an unaffiliated third party and, in connection therewith, agreed to pay such
party a fee of $75,000. Mr. Sillerman subsequently advanced such party the $8.2
million exercise price for the Meadows Repurchase, the repayment of which
became due upon the Broadcasting Merger. The third party has exercised the
option and transferred to Mr. Sillerman SFX's Class A common stock issued in
the Spin-Off with respect to the Meadows Shares. The Meadows Shares were
tendered in the Broadcasting Merger by the third party in exchange for the per
share Broadcasting Merger consideration of $75. The third party subsequently
repaid the advance from Mr. Sillerman and transferred $10.3 million, the
remainder of such consideration net of the third party fee, to SFX.
F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Connecticut Performing Arts, Inc. and
the Partners of Connecticut Performing Arts Partners:
We have audited the accompanying combined balance sheets of Connecticut
Performing Arts, Inc. and Connecticut Performing Arts Partners (collectively,
the Company) as of December 31, 1995 and 1996, and the related combined
statements of operations, shareholders' and partners' equity (deficit) and cash
flows for the years then ended. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1995 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 21, 1997
F-42
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------
1995 1996
--------------- ---------------
<S> <C> <C>
ASSETS:
Current assets:
Cash ................................................................ $ 63,061 $ 6,778
Accounts receivable ................................................. 192,382 152,205
Accounts receivable -- related party ................................ 124,700 226,265
Prepaid interest .................................................... 54,982 54,279
Prepaid insurance ................................................... 69,797 87,869
Other current assets ................................................ 21,156 60,784
Deposit ............................................................. -- 110,000
Subscription receivable ............................................. 100 100
----------- ------------
Total current assets ............................................. 526,178 698,280
----------- ------------
Plant and equipment:
Building and building improvements .................................. 14,127,632 14,208,153
Furniture, fixtures and equipment ................................... 1,899,041 1,973,911
Leasehold improvements .............................................. 1,221,069 1,224,071
----------- ------------
17,247,742 17,406,135
Less: Accumulated depreciation and amortization ..................... (408,897) (1,620,297)
----------- ------------
16,838,845 15,785,838
----------- ------------
Other assets:
Deferred costs, net of accumulated amortization of $165,300 and
$503,766 in 1995 and 1996, respectively ............................ 2,453,553 2,115,087
Deposit ............................................................. 110,000 --
Other ............................................................... -- 2,332
----------- ------------
Total other assets ............................................... 2,563,553 2,117,419
----------- ------------
$19,928,576 $ 18,601,537
=========== ============
LIABILITIES AND SHAREHOLDERS' AND PARTNERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable .................................................... $ 915,280 $ 908,986
Accrued expenses .................................................... 1,356,132 655,207
Deferred income ..................................................... 679,476 737,440
Notes payable ....................................................... 1,100,000 1,450,000
Current portion of long-term debt and capital lease obligations ..... 493,362 824,800
----------- ------------
Total current liabilities ........................................ 4,544,250 4,576,433
----------- ------------
Long-term debt and capital lease obligations,
less current portion ............................................... 13,398,700 13,982,196
----------- ------------
COMMITMENTS AND CONTINGENCIES
(Notes 2, 4, 5, 6, 9 and 10)
Shareholders' and Partners' Equity (Deficit):
Shareholders' equity--
Common stock ....................................................... 1,000 1,000
Series A Preferred Stock ........................................... 1,346,341 1,372,174
Series B Preferred Stock ........................................... 1,250,000 1,250,000
Accumulated deficit ................................................ (273,114) (1,999,823)
Partners' equity (deficit) .......................................... (338,601) (580,443)
----------- ------------
Total shareholders' and partners' equity (deficit) ............... 1,985,626 42,908
----------- ------------
$19,928,576 $ 18,601,537
=========== ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-43
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996
---------------- ----------------
<S> <C> <C>
Operating revenues:
Concert revenue ....................... $ 6,830,681 $ 8,122,797
Cost of concerts ...................... (5,524,043) (6,191,777)
------------ ------------
1,306,638 1,931,020
Ancillary income ...................... 1,431,577 2,052,592
------------ ------------
2,738,215 3,983,612
------------ ------------
Operating expenses:
General and administrative ............ 3,068,162 3,080,914
Depreciation and amortization ......... 574,197 1,549,894
Other ................................. 20,046 33,577
------------ ------------
3,662,405 4,664,385
------------ ------------
Loss from operations ............... (924,190) (680,773)
Other income (expense):
Interest income ....................... 428,869 30,015
Interest expense ...................... (509,225) (1,274,660)
------------ ------------
Loss before income taxes ........... (1,004,546) (1,925,418)
Provision for income taxes ............ 10,796 17,300
------------ ------------
Net loss ........................... $ (1,015,342) $ (1,942,718)
============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-44
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED STATEMENTS OF SHAREHOLDERS'
AND PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
------------------------------------------- PARTNERS'
COMMON PREFERRED ACCUMULATED EQUITY
STOCK STOCK DEFICIT (DEFICIT)
--------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 .................... $1,000 $2,500,000 $ (32) $ 500,000
Accretion of Series A Preferred Stock ......... -- 96,341 (96,341) --
Net loss ...................................... -- -- (176,741) (838,601)
------ ---------- ------------ ----------
Balance, December 31, 1995 .................... 1,000 2,596,341 (273,114) (338,601)
Accretion of Series A Preferred Stock ......... -- 25,833 (25,833) --
Net loss ...................................... -- -- (1,700,876) (241,842)
------ ---------- ------------ ----------
Balance, December 31, 1996 .................... $1,000 $2,622,174 $ (1,999,823) $ (580,443)
====== ========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-45
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ....................................................... $ (1,015,342) $ (1,942,718)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................. 574,197 1,549,894
Loss on disposal of equipment ................................. -- 1,031
Changes in operating assets and liabilities:
Accounts receivable ........................................... (192,382) 40,177
Accounts receivable -- related party .......................... -- (101,565)
Prepaid expenses and other assets ............................. (143,703) (59,329)
Accounts payable .............................................. -- (6,294)
Accrued expenses .............................................. 505,199 150,008
Deferred income ............................................... 679,476 57,964
------------- -------------
Net cash provided by (used in) operating activities ......... 407,445 (310,832)
------------- -------------
Cash flows from investing activities:
Purchases of plant and equipment .............................. (23,242,858) (159,452)
Grant proceeds ................................................ 7,680,161 --
Deferred start-up costs ....................................... (264,975) --
Accounts receivable -- related party .......................... 827,170 --
Accounts payable .............................................. (438,350) --
------------- -------------
Net cash used in investing activities ...................... (15,438,852) (159,452)
------------- -------------
Cash flows from financing activities:
Proceeds from borrowings on notes payable and long-term
debt ........................................................ 13,943,316 1,278,068
Repayments of notes payable, long-term debt and capital
lease obligations ........................................... (176,917) (864,067)
Proceeds from sales of common and preferred stock ............. 900 --
------------- -------------
Net cash provided by financing activities ................... 13,767,299 414,001
------------- -------------
Net decrease in cash ........................................... (1,264,108) (56,283)
Cash, beginning of year ........................................ 1,327,169 63,061
------------- -------------
Cash, end of year .............................................. $ 63,061 $ 6,778
============= =============
Supplemental Disclosures:
Cash Paid For--
Interest ...................................................... $ 554,342 $ 1,108,291
============= =============
Income taxes .................................................. $ 10,796 $ 17,300
============= =============
Noncash Transactions--
Capital lease obligations ..................................... $ 59,479 $ --
============= =============
Series A Preferred Stock accretion ............................ $ 96,341 $ 25,833
============= =============
Conversion of accrued expense for equipment purchase to
note payable ................................................ $ -- $ 850,933
============= =============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-46
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Operations --
Connecticut Performing Arts, Inc. (the Company) and Connecticut Performing
Arts Partners (the Partnership) were incorporated and formed, respectively, in
1993 pursuant to the laws of the State of Connecticut. The Company's
shareholders and the Partnership's partners are Nederlander of Connecticut,
Inc. and Connecticut Amphitheater Development Corporation. The Company's
shareholders and the Partnership's partners changed in March 1997 (see Note
10). The Company and Partnership are engaged in the ownership and operation of
an amphitheater in Hartford, Connecticut. The construction of the amphitheater
commenced in December 1994 and amphitheater operations commenced in July 1995.
Principles of combination --
The combined financial statements include the accounts of the Company and
the Partnership after elimination of intercompany accounts and transactions.
Use of estimates in the preparation of financial statements --
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Plant and equipment --
Plant and equipment is carried at cost. Major additions and betterments
are capitalized, while replacements, maintenance and repairs which do not
extend the lives of the assets are charged to operations as incurred. Upon the
disposition of plant and equipment, any resulting gain or loss is recognized in
the statement of operations as a component of income.
The Company received grant funds from the City of Hartford and Connecticut
Development Authority related to the construction of the amphitheater (see Note
4). Such amounts have been accounted for as a reduction in the cost of the
amphitheater.
Depreciation of plant and equipment is provided for, commencing when such
assets become operational, using straight-line and accelerated methods over the
following estimated useful lives:
<TABLE>
<CAPTION>
USEFUL LIVES
-------------------
<S> <C>
Building and building improvements .......... 39 years
Furniture, fixtures and equipment ........... 4-7 years
Leasehold improvements ...................... Shorter of asset
life or lease term
</TABLE>
Effective January 1, 1996, the Company and Partnership adopted Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which had no
effect upon adoption. This statement requires that long-lived assets and
certain identifiable intangible assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
F-47
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Deferred costs --
Deferred costs consist of start-up costs being amortized over a period of
5 years and deferred financing costs being amortized over the term of the
related debt (24 years and 4 months). As of December 31, 1995 and 1996 deferred
costs were as follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Deferred start-up ....................... $1,452,669 $1,452,669
Deferred financing ...................... 1,166,184 1,166,184
---------- ----------
2,618,853 2,618,853
Less: Accumulated amortization .......... (165,300) (503,766)
---------- ----------
$2,453,553 $2,115,087
========== ==========
</TABLE>
Deposit --
The deposit represents a deposit held by the City of Hartford related to
an employment agreement between the Partnership and the City of Hartford for
priority hiring of Hartford residents and utilization of minority business
enterprise or women business enterprise contractors and vendors in the future
operation of the amphitheater. The deposit will be returned to the Partnership
in December 1997 if the Partnership is in compliance with the employment
agreement. As of December 31, 1996, the Partnership has compensated the City of
Hartford for noncompliance with the terms of the agreement in connection with
the construction of the facility and the hiring of contractors and the City of
Hartford has agreed to make no additional claims with respect to this matter.
Income taxes --
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". This
statement requires a company to recognize deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
a company's financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statement carrying amounts and the tax bases of assets and
liabilities and net operating loss carryforwards available for tax reporting
purposes, using the applicable tax rates for the years in which the differences
are expected to reverse. A valuation allowance is recorded on deferred tax
assets unless realization is more likely than not.
The income tax effects of the operations of the Partnership accrue to the
partners in accordance with the terms of the Partnership agreement and are not
reflected in the accompanying combined financial statements.
Revenue recognition --
Revenue from ticket sales is recognized upon occurrence of the event.
Advance ticket sales are recorded as deferred income until the event occurs.
Ticket revenue is recorded net of payments in lieu of taxes under the terms of
the City of Hartford lease (see Note 6) and admission taxes.
Advertising --
The Company expenses the cost of advertising when the specific event takes
place. Advertising expense was $639,424 and $689,160 for the years ended
December 31, 1996 and 1995, respectively.
F-48
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SHAREHOLDERS' EQUITY:
Common stock --
The Company is authorized to issue 5,000 shares of common stock with no
par value. The subscription receivable of $100 as of December 31, 1996
represents the amount due from shareholders for 100 shares of common stock at
$10 per share, of which $900 was received in February 1995.
Preferred stock --
The Company is authorized to issue 295,000 shares of preferred stock at no
par value. As of December 31, 1996 and 1995, 125,000 of such shares have been
designated as Series A Preferred Stock and 125,000 of such shares have been
designated as Series B Preferred Stock. Series A and Series B Preferred Stock
are not entitled to dividends and have liquidation rights of $10 per share.
Series A Preferred Stock is mandatorily redeemable at the rate of 20,835
shares commencing December 31, 1995 (the Initial Redemption Date) and an
aggregate of 20,833 shares on each six month anniversary of the Initial
Redemption Date until all 125,000 shares of the Series A Preferred Stock have
been redeemed, at $11.445 per share. As of December 31, 1996, no shares of
Series A Preferred Stock had been redeemed. The Company is accreting the
difference between the redemption price and the proceeds per share over the
period from the issuance date to the respective scheduled redemption dates.
Series B Preferred Stock is mandatorily redeemable at a per share price of
$10 in whole or in part at the option of the Company at any such time as
legally available funds, as defined in the resolution establishing and
designating the preferred stock, are available. On the tenth anniversary of the
completion date of the amphitheater any Series B Preferred Stock outstanding
shall be redeemed by the Company at a per share price of $10.
The Series A and Series B Preferred Stock will not be redeemed if such
redemption would result in a violation of the provisions of the Connecticut
Development Authority assistance agreement (see Note 4) or the mortgage loan
agreement (see Note 5).
3. PARTNERS' EQUITY:
In 1993, Nederlander of Connecticut, Inc. and Connecticut Amphitheater
Development Corporation each made an initial capital contribution of $250,000.
4. GRANT FUNDS:
Connecticut Development Authority (CDA) Assistance Agreement --
On September 12, 1994, the CDA entered into a non-recourse assistance
agreement with the Company whereby the CDA provided grant funds for the
construction and development of an amphitheater in the City of Hartford (the
Project) through the issuance of State of Connecticut General Fund Obligation
Bonds (GFO Bonds). The Company received bond proceeds of $8,863,000, which
amount is net of CDA bond issuance costs of $593,000 and withholdings of
$429,000 by the CDA to cover the expected operating shortfall, as discussed
below, through December 31, 1995. Commencing January 1, 1996, the annual tax
revenues derived from the operation of the amphitheater are utilized to satisfy
the annual debt service requirements under the GFO Bonds. In the event that
annual tax revenues derived from the operation of the amphitheater do not equal
annual debt service requirements under the GFO Bonds, the Company must deposit
the lesser of the operating shortfall, as defined, or 10% of the annual debt
service under the GFO Bonds. An operating shortfall did not exist for the year
ended December 31, 1996. The GFO Bonds mature on October 15, 2024 and have an
average coupon rate of 6.33%. Annual debt service requirements on the GFO Bonds
for each of the next five years and thereafter are as follows:
F-49
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. GRANT FUNDS: (CONTINUED)
<TABLE>
<CAPTION>
YEAR AMOUNT
- ----------------------- -------------
<S> <C>
1997 ............... $ 740,556
1998 ............... 738,906
1999 ............... 736,656
2000 ............... 738,856
2001 ............... 740,293
Thereafter ......... 17,140,363
-----------
$20,835,630
===========
</TABLE>
The assistance agreement requires an annual attendance of at least 400,000
for each of the first three years of operations. It will not be considered an
event of default if the annual attendance is less than 400,000 provided that no
operating shortfall exists for that year or if an operating shortfall exists
such amount has been deposited by the Company. If there is an event of default,
the CDA may foreclose on the construction mortgage loan (see Note 5). If the
amphitheater's operations are relocated outside of Connecticut during the ten
year period subsequent to the assistance agreement or during the period of the
construction mortgage loan, the full amount of the grant funds plus a penalty
of 5% must be repaid to the State of Connecticut.
City of Hartford Grant Funds --
On February 15, 1995 the Company entered into an agreement with the City
of Hartford whereby the City of Hartford provided grant funds of $2,050,000 for
the remediation and closure of a solid waste disposal area near the
amphitheater. As of December 31, 1995 all funds had been received by the
Company.
5. NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable --
In October 1995, the Company entered into two notes payable with related
parties for an aggregate of $2,000,000. As of December 31, 1996 and 1995,
$1,450,000 and $1,100,000, respectively was outstanding on these notes. The
notes bear interest at 6.6% per annum and are payable upon demand.
CDA mortgage loan --
On September 12, 1994, CDA entered into a construction mortgage loan
agreement for $7,685,000 with the Company. The purpose of the loan was to
finance a portion of the construction and development of the amphitheater. The
loan agreement contains substantially the same covenants as the CDA assistance
agreement (see Note 4). As of December 31, 1995, proceeds of $6,519,000, which
amount is net of deferred financing costs of approximately $1,166,000, had been
received by the Company.
F-50
<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
F-51
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE AND LONG-TERM DEBT: (CONTINUED)
Initial Equipment). The Initial Equipment was purchased by OE at a cost of
$850,933 and the Partnership was obligated to reimburse OE for the cost of the
equipment. Accordingly, this amount was reflected as an accrued expense in the
accompanying combined balance sheet as of December 31, 1995. In 1996, in
connection with the amended concession agreement, the $850,933, and an
additional $33,067 related to 1996 equipment purchases, was converted to a note
payable for $884,000. The note bears interest at the rate of 9.25% per annum
and provides for monthly principal and interest payments of $10,185 to OE,
however, the Partnership is not required to make any principal or interest
payments to the extent that 5% of receipts, as defined, in any month are less
than the amount of the payment due. As of December 31, 1996, future principal
payments to OE by the Partnership are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------ ----------
<S> <C>
1997 ................ $ 42,210
1998 ................ 46,284
1999 ................ 50,751
2000 ................ 55,650
2001 ................ 61,022
Thereafter .......... 628,083
--------
$884,000
========
</TABLE>
Conn Ticketing Company (CTC) Promissory Note Payable --
On April 1, 1995, CTC (a company related to the Company and the
Partnership via common ownership) entered into a promissory note agreement with
ProTix Connecticut General Partnership (PTCGP). Under the terms of the
agreement, CTC borrowed $825,000 at 9.375% per annum from PTCGP. Principal and
interest are repayable by CTC in nine annual installments of $139,714 which
commenced March 31, 1996. In May 1995, CTC loaned $824,500 to the Company which
is also repayable in nine annual installments of principal and interest of
$139,714. The PTCGP loan to CTC is secured by CTC's receivable from the
Company. As of December 31, 1996, future principal payments to CTC by the
Company are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------ ----------
<S> <C>
1997 ................ $ 68,217
1998 ................ 74,613
1999 ................ 81,608
2000 ................ 89,259
2001 ................ 97,627
Thereafter .......... 351,306
--------
$762,630
========
</TABLE>
In January 1995, the Partnership entered into a ticket and sales agreement
with PTCGP through December 31, 2004. Under the terms of the agreement, PTCGP
pays the Partnership an annual fee of $140,000 commencing in March 1996.
Proceeds from the annual fee for the first nine years will be used by the
Partnership to make the annual principal and interest payment to CTC.
Line of credit --
The Partnership has a line of credit in the amount of $2,000,000, which
bears interest at 8.25% per annum, with a bank. As of December 31, 1996,
$395,000 was outstanding on the line of credit.
F-52
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE AND LONG-TERM DEBT: (CONTINUED)
Capital lease obligations --
The Partnership entered into capital leases for certain office equipment.
The leases expire in 1998 and 2000. As of December 31, 1996 future principal
payments are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------ ----------
<S> <C>
1997 .......... $16,984
1998 .......... 13,905
1999 .......... 4,550
2000 .......... 4,213
-------
$39,652
=======
</TABLE>
6. LAND AND BUILDING LEASES:
Land lease agreement between the City of Hartford and the Partnership --
The Partnership entered into a 40 year lease agreement for certain land
with the City of Hartford, Connecticut on September 14, 1994. The lease
agreement provides for two successive options to extend the term of the lease
for a period of ten years each. The Partnership pays an annual basic rent of
$50,000 commencing July 1, 1995; and additional rent payments in lieu of real
estate taxes (PILOT) in an amount equal to 2% of all admission receipts, food
and beverage revenue, merchandise revenue and parking receipts that exceed 10%
of the total admission receipts, which amount is to be net of any surcharges
and sales or like taxes levied by governmental authorities on the price of such
items.
Assignment of lease by the Partnership to the Company --
The above lease was subsequently assigned by the Partnership to the
Company on September 22, 1994 for consideration of $1.
Lease and sublease agreement between the Company and the Partnership --
On October 19, 1994, the Company subleased the land and buildings and
improvements thereon to the Partnership for a period of 40 years commencing
upon substantial completion of the amphitheater. The sublease agreement
provides for two successive options to extend the term of the lease for a
period of ten years each. The sublease agreement provides for the Partnership
to pay rent to the Company in amounts ranging from $804,000 to $831,100 per
annum for the first 25 years and $100,000 per annum thereafter including the
option periods. Additional rent of six semi-annual installments of $238,452 is
also payable by the Partnership commencing six months after the start of
operations. Subsequent to the six semi-annual installments an aggregate of
$1,250,000 will be payable in semi-annual installments based on available cash
flow of the Partnership, as defined. Additionally, the Partnership is also
required to pay the annual basic rent ($50,000) and any additional payments in
lieu of taxes under the terms of the lease agreement between the City of
Hartford and the Partnership described above. The Partnership will also pay
additional rent equal to principal and interest payable by the Company to the
concession company for a previously arranged concessionaire arrangement (see
Note 5). The accompanying combined statement of operations for the year ended
December 31, 1996 includes rent expense of $50,000 which represents the
aggregate amount due to the City of Hartford under the terms of the above
agreements.
7. INCOME TAXES:
The provision for income taxes for the year ended December 31, 1996
represents minimum state income taxes for the Company. As of December 31, 1996,
the Company has a net deferred tax asset of
F-53
<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.
0
In March 1997, three subsidiaries of SFX Broadcasting, Inc.
(Broadcasting), which were created for such purpose, were merged into
Nederlander of Connecticut, Inc., Connecticut Amphitheater Development
Corporation and QN Corp., a newly formed entity. In connection with the merger,
the name of Nederlander of Connecticut, Inc., was changed to NOC, Inc. (NOC)
and the directors of NOC, Inc., Connecticut Amphitheater Development
Corporation (CADCO) and QN Corp. (QN) were replaced with directors of the
Broadcasting acquisition subsidiaries. Each outstanding share of stock of NOC,
CADCO and QN was canceled and exchanged for an aggregate of $1 million cash and
shares of Broadcasting Class A Common Stock valued at $9 million, subject to
certain adjustments. The shares are subject to a put provision between the
second and seventh anniversary of the closing whereby the holder can put each
share back to Broadcasting for the per share value of Broadcasting stock as of
the merger closing date, as defined, less 10%. Additionally, the shares may be
called by Broadcasting during the same period for an amount equal to the per
share value of the Broadcasting stock as of the merger closing date, as
defined, plus 10%. As consideration for approval of the transaction, the CDA
received shares of Broadcasting stock valued at approximately $361,000.
F-54
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of SFX Broadcasting, Inc.:
We have audited the accompanying combined balance sheets of DEER CREEK
PARTNERS, L.P. (formerly Sand Creek Partners, L.P.) and MURAT CENTRE, L.P., as
of December 31, 1996 and 1995, and the related combined statements of
operations and partners' equity (deficit) and cash flows for the years ended
December 31, 1996 and 1995. These financial statements are the responsibility
of the Partnerships' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Deer Creek
Partners, L.P. and Murat Centre, L.P. as of December 31, 1996 and 1995, and the
combined results of their operations and their cash flows for the years ended
December 31, 1996 and 1995 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana
September 29, 1997.
F-55
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------- --------------
1995 1996 1997
------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................... $ 1,894,533 $ 876,776 $ 1,704,847
Accounts receivable ................................. 138,548 155,929 345,891
Prepaid show expense ................................ -- 42,114 95,918
Prepaid expenses .................................... 91,919 118,152 169,771
----------- ----------- -----------
Total current assets ............................. 2,125,000 1,192,971 2,316,427
----------- ----------- -----------
Property and equipment:
Land ................................................ 2,428,770 2,428,770 2,428,771
Buildings ........................................... 6,155,979 6,155,979 6,155,979
Site improvements ................................... 2,328,369 2,230,594 2,238,898
Leasehold improvements .............................. 5,270,038 9,663,357 9,663,357
Furniture and equipment ............................. 1,070,547 1,722,874 1,731,720
----------- ----------- -----------
17,253,703 22,201,574 22,218,725
Less: Accumulated depreciation ...................... 2,167,567 2,850,077 3,039,185
----------- ----------- -----------
Total property and equipment ..................... 15,086,136 19,351,497 19,179,540
----------- ----------- -----------
Other Assets:
Cash surrender value--life insurance policy ......... 62,819 71,815 71,814
Unamortized loan acquisition costs .................. 93,439 350,055 343,841
----------- ----------- -----------
Total other assets ............................... 156,258 421,870 415,655
----------- ----------- -----------
TOTAL ASSETS ..................................... $17,367,394 $20,966,338 $21,911,622
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------- ---------------
1995 1996 1997
--------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities:
Current portion of notes and capital lease obligation..... $ 796,391 $ 611,127 $ 595,503
Current portion of deferred ticket revenue ............... 542,420 841,476 2,854,155
Accounts payable ......................................... 472,365 520,663 1,228,317
Accrued interest ......................................... 663,391 299,600 389,600
Accrued property taxes ................................... 125,524 280,734 361,983
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 5,429,558
------------ ------------ ------------
Long-term Liabilities:
Notes payable and capital lease obligation,
net of current portion .................................. 12,998,738 17,266,768 17,160,968
Loan, net of current portion (Note 5) .................... -- 99,200 99,200
Deferred ticket revenue, net of current portion .......... -- 168,833 168,833
------------ ------------ ------------
Total long-term liabilities ........................... 12,998,738 17,534,801 17,429,001
------------ ------------ ------------
Partners' equity (deficit):
Contributed capital ...................................... -- 2,200,000 2,200,000
Undistributed earnings (loss) ............................ (1,572,719) (1,406,904) (3,146,937)
------------ ------------ ------------
(1,572,719) 793,096 (946,937)
------------ ------------ ------------
TOTAL LIABILITIES AND PARTNERS'
EQUITY ............................................... $ 17,367,394 $ 20,966,338 $ 21,911,622
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-57
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
COMBINED STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31
--------------------------------- ------------------------------
1996 1996 1997
1995 ---------------- ---------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenues:
Concert revenue ......................................... $11,073,491 $14,194,502 $ 1,338,260 $1,670,645
Cost of concerts ........................................ 8,939,022 10,724,059 1,206,013 1,328,882
----------- ----------- ----------- ----------
2,134,469 3,470,443 132,247 341,763
Ancillary income:
Royalty commissions ..................................... 1,706,458 1,799,950 48,840 109,840
Corporate sponsorships .................................. 959,518 1,056,161 -- 14,784
Other ancillary income .................................. 789,433 1,375,528 71,025 195,771
----------- ----------- ----------- ----------
5,589,878 7,702,082 119,865 320,395
Operating expenses:
General & administrative ................................ 2,419,679 3,452,990 580,897 872,445
Depreciation & amortization ............................. 343,567 783,167 108,373 195,320
Other operating expenses ................................ 249,812 471,126 -- --
----------- ----------- ----------- ----------
3,013,058 4,707,283 689,270 1,067,765
Income from operations .................................. 2,576,820 2,994,799 (437,158) (405,607)
Other income (expense):
Interest and other income ............................... 86,034 84,123 16,246 25,639
Interest expense ........................................ (2,203,690) (1,549,579) (273,335) (400,469)
----------- ----------- ----------- ----------
Net Income (Loss) .................................... $ 459,164 $ 1,529,343 $ (694,247) $(780,437)
Partners' Equity (Deficit) at beginning of year ......... $(1,857,603) $(1,572,719) $(1,572,719) $(793,096)
Contributions ........................................... -- 2,200,000 2,200,000 --
Distributions ........................................... (174,280) (1,363,528) (563,529) (959,596)
----------- ----------- ----------- ----------
Partners' Equity (Deficit) at end of year ............... $(1,572,719) $ 793,096 $ (630,495) $(946,937)
=========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-58
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31
--------------------------------- -----------------------------
1995 1996 1996 1997
--------------- --------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating Activities:
Net income ........................................... $ 459,164 $1,529,343 $ (694,249) $ (780,436)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................... 461,678 783,167 108,373 195,320
Decrease (increase) in certain assets:
Accounts receivable ................................. (45,317) (17,381) (219,190) (189,962)
Prepaid show expenses ............................... -- (42,114) (88,012) (53,804)
Prepaid expenses and other .......................... 746,307 (33,381) (77,135) (51,619)
Increase (decrease) in certain liabilities:
Accounts payable, construction payable and
other accrued liabilities ......................... 3,424,461 (3,087,135) (2,568,202) 738,263
Deferred ticket revenue ............................. (1,266,654) 467,889 2,205,631 2,012,679
Accrued interest .................................... 389,251 (363,791) (663,391) 90,000
Other ............................................... (75,407) 44,852 -- --
---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities ....................................... 4,093,483 (718,551) (1,996,175) 1,960,441
---------- ---------- ---------- ----------
Investing Activities:
Capital expenditures ................................ (6,713,889) (5,197,260) (3,738,002) (17,151)
---------- ---------- ---------- ----------
Net cash used by investing activities ............... (6,713,889) (5,197,260) (3,738,002) (17,151)
---------- ---------- ---------- ----------
Financing Activities:
Net proceeds from borrowings ........................ 3,060,087 5,057,249 3,600,229 --
Capital contributions ............................... -- 2,200,000 2,200,000 --
Department of Metropolitan Development
Grant ............................................. 761,014 338,986 338,986 --
Principal payments on notes and loan payable
and capital leases ................................ (20,308) (1,334,653) (47,167) (155,623)
Distributions to partners ........................... (174,280) (1,363,528) (563,529) (959,596)
---------- ---------- ---------- ----------
Net cash provided by financing activities ......... 3,626,513 4,898,054 5,528,519 (1,115,219)
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents ......................................... 1,006,107 (1,017,757) (205,658) 828,071
Cash and cash equivalents:
Beginning of period ................................. 888,426 1,894,533 1,894,533 876,776
---------- ---------- ---------- ----------
End of period ....................................... $1,894,533 $ 876,776 $1,688,875 $1,704,847
========== ========== ========== ==========
Supplemental disclosures:
Cash paid for interest .............................. $1,148,049 $1,912,494 $ 936,726 $ 310,469
Equipment acquired under capital leases ............. -- 139,000 137,033 $ --
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-59
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS TO MARCH 31, 1997 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
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.
F-60
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS TO MARCH 31, 1997 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
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.
e. Deferred Revenue
Deferred revenue includes individual show ticket revenue, season ticket
revenue, and corporate box seat revenue received in advance of events or the
next concert season and will be recognized over the period in which the shows
are held. A portion of the deferred revenue was derived from the bartering of
tickets for goods and services related to the Murat renovation. Barter
transactions are recorded at the estimated fair value of the materials or
service received.
f. Income Taxes
No provision for Federal or state income taxes is required because the
partners are taxed directly on their distributable shares of the Partnerships'
income or loss.
g. Cash Equivalents
The Partnerships consider all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
h. Advertising and Promotion
Advertising and promotion costs are expensed at the time the related
promotional event is held. The costs were approximately $930,000 in 1996 and
$595,000 in 1995. For the three month periods ended March 31, 1997 and 1996
these costs were approximately $70,000 and $172,000, respectively.
i. Interim Financial Statements
The unaudited interim information as of March 31, 1997 and for the three
months ended March 31, 1996 and 1997 has been prepared on the same basis as the
annual financial statements and, in the opinion of the Company's management,
reflects normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. Interim results are not necessarily
indicative of results for a full year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
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
</TABLE>
F-61
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS TO MARCH 31, 1997 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- -------------
<S> <C> <C>
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
Note payable with interest calculated annually and is equal to the
lesser of (1) $.10 per ticket sold during fiscal year, (2) prime
plus 1% or (3) remaining net cash flow as defined in Note 3;
interest and principal is paid at the lesser of $.10 per ticket sold
during fiscal year or remaining net cash flow as defined in Note
3; principal is also required to be paid down upon sale of
certain Partnership assets or the refinancing of certain
Partnership loans; subordinate to above bank note payable .......... -- 1,000,000
Other .............................................................. 90,940 --
DEER CREEK PARTNERSHIP
Note payable with interest calculated annually at 9.5%; payable in
quarterly installments of approximately $353,000, including
interest, through the year 2010; secured by substantially all of
the assets of the partnership and is guaranteed up to 50%,
jointly and severally, by two officers of Sunshine Promotions,
Inc. (Sunshine), and by Sunshine (See Note 6.) ..................... -- 10,019,361
Note payable with interest at 11.18% payable in monthly
installments and contingent interest based upon net cash flow;
secured by substantially all of the assets of the Partnership;
principal due 1999 with the option for the holder to accelerate
the maturity date to 1996. ......................................... 11,041,024 --
Capital leases ...................................................... 16,000 130,481
----------- -----------
Total notes payable and capital lease obligations ................. 13,795,129 17,877,894
Less -- Current portion ........................................... 796,391 611,127
----------- -----------
$12,998,738 $17,266,768
=========== ===========
</TABLE>
Principal payments made on the Murat Partnership bank term note during
1996 totaled $71,947. The Murat Partnership's 1996 net cash flow (see Note 3)
did not require additional principal payments to be made on its notes payable.
The bank term note contains cash flow and leverage ratio covenants. The Murat
Partnership was not in compliance with the cash flow covenant as of December
31, 1996, but received a waiver dated March 31, 1997 for the December 31, 1996
calculation. Provisions of the $800,000 note payable require the Murat
Partnership to continue making payments after the principal has been paid down
equal to the lesser of $.15 per ticket sold during the fiscal year or remaining
cash flow, as defined in Note 3. These payments are to be made to a
not-for-profit foundation and will be designated for remodeling and upkeep of
the Theatre.
Under the terms of the note payable in 1995, the Deer Creek Partnership
incurred contingent interest, which was based on cash flow, of $885,000. During
1995, Deer Creek Partnership's current
F-62
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS TO MARCH 31, 1997 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
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.
Principal maturities of notes payable for the next 5 years, excluding
principal paydowns resulting from excess cash flow:
<TABLE>
<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>
<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;
F-63
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS TO MARCH 31, 1997 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
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.
5. AGREEMENTS WITH OUTSIDE VENDORS
Effective February 1996, the Murat Partnership entered into a ten year
agreement with a caterer to provide exclusive catering services at the Theatre.
The Murat Partnership is entitled to a commission based upon a percentage of
the caterer's net sales. As part of the agreement the caterer loaned the Murat
Partnership $165,000, at a nominal interest rate, for leasehold improvements
necessary to provide catering services. In February 1996 the Murat Partnership
began repaying the loan ratably over 5 years.
Effective February 1996, the Murat Partnership entered into a ten year
agreement with a concessionaire for the exclusive license to sell concession
food and beverages at Theatre events. The Murat Partnership is entitled to
royalty commissions based upon a percentage of the concessionaire's gross
receipts. The concessionaire has paid the Murat Partnership $50,000 to be used
for leasehold improvements (which are being depreciated over 30 years) which
will be used by the concessionaire. This payment has been recorded as deferred
income and is being amortized over the term of the agreement. On March 28, 1997
the rights to the concession agreement were acquired by the caterer under the
same terms as the original concession agreement.
Effective March 1996, the Murat Partnership entered into a five year
agreement with a stagehand union allowing the union to provide services at all
ticketed shows held in the main theater other than the broadway series. The
agreement, among other items, sets minimum hours per show and hourly wages to
be paid to union members. It also sets forth duties which must be performed
solely by union members. A separate agreement between the stagehand union and
Pace Theatrical Group, Inc. (see Note 7) governs the use of union stagehands
for the broadway series.
Effective February 1996, the Murat Partnership entered into a one year
agreement granting another party the right to manage and operate the Theatre
parking lot.
In July 1988, the Deer Creek Partnership entered into a ten-year agreement
with a concessionaire for the exclusive license to sell food and beverages at
Deer Creek events. The Deer Creek Partnership is entitled to royalty
commissions based upon a percentage of the concessionaire's gross receipts.
The Deer Creek Partnership has an agreement with another concessionaire
for an exclusive license to sell consigned nonconsumable novelties and programs
at Deer Creek events. The agreement expires on October 31, 2001. The Deer Creek
Partnership is entitled to royalty commissions based on the concessionaire's
gross receipts.
Total revenues related to the Deer Creek and Murat Center Partnership's
vendor agreements were approximately $1.8 million and $1.7 million in 1996 and
1995, respectively. For the three month periods ended March 31, 1997 and 1996,
there was no revenue related to these agreements.
F-64
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS TO MARCH 31, 1997 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
6. MANAGEMENT AGREEMENTS
The Deer Creek Partnership and Murat Partnership have entered into
agreements which expire in 2009 and 2015, respectively, with Sunshine whose
stockholders are also the limited partners of the general partner. Sunshine
provides the overall promotional management and booking of the entertainment
events held at respective venues, along with other general management
responsibilities. As compensation for Sunshine's services, the Deer Creek
Partnership pays Sunshine 4 percent of gross ticket sales, royalty income and
various other revenues. Total fees to Sunshine for these services were
approximately $581,000 in 1995 and $560,000 in 1996. The Murat pays Sunshine an
annual management fee of $300,000, adjusted annually each January 1 by the
greater of 4% or the annual increase in the consumer price index. In 1996 no
such fee was recognized by the Murat Partnership as Sunshine permanently waived
the $300,000 management fee due for 1996.
In June 1988, the Deer Creek Partnership entered into a ten-year agreement
with an unrelated management company to provide the on-site operations
management for Deer Creek. At the end of 1995, this agreement was terminated by
mutual consent of both parties. The Deer Creek Partnership entered into a new
agreement with the former management company whereby it agreed to pay $75,000
in 1996, 1997 and 1998 and also to provide to the former management company
selected season tickets at Deer Creek in 1997 and 1998. In return, for 1996,
1997 and 1998, the Deer Creek Partnership is to receive advertising and
promotion.
7. BROADWAY SERIES PARTNERSHIP
In 1996 the Murat Partnership entered into a 5 year partnership agreement
with Pace Theatrical Group, Inc. (Pace) and Broadway Series Management (BSMG)
to co-present a subscription series of touring Broadway type shows in
Indianapolis. This agreement calls for net profits and losses derived from the
series to be split, after the allocation of certain revenues to the Murat
Partnership and Pace, as follows: 45% Murat Partnership, 45% Pace, and 10%
BSMG. No capital was invested by any of the parties and all income has been
distributed to the parties. The Murat Partnership is responsible for the local
marketing and management of the series, while Pace is responsible for booking,
series management, and season ticket sales for the series. The Murat
Partnership recognized earnings related to this partnership of $270,000 in
1996.
8. RELATED PARTIES
In addition to the management agreement with Sunshine discussed in Note 6,
the Deer Creek Partnership and Murat Partnership have conducted business with
certain related parties in which the limited partners of the general partner
have significant interests. Fees paid to all other related parties for
catering, uniforms and marketing services totaled $249,000 in 1995 and $65,000
in 1996 from the Deer Creek Partnership and $46,000 in 1996 from the Murat
Partnership.
9. SALE OF MURAT PARTNERSHIP AND DEER CREEK PARTNERSHIP
In June 1997, the partners of the Murat Partnership and the Deer Creek
Partnership agreed to sell all of the assets of the Murat Partnership and Deer
Creek Partnership to SFX Broadcasting, Inc. (Broadcasting). The total sales
price to Broadcasting of the combined partnership assets was approximately $33
million. As a part of the sale, Broadcasting assumed or retired virtually all
liabilities and acquired all assets of the Murat Partnership and the Deer Creek
Partnership.
F-65
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PACE Entertainment Corporation:
We have audited the accompanying consolidated balance sheet of PACE
Entertainment Corporation (a Texas Corporation) and subsidiaries as of
September 30, 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PACE Entertainment
Corporation and subsidiaries as of September 30, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 15, 1997 (except with respect
to the matters discussed in
Note 12, as to which the date
is December 22, 1997)
F-66
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
PACE Entertainment Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of PACE
Entertainment Corporation and subsidiaries as of September 30, 1996, and the
related consolidated statements of operations, cash flows, and shareholders'
equity for each of the two years in the period ended September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PACE
Entertainment Corporation and subsidiaries at September 30, 1996, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended September 30, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 13, 1996
F-67
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
--------------------- ------------
1996 1997 1997
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................... $23,165 $23,784 $27,702
Trade receivables, net ...................................... 4,097 4,562 6,741
Accounts receivable, related parties ........................ 1,010 1,007 1,096
Notes receivable ............................................ 3,040 386 81
Prepaid expenses ............................................ 6,106 9,967 10,586
Investments in theatrical productions ....................... 2,489 4,402 3,958
Deferred tax asset .......................................... 1,872 979 943
------- ------- -------
Total current assets ...................................... 41,779 45,087 51,107
INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS ................... 8,816 13,899 15,613
NOTES RECEIVABLE, related parties ............................ 6,958 8,024 7,766
INTANGIBLE ASSETS, net ....................................... 17,244 17,894 17,633
OTHER ASSETS, net ............................................ 4,484 4,933 6,047
------- ------- -------
Total assets .............................................. $79,281 $89,837 $98,166
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .................... $10,285 $11,078 9,277
Deferred revenue ............................................ 26,909 32,093 33,208
Current maturities of long-term debt ........................ 2,576 2,394 2,688
------- ------- -------
Total current liabilities ................................. 39,770 45,565 45,173
LONG-TERM DEBT ............................................... 21,863 23,129 31,543
OTHER NONCURRENT LIABILITIES ................................. 2,496 1,607 2,080
REDEEMABLE COMMON STOCK ...................................... 3,264 2,456 2,983
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 500,000 shares authorized,
2,579 shares issued as of September 30, 1996 and 1997 ..... 3 3 3
Additional paid-in capital .................................. 1,910 1,942 2,097
Retained earnings ........................................... 10,115 15,275 14,427
Treasury stock, at cost, 544 shares ......................... (140) (140) (140)
------- ------- -------
Total shareholders' equity ................................ 11,888 17,080 16,387
------- ------- -------
Total liabilities and shareholders' equity ................ $79,281 $89,837 $98,166
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-68
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30 DECEMBER 31
------------------------------------------- ----------------------------
1995 1996 1997 1996 1997
------------- ------------- ------------- -------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
GROSS REVENUES ........................... $ 150,385 $ 156,325 $ 176,046 $ 38,430 $ 38,552
COST OF SALES ............................ (131,364) (135,925) (148,503) (34,221) (33,687)
EQUITY IN EARNINGS (LOSS) OF
UNCONSOLIDATED PARTNERSHIPS
AND THEATRICAL PRODUCTIONS .............. 2,183 3,048 6,838 (111) 1,185
---------- ---------- ---------- -------- ---------
Gross profit ........................... 21,204 23,448 34,381 4,098 6,050
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ................. (13,351) (15,951) (21,260) (4,072) (5,018)
STOCK COMPENSATION ....................... (25) (3,675) (456) (6) (683)
LITIGATION SETTLEMENT .................... -- (3,657) -- -- --
DEPRECIATION AND AMORTIZATION ............ (1,223) (1,737) (1,896) (434) (523)
---------- ---------- ---------- ---------- ---------
Operating profit (loss) ................ 6,605 (1,572) 10,769 (414) (174)
INTEREST INCOME, related parties ......... 305 329 403 75 178
INTEREST INCOME, other ................... 147 176 60 35 6
INTEREST EXPENSE ......................... (655) (1,206) (1,997) (480) (867)
---------- ---------- ---------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST ................... 6,402 (2,273) 9,235 (784) (857)
INCOME TAX (PROVISION) BENEFIT ........... (2,575) 714 (3,529) 222 182
MINORITY INTEREST ........................ (485) (446) (546) (130) (173)
---------- ---------- ---------- ---------- ---------
NET INCOME (LOSS) ........................ $ 3,342 $ (2,005) $ 5,160 $ (692) $ (848)
========== ========== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-69
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
-------- ------------ ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1994 ................ $ 3 $1,465 $ 8,778 $ (140) $ 10,106
Amortization of deferred stock compensation -- 25 -- -- 25
Net income .................................. -- -- 3,342 -- 3,342
--- ------ -------- ------ --------
BALANCE AT SEPTEMBER 30, 1995 ................ 3 1,490 12,120 (140) 13,473
Issuance of restricted stock and amortization
of deferred stock compensation ............ -- 420 -- -- 420
Net loss .................................... -- -- (2,005) -- (2,005)
--- ------ -------- ------ --------
BALANCE AT SEPTEMBER 30, 1996 ................ 3 1,910 10,115 (140) 11,888
Issuance of restricted stock and amortization
of deferred stock compensation ............ -- 32 -- -- 32
Net income .................................. -- -- 5,160 -- 5,160
--- ------ -------- ------ --------
BALANCE AT SEPTEMBER 30, 1997 ................ 3 1,942 15,275 (140) 17,080
Issuance of restricted stock and amortization
of deferred stock compensation
(unaudited) ............................... -- 155 -- -- 155
Net loss (unaudited) ........................ -- -- (848) -- (848)
--- ------ -------- ------ --------
BALANCE AT DECEMBER 31, 1997
(unaudited) ................................. $ 3 $2,097 $ 14,427 $ (140) $ 16,387
=== ====== ======== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-70
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30 DECEMBER 31
-------------------------------------- ---------------------
1995 1996 1997 1996 1997
------------- ------------ ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................ $ 3,342 $ (2,005) $ 5,160 $ (692) $ (848)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization .......................... 1,223 1,737 1,896 434 522
Equity in (earnings) loss of unconsolidated
partnerships .......................................... (1,624) (486) (4,912) 607 (1,150)
Distributions from unconsolidated partnerships ......... 1,297 1,090 2,354 1,073 411
Restricted stock compensation .......................... 25 3,675 456 6 683
Deferred income tax expense (benefit) .................. 848 (4,541) 2,037 36 (574)
Changes in operating assets and liabilities- ...........
Trade receivables ..................................... 447 (826) (465) 383 (2,179)
Notes receivable ...................................... (1,813) (1,227) 2,654 1,140 305
Prepaid expenses ...................................... (221) 1,466 (3,861) (2,099) (619)
Investments in theatrical productions ................. 305 (335) (1,913) (1,658) 444
Other assets .......................................... (37) (1,130) (421) (39) (469)
Accounts payable and accrued liabilities .............. 947 (1,142) (920) (264) (2,626)
Deferred revenue ...................................... (1,082) (1,008) 5,184 (7,004) 1,115
Other liabilities ..................................... 171 1,601 (34) 130 3,083
-------- --------- --------- -------- --------
Net cash provided by (used in) operating
activities ......................................... 3,828 (3,131) 7,215 (7,947) (1,902)
-------- --------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired ....................... -- (13,233) (2,215) -- (178)
Capital expenditures ..................................... (728) (827) (1,008) (407) (900)
Loans and advances to related parties .................... (2,301) (535) (2,295) 2 169
Contributions to unconsolidated partnerships ............. (1,212) (1,806) (2,162) (618) (1,980)
-------- --------- --------- -------- --------
Net cash used in investing activities ............... (4,241) (16,401) (7,680) (1,023) (2,889)
-------- --------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt additions ............................. 8,927 24,043 24,287 557 14,593
Payments on debt ......................................... (8,928) (6,512) (23,203) (873) (5,884)
-------- --------- --------- -------- --------
Net cash provided by (used in) financing
activities ......................................... (1) 17,531 1,084 (316) 8,709
---------- --------- --------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ......................................... (414) (2,001) 619 (9,286) 3,918
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ......................................... 25,580 25,166 23,165 23,165 23,784
--------- --------- --------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
YEAR ..................................................... $25,166 $ 23,165 $ 23,784 $ 13,879 $ 27,702
========= ========= ========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid ............................................ $ 620 $ 1,117 $ 1,900 $ 180 $ 644
Income taxes paid ........................................ 2,276 2,804 2,103 565 93
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-71
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION:
Description of Business
PACE Entertainment Corporation (referred to herein as PACE or the
Company), a Texas corporation, is a diversified live entertainment company
operating principally in the United States. The Company presents and produces
theatrical shows, musical concerts and specialized motor sports events. Through
certain unconsolidated partnerships, the Company also owns interests in and
operates amphitheaters, which are used primarily for the presentation of live
performances by musical artists.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
PACE and its majority-owned subsidiaries. The Company accounts for its
investments in 50 percent or less owned entities, including theatrical
production partnerships, using the equity method. Intercompany balances are
eliminated.
The Company has various agreements related to the presentation of events
with other live entertainment organizations whereby the Company retains 50
percent to 80 percent of the profits from such events. The Company consolidates
the revenues and related costs from these events and records the amounts paid
to the other parties in cost of sales.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. At September 30,
1997, the Company had restricted cash and cash equivalents of $2,950,000, which
secured letters of credit totaling $3,750,000.
Trade Receivables
Trade receivables are shown net of allowance for doubtful accounts of
$120,000 and $134,000 at September 30, 1996 and 1997, respectively.
Prepaid Expenses
Prepaid expenses include show advances and deposits, event advertising
costs and other costs directly related to future events. Such costs are charged
to operations upon completion of the related events.
As of September 30, 1996 and 1997, prepaid expenses included event
advertising costs of $1,337,000 and $1,498,000, respectively. The Company
recognized event advertising expenses of $13,818,000, $14,861,000 and
$13,802,000 in cost of sales for the years ended September 30, 1995, 1996 and
1997, respectively.
Investments in Theatrical Productions
Theatrical production partnerships are typically formed to invest in a
single theatrical production and, therefore, have limited lives which are
generally less than one year. Accordingly, the Company's investments in such
partnerships are generally shown as current assets. The partnerships amortize
production costs over the estimated life of each production based on the
percentage of revenues earned in relation to projected total revenues.
F-72
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangible Assets
Intangible assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Goodwill ............................................ $ 16,599 $ 17,851
Noncompete agreements and other intangibles ......... 3,940 3,857
-------- --------
20,539 21,708
Accumulated amortization ............................ (3,295) (3,814)
-------- --------
$ 17,244 $ 17,894
======== ========
</TABLE>
Goodwill, which represents the excess of costs of business acquisitions
over the fair value of net assets acquired, is being amortized on a
straight-line basis over periods not exceeding 40 years. The noncompete
agreements and other intangibles are being amortized on a straight-line basis
over periods generally not exceeding five years. The Company evaluates on an
ongoing basis whether events and circumstances indicate that the amortization
periods of intangibles warrant revision. Additionally, the Company periodically
assesses whether the carrying amounts of intangibles exceed their expected
future benefits and value, in which case an impairment loss would be
recognized. Such assessments are based on various analyses, including cash flow
and profitability projections.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------
1996 1997
--------- ---------
<S> <C> <C>
Accounts payable .................. $ 1,192 $ 1,866
Accrued payroll ................... 2,384 2,936
Other accrued liabilities ......... 6,709 6,276
------- -------
$10,285 $11,078
======= =======
</TABLE>
Revenue Recognition
Revenues from the presentation and production of an event, including
interest on advance ticket sales, are recognized upon completion of the event.
Deferred revenue relates primarily to advance ticket sales.
The Company barters event tickets and sponsorship rights for products and
services, including event advertising. These barter transactions are not
recognized in the accompanying consolidated financial statements and are not
material to the Company's financial position or results of operations.
Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," during the year ended September
30, 1997, and implemented its disclosure provisions. While SFAS No. 123
encourages companies to recognize expense for stock options at estimated fair
value based on an option-pricing model, the Company has elected to continue to
follow Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its
employee stock options.
F-73
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Instruments
The carrying amounts of cash equivalents approximate fair value because of
the short maturities of these investments. The carrying amount of long-term
debt approximates fair value as borrowings bear interest at current market
rates.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain 1995 and 1996 amounts have been reclassified to conform with the
1997 presentation.
Interim Financial Information
The interim financial data as of December 31, 1997 and for the three-month
periods ended December 31, 1996 and 1997 is unaudited and certain information
and disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted.
However, in the opinion of management, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the interim periods. The results of
operations for the interim periods are not necessarily indicative of the
results to be expected for the entire year.
2. ACQUISITIONS:
On March 13, 1996, the Company acquired substantially all the assets of
SRO Motorsports (SRO), a division of Madison Square Garden, L.P., under an
asset purchase agreement for an aggregate initial purchase price of
approximately $13,300,000 in cash and $3,800,000 in assumed liabilities. The
agreement also provides for a contingent deferred purchase price not to exceed
$1,000,000, payable if annual earnings before interest, taxes, depreciation and
amortization of the Company's motor sports operations, as defined, exceed
$8,000,000 for any fiscal year through September 30, 2001. No deferred purchase
price costs had been incurred through September 30, 1997.
The acquisition of SRO was accounted for under the purchase method and the
assets acquired and liabilities assumed were recorded at fair value, resulting
in the recognition of $14,250,000 of goodwill and $400,000 of other
intangibles. The results of operations of SRO since March 13, 1996, have been
included in the accompanying consolidated financial statements.
The following unaudited pro forma information assumes that the Company had
acquired SRO as of October 1, 1994. The pro forma information includes
adjustments for interest expense that would have been incurred to finance the
acquisition, amortization of goodwill and other intangibles, the income tax
effects of the operations of SRO, and the elimination of certain intercompany
balances. The unaudited pro forma information, which is not necessarily
indicative of what actual results would have been, is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30
-------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Gross revenues ............ $167,422 $172,952
Net income (loss) ......... 3,742 (257)
</TABLE>
F-74
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS AND THEATRICAL
PRODUCTIONS:
Investments in unconsolidated partnerships and theatrical productions
consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------
1996 1997
--------- ---------
<S> <C> <C>
Investment in--
Pavilion Partners ................................. $ 3,131 $ 4,810
Universal/PACE Amphitheaters Group, L.P. .......... 3,380 3,991
Other ............................................. 2,305 5,098
------- -------
Investments in unconsolidated partnerships ......... 8,816 13,899
Investments in theatrical productions .............. 2,489 4,402
------- -------
$11,305 $18,301
======= =======
</TABLE>
The Company's share of earnings and the distributions received from these
investments were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Equity in earnings (losses) of--
Pavilion Partners ................. $1,872 $ 103 $2,803
Universal/PACE Amphitheaters
Group, L.P. ............................. 551 871 645
Other ............................. (799) (488) 1,464
------ ------ ------
Equity in earnings of unconsolidated
partnerships ...................... 1,624 486 4,912
Equity in earnings of theatrical
productions ....................... 559 2,562 1,926
------ ------ ------
$2,183 $3,048 $6,838
====== ====== ======
Distributions received from--
Pavilion Partners ................. $ 992 $1,002 $1,124
Universal/PACE Amphitheaters
Group, L.P. ............................. 166 78 34
Other ............................. 139 10 1,196
------ ------ ------
Distributions from unconsolidated
partnerships ...................... 1,297 1,090 2,354
Distributions from theatrical
productions ....................... 4,240 5,836 6,803
------ ------ ------
$5,537 $6,926 $9,157
====== ====== ======
</TABLE>
F-75
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pavilion Partners
Pavilion Partners is a Delaware general partnership between the Company
and Amphitheater Entertainment Partnership (AEP). AEP is a partnership between
Sony Music Entertainment Inc. (Sony) and Blockbuster Entertainment Corporation
(Blockbuster). Pavilion Partners owns and operates amphitheaters, which are
used primarily for the presentation of live performances by musical artists.
Pavilion Partners had interests in 10 and 11 amphitheaters at September 30,
1996 and 1997, respectively. The Company owns a 33-1/3 percent interest in, and
is the managing partner of, Pavilion Partners.
In general, all of Pavilion Partners' income is allocated to the partners
in proportion to their respective ownership interests. The partnership
agreement generally restricts cash distributions to 35 percent of cash flow
after scheduled debt service. Additionally, PACE has been entitled to certain
priority allocations of net income based, in part, on the cash flow from one of
the amphitheaters it contributed to Pavilion Partners. During the periods ended
September 30, 1995, 1996 and 1997, the priority allocations of net income
included in the Company's equity in earnings of Pavilion Partners were
$771,000, $725,000 and $119,000, respectively. The cumulative amount of the
priority allocations of net income was limited; PACE is not entitled to any
future priority allocations. AEP is entitled to receive priority allocations of
net income once a loan related to an amphitheater contributed by Blockbuster is
repaid. The cumulative priority allocations of net income to AEP is limited to
$7,000,000. The loan is scheduled to mature in 2004 and no such allocation has
yet been made.
PACE also received booking fees of $323,000, $235,000 and $395,000 from
Pavilion Partners for the years ended September 30, 1995, 1996 and 1997,
respectively. In addition, the Company is reimbursed for certain costs of
providing management services to Pavilion Partners. These reimbursements
totaled $1,629,000, $1,824,000 and $1,968,000 during the periods ended
September 30, 1995, 1996 and 1997, respectively, and offset general and
administrative expenses.
Summarized financial information as of and for the years ended September
30, 1995, 1996 and 1997, for Pavilion Partners follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current assets ................................ $15,787 $20,700 $ 30,178
Noncurrent assets ............................. 64,619 72,793 72,598
------- ------- --------
Total assets ................................. $80,406 $93,493 $102,776
======= ======= ========
Current liabilities ........................... $ 9,467 $17,194 $ 19,748
Noncurrent liabilities ........................ 51,578 58,695 59,166
Partners' capital ............................. 19,361 17,604 23,862
------- ------- --------
Total liabilities and partners' capital ...... $80,406 $93,493 $102,776
======= ======= ========
Gross revenues ................................ $69,372 $89,223 $100,209
======= ======= ========
Gross profit .................................. $19,440 $27,993 $ 36,157
======= ======= ========
Net income (loss) ............................. $ 3,104 $ (839) $ 6,986
======= ======= ========
</TABLE>
F-76
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Universal/PACE
The Company owns a 32.5 percent interest in Universal/PACE Amphitheaters
Group, L.P. (Universal/PACE), a limited partnership between the Company and
Universal Concerts, Inc., which controls two amphitheaters. PACE earned
management fees of $167,000, $79,000 and $34,000 from Universal/PACE for the
years ended September 30, 1995, 1996 and 1997, respectively. Summarized
financial information as of and for the years ended September 30, 1995, 1996
and 1997, for Universal/PACE follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current assets ................................ $ 4,085 $ 3,420 $ 6,659
Noncurrent assets ............................. 14,654 14,185 14,156
------- ------- -------
Total assets ................................. $18,739 $17,605 $20,815
======= ======= =======
Current liabilities ........................... $ 6,599 $ 3,876 $10,221
Noncurrent liabilities ........................ 6,467 5,618 602
Partners' capital ............................. 5,673 8,111 9,992
------- ------- -------
Total liabilities and partners' capital ...... $18,739 $17,605 $20,815
======= ======= =======
Gross revenues ................................ $24,070 $20,336 $25,299
======= ======= =======
Gross profit .................................. $ 5,968 $ 6,361 $ 5,817
======= ======= =======
Net income .................................... $ 1,183 $ 2,438 $ 1,880
======= ======= =======
</TABLE>
Other
The Company also has investments in numerous theatrical production and
other unconsolidated partnerships. Summarized financial information as of and
for the years ended September 30, 1995, 1996 and 1997, for these partnerships,
excluding Pavilion Partners and Universal/PACE, follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
Current assets ................................ $ 10,410 $ 12,433 $ 35,743
Noncurrent assets ............................. 5,668 7,267 14,050
-------- -------- --------
Total assets ................................. $ 16,078 $ 19,700 $ 49,793
======== ======== ========
Current liabilities ........................... $ 7,539 $ 6,566 $ 19,134
Noncurrent liabilities ........................ 2,315 2,250 2,957
Partners' capital ............................. 6,224 10,884 27,702
-------- -------- --------
Total liabilities and partners' capital ...... $ 16,078 $ 19,700 $ 49,793
======== ======== ========
Gross revenues ................................ $113,854 $111,715 $249,707
======== ======== ========
Gross profit .................................. $ 221 $ 10,440 $ 34,454
======== ======== ========
Net income (loss) ............................. $ (1,863) $ 9,823 $ 32,164
======== ======== ========
</TABLE>
F-77
<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>
<S> <C>
For the year ending September 30--
1998 ............................ $ 2,394
1999 ............................ 2,143
2000 ............................ 2,143
2001 ............................ 18,843
-------
$25,523
=======
</TABLE>
F-78
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES:
Deferred taxes reflect the tax effects of temporary differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities. Significant components of the Company's deferred tax assets and
liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------
1996 1997
-------- ----------
<S> <C> <C>
Deferred tax assets--
Investments in unconsolidated partnerships and
theatrical productions ......................... $ 286 $ 237
Accounts payable and accrued liabilities ......... 1,014 1,480
Restricted stock compensation .................... 1,387 409
Other noncurrent liabilities ..................... 1,717 --
Other ............................................ 107 281
------ ------
Total deferred tax assets ...................... 4,511 2,407
------ ------
Deferred tax liabilities--
Investments in unconsolidated partnerships and
theatrical productions ......................... 1,522 1,099
Prepaid expenses ................................. 907 1,237
Intangibles ...................................... 646 672
------ ------
Total deferred tax liabilities ................. 3,075 3,008
------ ------
$1,436 $ (601)
====== ======
</TABLE>
Deferred taxes are included in the consolidated balance sheets as follows
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-----------------------
1996 1997
--------- -----------
<S> <C> <C>
Current deferred tax assets .......... $1,872 $ 979
Other noncurrent liabilities ......... (436) (1,580)
------ --------
$1,436 $ (601)
====== ========
</TABLE>
The income tax (provision) benefit consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current--
Federal .............................. $ (1,251) $ (2,817) $ (1,319)
State ................................ (476) (1,010) (173)
Deferred--
Federal .............................. (692) 3,705 (1,777)
State ................................ (156) 836 (260)
-------- -------- --------
Total tax (provision) benefit ......... $ (2,575) $ 714 $ (3,529)
======== ======== ========
Effective tax rate .................... 44% 26% 41%
======== ======== ========
</TABLE>
F-79
<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
F-80
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-81
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $5,961,000, including accrued interest of $550,000. One note, in the
original principal amount of $2,911,000, bears interest at 5.83 percent, is
secured by 254 shares of PACE common stock and matures on March 28, 1999. The
other note is for $2,500,000, bears interest at 6.34 percent, is secured by 246
shares of PACE common stock and was scheduled to mature on November 3, 1997.
This note has been extended to mature on November 4, 2000. Interest income on
these two notes was approximately $300,000 for each of the years ended
September 30, 1995, 1996 and 1997. At September 30, 1997, the Company also had
a $583,000 receivable from its principal shareholder. The principal shareholder
has represented his intention to pay the outstanding loans and receivable
balance from personal assets or if necessary, the liquidation of certain
ownership interests in the Company.
At September 30, 1997, notes receivable from other related parties
included $945,000 due from a joint venture partner. The terms of the related
joint venture agreement provide for the Company to loan to the joint venture
partner any required capital contributions, to be repaid on a priority basis
from the profits allocated to the joint venture partner. The advances accrue
interest at the prime rate plus 4 percent (12.5 percent at September 30, 1997)
and are secured by the joint venture partner's 50 percent interest in the joint
venture.
10. LITIGATION SETTLEMENT:
The Company was previously named as a defendant in a case filed in Wake
County, North Carolina (Promotion Litigation). There were several other
defendants named in the litigation, including Pavilion Partners, with various
causes of action asserted against one or more of each of the defendants,
including (a) breach of alleged contract, partnership, joint venture and
fiduciary duties between certain of the defendants and Pro Motion Concerts, (b)
constructive fraud, (c) interference with prospective advantage, (d) unfair
trade practices, (e) constructive trust and (f) unjust enrichment. The essence
of the plaintiffs' claims was that certain of the defendants agreed to enter
into a partnership with plaintiffs for the development and operation of an
amphitheater.
On May 1, 1997, the Promotion Litigation was settled. All defendants were
fully and finally released with prejudice from any and all claims and causes of
action. The defendants did not acknowledge or admit any liability. The
settlement called for payments from defendants totaling $4,500,000. The Company
was obligated to pay $1,500,000 immediately after the settlement and is
obligated to pay an additional $2,000,000 on or before May 1, 1998. To
guarantee payment of this $2,000,000 obligation, the Company had a standby
letter of credit outstanding at September 30, 1997. The remaining $1,000,000 of
the settlement was paid by Pavilion Partners during the year ended September
30, 1997. This expense and related legal expenses were charged to operations
for the year ended September 30, 1996.
F-82
<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>
<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>
<S> <C>
For the year ending September 30--
1998 ............................ $4,463
1999 ............................ 3,825
2000 ............................ 2,789
2001 ............................ 1,430
2002 ............................ 743
</TABLE>
The Company is currently negotiating certain other employment agreements
that may result in additional future commitments.
Insurance
The Company carries a broad range of insurance coverage, including general
liability, workers' compensation, stop-loss coverage for its employee health
plan and umbrella policies. The Company carries deductibles of up to $10,000
per occurrence for general liability claims and is self-insured for annual
healthcare costs of up to $25,000 per covered employee and family. The Company
has accrued for estimated potential claim costs in satisfying the deductible
and self-insurance provisions of the insurance policies for claims occurring
through September 30, 1997. The accrual is based on known facts and historical
trends, and management believes such accrual to be adequate.
F-83
<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 sterling)239,000 in April 1998.
Construction Commitments
An unconsolidated partnership has committed to certain renovation work at
its amphitheater. The Company may be obligated to fund up to approximately $7.3
million of these renovations. Through its investment in another unconsolidated
partnership, the Company has an interest in a performance hall being
constructed for musical and theatrical presentations. The Company had funded
$0.4 million of the performance hall construction costs through September 30,
1997; the Company's estimated additional funding commitments are approximately
$2.0 million. In addition, the Company and several third parties are currently
negotiating definitive agreements to develop a theatrical venue. The Company
may be obligated to fund approximately $3.0 million of the costs of this
development over an undetermined period of time.
Put Option Agreement
The Company has entered into put option agreements with two banks whereby
the Company may be required to repurchase a total of 1,000 shares of the
Company's common stock held by an affiliate that collateralizes the personal
loans of the Company's principal shareholder at a per share price of $1,500.
The put options are effective only in the event of a loan default of the
shareholder prior to July 31, 1999. At September 30, 1997, the loans were not
in default.
12. SUBSEQUENT EVENTS:
Subsequent to September 30, 1997, the Company entered into certain
agreements with an executive who previously had been granted an option to
purchase 22 shares of common stock at $10,000 per share. Pursuant to the new
agreements, the option was canceled and the executive was granted 22 shares of
restricted common stock.
In December 1997, the Company and its shareholders entered into an
agreement with SFX Entertainment, Inc. (SFX), whereby the shareholders would
sell their interests in the Company to SFX (SFX Transaction). The purchase
price of $109 million in cash and 1,500,000 shares of SFX
F-84
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Class A Common Stock is subject to adjustment prior to closing. Closing is
subject to certain conditions, including approval of certain third parties.
Concurrent with closing, the agreement requires, among other things, the
repayment of all outstanding loans and receivables due from the Company's
principal shareholder (see Note 9) and the repayment of the promissory note
received from an executive in connection with a stock grant (see Note 6).
Additionally, the agreement provides for the settlement of all restricted and
redeemable stock, as well as all outstanding stock options. This settlement is
expected to result in a one-time charge by the Company of approximately $4.7
million, net of related tax effects. The agreement also requires SFX to provide
the Company with a $25 million line of credit (Acquisition Facility) to be used
for certain acquisitions being contemplated by the Company. If the acquisition
of the Company is not consummated, this line of credit will be converted to a
term loan in the amount of advances then outstanding or, under certain
circumstances, will become immediately due and payable. This bridge financing
is secured by the assets acquired and an option to purchase the Company's
interest in Pavilion Partners.
In December 1997, the Company entered into agreements to effectively
purchase substantially all of the assets of United Sports of America (USA
Transaction), a producer and presenter of demolition derbies, thrill shows, air
shows, monster truck shows, tractor pull events, motorcycle racing and bull
riding in the United States and Canada. Pursuant to the agreements, the total
purchase price is $6,000,000 in cash of which an option amount of $500,000 was
paid upon the execution of the agreement and closing is subject to the
satisfactory completion of due diligence by the Company. Management does not
expect this transaction to close until May 1998. In the event the transaction
does not close, the option amount will be forfeited if certain conditions are
not met.
In December 1997, the Company entered into an agreement to purchase
Blockbuster's 331/3 percent interest in Pavilion Partners (Blockbuster
Transaction) for $4,171,000 in cash, $2,940,000 in assumed liabilities and the
assumption of certain indemnification obligations of Blockbuster under the
Pavilion Partners Partnership Agreement. In addition, the Company has agreed to
purchase a note with a balance of $9,507,000, including accrued interest of
$1,601,000, at September 30, 1997. The transaction is contingent on, among
other things, obtaining acceptable financing including the release of
Blockbuster from certain debt obligations and the approval of Sony. (Note 3)
On December 22, 1997, the Company entered into an agreement to purchase
Sony's 331/3 percent interest in Pavilion Partners (Sony Transaction) for
$27,500,000 in cash. The transaction is contingent on, among other things,
government approval and obtaining acceptable financing including the release of
Sony from certain debt obligations. (see Note 3)
13. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
Effective February 25, 1998, the SFX Transaction, Blockbuster Transaction
and Sony Transaction closed. In conjunction with the closing, SFX retired the
Company's outstanding term loan and revolving line of credit and purchased or
retired a substantial portion of the indebtedness of Pavilion Partners,
including debt which was previously guaranteed by PACE. No borrowings had been
made under the Acquisition Facility, which expired with the closing of the SFX
Transaction. Additionally, all put option agreements related to the Company's
common stock were terminated.
During February 1998, the Company granted 40 shares of restricted common
stock to an executive. This grant combined with the settlement of all
restricted and redeemable stock, all outstanding stock options and certain
bonuses paid in conjunction with the SFX Transaction resulted in a one-time
charge during February 1998 of approximately $6.4 million, net of related tax
effects.
The USA Transaction closed on March 25, 1998. To effect the USA
Transaction, PACE contributed $4,000,000 to a newly formed partnership and that
partnership acquired a 67% interest in certain assets and liabilities of United
Sports of America from third parties. The remaining 33% interest in those
assets and liabilities was contributed to the partnership by a subsidiary of
SFX.
F-85
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Pavilion Partners:
We have audited the accompanying consolidated balance sheet of Pavilion
Partners, a Delaware general partnership, as of September 30, 1997, and the
related consolidated statements of income, partners' capital and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the partnership's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pavilion Partners
as of September 30, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 15, 1997 (except with
respect to the matters discussed
in Note 11, as to which the date
is December 22, 1997)
F-86
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Pavilion Partners
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of partners' capital and of cash
flows present fairly, in all material respects, the financial position of
Pavilion Partners and its subsidiaries (the Partnership) at September 30, 1996
and the results of their operations and their cash flows for the year ended
October 31, 1995 and the eleven months ended September 30, 1996, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
December 12, 1996
F-87
<PAGE>
PAVILION PARTNERS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------- DECEMBER 31
1996 1997 1997
--------- ---------- ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 8,554 $ 17,898 $15,464
Accounts receivable .................................... 7,842 6,167 2,067
Accounts receivable, related parties ................... 1,878 3,878 1,687
Notes receivable, related parties ...................... 1,218 1,218 1,218
Prepaid expenses and other current assets .............. 1,208 1,017 622
------- -------- -------
Total current assets .............................. 20,700 30,178 21,058
Prepaid rent ........................................... 7,075 6,938 6,898
Property and equipment, net ............................ 61,292 59,938 59,291
Other assets ........................................... 4,426 5,722 5,777
------- -------- -------
Total assets ...................................... $93,493 $102,776 $93,024
======= ======== =======
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable ....................................... $ 1,404 $ 1,193 $ 260
Accounts payable, related parties ...................... 1,866 3,948 2,193
Accrued liabilities .................................... 8,112 7,032 5,614
Deferred revenue ....................................... 3,602 5,081 3,067
Current portion of notes payable and capital lease
obligation ........................................... 1,573 1,614 1,639
Current portion of note payable, related party ......... 637 880 945
------- -------- -------
Total current liabilities ......................... 17,194 19,748 13,718
Notes payable .......................................... 43,680 42,192 41,879
Note payable, related party ............................ 7,268 7,025 6,961
Capital lease obligation ............................... 6,130 5,989 5,952
Other liabilities and minority interests in consolidated
subsidiaries ......................................... 1,617 3,960 2,911
------- -------- -------
Total liabilities ................................. 75,889 78,914 71,421
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL ....................................... 17,604 23,862 21,603
------- -------- -------
Total liabilities and partners' capital ........... $93,493 $102,776 $93,024
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-88
<PAGE>
PAVILION PARTNERS
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS THREE MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30, -------------------------
1995 1996 1997 1996 1997
------------- --------------- -------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
TICKET REVENUES .................... $43,266 $50,151 $ 58,479 $ 4,186 $ 4,554
OTHER OPERATING REVENUES 28,109 33,942 41,730 3,254 3,141
------- ------- -------- -------- --------
Total revenues .................. 71,375 84,093 100,209 7,440 7,695
COST OF SALES ...................... 49,226 57,723 64,052 4,862 5,229
------- ------- -------- -------- --------
Gross profit .................... 22,149 26,370 36,157 2,578 2,466
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 8,329 9,774 10,858 2,299 1,987
DEPRECIATION AND
AMORTIZATION ...................... 2,461 3,346 3,975 961 1,031
OTHER OPERATING COSTS .............. 5,345 7,390 8,531 961 723
LITIGATION EXPENSES AND
SETTLEMENT ........................ -- 2,380 -- -- --
------- ------- -------- -------- --------
Operating profit (loss) ......... 6,014 3,480 12,793 (1,643) (1,275)
INTEREST INCOME .................... 504 391 532 74 167
INTEREST EXPENSE ................... 2,793 3,855 4,413 1,127 1,102
------- ------- -------- -------- --------
INCOME (LOSS) BEFORE
MINORITY INTEREST ................. 3,725 16 8,912 (2,696) (2,210)
MINORITY INTEREST .................. 276 308 1,926 (63) (59)
------- ------- -------- -------- --------
NET INCOME (LOSS) .................. $ 3,449 $ (292) $ 6,986 $ (2,633) $ (2,151)
======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-89
<PAGE>
PAVILION PARTNERS
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMPHITHEATER
ENTERTAINMENT
PARTNERSHIP SM/PACE, INC. TOTAL
-------------- --------------- ----------
<S> <C> <C> <C>
BALANCE, October 31, 1994 ...................... $ 13,108 $2,805 $ 15,913
Net income .................................... 1,788 1,661 3,449
Distributions ................................. -- (699) (699)
-------- ------ --------
BALANCE, October 31, 1995 ...................... 14,896 3,767 18,663
Net income (loss) ............................. (330) 38 (292)
Distributions ................................. -- (767) (767)
-------- ------ --------
BALANCE, September 30, 1996 .................... 14,566 3,038 17,604
Net income .................................... 4,578 2,408 6,986
Distributions ................................. -- (728) (728)
-------- ------ --------
BALANCE, September 30, 1997 .................... $ 19,144 $4,718 $ 23,862
Net loss (unaudited) .......................... (1,435) (716) (2,151)
Distributions (unaudited) ..................... -- (108) (108)
-------- ------ --------
BALANCE, December 31, 1997 (unaudited) ......... $ 17,709 $3,894 $ 21,603
======== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-90
<PAGE>
PAVILION PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE ELEVEN MONTHS FOR THE THREE MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30, ---------------------------
1995 1996 1997 1996 1997
------------- --------------- -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss) ....................... $ 3,449 $ (292) $ 6,986 $ (2,633) $ (2,151)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities--
Depreciation and amortization ......... 2,461 3,346 3,975 961 1,031
Minority interest ..................... 276 308 1,926 (63) (59)
Changes in assets and
liabilities--
Accounts receivable .................. (1,455) (3,647) 1,669 5,124 4,100
Accounts receivable and
payable, related parties ........... 32 (756) 82 (299) 436
Prepaid expenses and other
current assets ..................... 191 (296) 266 774 435
Accounts payable and accrued
liabilities ........................ (512) 1,695 (2,184) (1,925) (2,350)
Deferred revenue and other
liabilities ........................ 1,304 2,110 2,284 (2,082) (2,092)
Other, net ........................... (785) (1,259) (1,548) (141) (1,210)
--------- -------- -------- -------- --------
Net cash provided by (used
in) operating activities .......... 4,961 1,209 13,456 (284) (1,860)
--------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Payments of preoperating costs .......... (1,318) (1,114) (59) (271) --
Capital expenditures .................... (25,856) (7,483) (1,879) (15) (178)
--------- -------- -------- -------- --------
Net cash used in investing
activities ........................ (27,174) (8,597) (1,938) (286) (178)
--------- -------- -------- -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Funding of capital commitments by
partners .............................. 4,046 -- -- -- --
Distributions to partner ................ (699) (767) (728) (728) (108)
Proceeds from borrowings ................ 24,322 8,323 -- -- --
Repayments of borrowings ................ (639) (1,072) (1,446) (375) (288)
--------- -------- -------- -------- --------
Net cash provided by (used
in) financing activities .......... 27,030 6,484 (2,174) (1,103) (396)
--------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS ............................. 4,817 (904) 9,344 (1,673) (2,434)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD ..................... 4,641 9,458 8,554 8,554 17,898
--------- -------- -------- -------- --------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD .................................. $ 9,458 $ 8,554 $ 17,898 $ 6,881 $ 15,464
========= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-91
<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 662/3 percent interest in the Partnership, and PACE
owns a 331/3 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 331/3
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 662/3 percent interest in
the Partnership and PACE owned a 331/3 percent interest in the Partnership.
The Partnership owns and operates amphitheaters, which are primarily used
for the presentation of live performances by musical artists. As of September
30, 1997, the Partnership owned interests in or leased 10 amphitheaters and had
a long-term management contract to operate an additional amphitheater. All of
the amphitheaters owned or operated by the Partnership are located in the
United States.
In April 1997, the Partnership entered into a new partnership agreement
with a third party to be known as Western Amphitheater Partners (WAP). The
Partnership contributed or licensed the assets and liabilities of the Glen
Helen Amphitheatre, and the other partner contributed or licensed the assets
and liabilities of the Irvine Meadows Amphitheatre. Each partner has a 50
percent interest in WAP. Under the terms of the Partnership agreement, the
partners are required to make an additional capital contribution of
approximately $850,000 each in WAP which was accrued by the Partnership at
September 30, 1997. The fiscal year-end for the WAP partnership will be
December 31.
During 1996, the Partnership changed its fiscal year-end from October 31
to September 30.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements of the Partnership include all of
its wholly owned subsidiaries and other partnerships in which Pavilion Partners
holds a controlling interest. All partnerships in which Pavilion Partners holds
less than a controlling interest are reported on the equity method of
accounting. All significant intercompany transactions have been eliminated in
consolidation.
Basis of Contributed Assets
All assets contributed to the Partnership by the partners were recorded at
the carrying values of the contributing entities.
Revenue Recognition
The Partnership records revenues from the presentation of events at the
completion of the related event. Advance ticket sales are classified as
deferred revenue until the event has occurred. Sponsorship and other revenues
that are not related to any single event are classified as deferred revenue and
amortized over each of the amphitheaters' various shows during the operating
season.
F-92
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Partnership barters event tickets and sponsorship rights for products
and services, including event advertising. These barter transactions are not
recognized in the accompanying consolidated financial statements and are not
material to the Partnership's financial position or results of operations.
Income Taxes
No provision for federal or state income taxes is necessary in the
financial statements of the Partnership because, as a partnership, it is not
subject to federal or state income taxes and the tax effect of its activities
accrues to the partners.
Prepaid Expenses
Prepaid expenses include show advances and deposits, event advertising
costs and other costs directly related to future events. Such costs are charged
to operations upon completion of the related events.
As of September 30, 1996 and 1997, prepaid expenses included event
advertising costs of $160,000 and $137,000, respectively. The Partnership
recognized event advertising expenses of $5,815,000, $6,439,000 and $6,569,000
in cost of sales for the year ended October 31, 1995, the eleven months ended
September 30, 1996, and the year ended September 30, 1997, respectively.
Other Assets
The Partnership incurs certain costs in identifying and selecting
potential sites for amphitheater development. All costs incurred by the
Partnership during the initial site selection phase are expensed as incurred.
Certain incremental start-up costs that are incurred after a decision has been
made to develop a site are capitalized as preoperating costs. After an
amphitheater is fully developed, these preoperating costs are amortized on a
straight-line basis over a five-year period.
Contract acquisition costs include fees associated with securing a
contract with a booking agent for one of the Partnership's amphitheaters. These
costs are amortized on a straight-line basis over the life of the contract
which is 10 years.
Property and Equipment
Property and equipment is stated at cost. Repair and maintenance costs are
expensed as incurred. Interest incurred in connection with the construction of
an amphitheater is capitalized as part of the cost of the amphitheater. During
1995 and 1996, the Partnership capitalized interest in connection with the
construction of amphitheaters of $645,000 and $161,000, respectively. No
interest was capitalized in 1997.
Leasehold improvements are amortized on a straight-line basis over the
shorter of their estimated useful lives or the term of the lease. Other
property and equipment is depreciated on a straight-line basis over the
estimated useful lives of the assets. A summary of the principal ranges of
useful lives used in computing the annual provision for depreciation and
amortization is as follows:
<TABLE>
<CAPTION>
RANGE OF YEARS
---------------
<S> <C>
Buildings ....................... 27-31.5
Leasehold improvements .......... 5-31.5
Equipment ....................... 3-7
Furniture and fixtures .......... 5-10
</TABLE>
The Partnership evaluates on an ongoing basis whether events and
circumstances indicate that the estimated useful lives of property and
equipment warrant revision. The Partnership adopted Statement
F-93
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Fair Value of Financial Instruments
The carrying amounts of the Partnership's financial instruments
approximate their fair value at September 30, 1996 and 1997.
Statement of Cash Flows
The Partnership considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Interest paid was
$2,319,000, $3,652,000 and $3,917,000 for 1995, 1996 and 1997, respectively.
During the year ended October 31, 1995, the Partnership issued a note payable
with a fair value of $1,300,000 to a vendor in exchange for certain equipment
with a fair value which approximated the amount of the note. During 1997, the
Partnership contributed or licensed the assets and liabilities of the Glen
Helen Amphitheatre into the new WAP Partnership in which it holds a 50 percent
interest. The net book value of the investment made in the WAP Partnership was
$54,000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Partnership to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 1995 and 1996 consolidated financial statements
have been reclassified to conform to the 1997 presentation.
Interim Financial Information
The interim financial data as of December 31, 1997 and for the three-month
periods ended December 31, 1996 and 1997 is unaudited and certain information
and disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted.
However, in the opinion of management, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the interim periods. The results of
operations for the interim periods are not necessarily indicative of the
results to be expected for the entire year.
3. PARTNERSHIP AGREEMENT:
The Partnership agreement provides, among other things, for the following:
Contributions and Project Loans
In addition to the initial contributions as discussed in Note 1, the
partners are obligated to contribute, in proportion to their respective
Partnership interests, any deficiency in the funding for the construction of
each approved amphitheater development or any operational shortfall, as defined
in the Partnership agreement. No such funding was required in 1995, 1996 or
1997.
In addition, AEP is responsible for providing project financing, as
defined, for each approved amphitheater development. To the extent AEP does not
fulfill this responsibility, AEP must indemnify, defend and hold harmless the
Partnership from all claims, demands, liabilities or other losses (including
the loss of any earnest money deposits and any reasonable attorneys' fees)
which might result from AEP's failure to provide such project loan.
F-94
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
F-95
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Amortization expense associated with assets under capital lease for 1995,
1996 and 1997 was $169,000, $156,000 and $169,000, respectively.
5. OTHER ASSETS:
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Preoperating costs, net of accumulated amortization of $2,092,000 and
$1,094,000, respectively.................................................. $2,153 $1,709
Investment in unconsolidated partnerships .................................. 1,302 2,797
Contract acquisition costs, net of accumulated amortization of $45,000 and
$129,000, respectively ................................................... 624 815
Other ...................................................................... 347 402
------ ------
$4,426 $5,723
====== ======
</TABLE>
During 1995, 1996 and 1997, the Partnership recognized equity in earnings
of unconsolidated partnerships of $263,000, $129,000 and $1,592,000,
respectively, which is included in other operating revenues.
6. ACCRUED LIABILITIES:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1996 1997
-------- ---------
<S> <C> <C>
Interest ................................... $ 544 $ 522
Rent ....................................... 638 580
Taxes ...................................... 748 613
Litigation expenses and settlement ......... 1,873 --
Insurance .................................. 1,216 1,656
Other ...................................... 3,093 3,660
------ ------
$8,112 $7,031
====== ======
</TABLE>
Accrued liabilities do not include accrued interest on the notes payable
to Blockbuster (see
Note 7). Such accrued interest, which is included in accounts payable, related
parties, was $1,082,000 and $1,601,000 as of September 30, 1996 and 1997,
respectively.
F-96
<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
F-97
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
vendors under 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>
<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
F-98
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Corporation and 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 662/3 percent partnership interest in
that amphitheater. The renovations are to include increasing seating capacity
and upgrading the amphitheater's concession plazas and parking facilities. The
total budget for these renovations is approximately $11.0 million of which $5.0
million will be funded by the minority partner and a note payable to vendor,
therefore the Partnership's funding commitment is approximately $6.0 million.
The Partnership maintains cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Partnership has not experienced any
losses in such accounts. Management performs periodic evaluations of the
relative credit standards of the financial institutions with which it deals.
Additionally, the Partnership's cash management and investment policies
restrict investments to low-risk, highly liquid securities. Accordingly,
management does not believe that the Partnership is currently exposed to any
significant credit risk on cash and cash equivalents.
The Partnership is subject to other claims and litigation arising in the
normal course of its business. The Partnership does not believe that any of
these proceedings will have a material adverse effect on its financial position
or results of operations.
The Partnership was previously named as a defendant in a case filed in
Wake County, North Carolina (Promotion Litigation). There were several
defendants named in the litigation with various causes of action asserted
against one or more of each of the defendants, including (a) breach of alleged
contract, partnership, joint venture and fiduciary duties between certain of
the defendants and Pro Motion Concerts, (b) constructive fraud, (c)
interference with prospective advantage, (d) unfair trade practices, (e)
constructive trust and (f) unjust enrichment. The essence of the plaintiff's
claims was that certain of the defendants agreed to enter into a partnership
with the plaintiffs for the development and operation of an amphitheater. On
May 1, 1997, the Promotion Litigation was settled. All defendants were fully
and finally released with prejudice from any and all claims and causes of
action. Although the defendants believe that they would have prevailed at a
trial of the Promotion
F-99
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Litigation, the defendants chose to 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>
<S> <C>
For the year ending September 30--
1998 ............................. $335
1999 ............................. 177
</TABLE>
Insurance
The Partnership carries a broad range of insurance coverage, including
general liability, workers' compensation, employee health coverage and umbrella
policies. The Partnership carries deductibles of up to $10,000 per occurrence
for general liability claims. The Partnership has accrued for estimated
potential claim costs in satisfying the deductible provisions of the insurance
policies for claims occurring through September 30, 1997. The accrual is based
on known facts and historical trends, and management believes such accrual to
be adequate.
11. SUBSEQUENT EVENTS:
In December 1997, the managing partner and its shareholders entered into
an agreement whereby the shareholders would sell their interests in PACE
Entertainment Corporation to SFX Entertainment, Inc. (SFX Transaction). Closing
is subject to certain conditions, including the approval of third parties.
On December 19, 1997, the PACE Entertainment Corporation entered into an
agreement to purchase Blockbuster's 331/3 percent interest in the Partnership
(Blockbuster Transaction) for $4,171,000 in cash, $2,940,000 in assumed
liabilities and the assumption of certain indemnification obligations of
Blockbuster under the Partnership agreement. In addition, PACE Entertainment
Corporation has agreed to purchase the note payable to Blockbuster with a
balance of $9,507,000, including accrued interest of $1,601,000, at September
30, 1997. The transaction is contingent on, among other things, obtaining
acceptable financing including the release of Blockbuster from certain debt
obligations and the approval of Sony.
On December 22, 1997, PACE Entertainment Corporation entered into an
agreement to purchase Sony's 331/3 percent interest in the Partnership (Sony
Transaction) for $27,500,000 in cash. The transaction is contingent on, among
other things, government approval and obtaining acceptable financing including
the release of Sony from certain debt obligations (see Note 7).
12. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
Effective February 25, 1998, the SFX Transaction, Blockbuster Transaction
and Sony Transaction closed. In conjunction with the closing, SFX purchased or
retired approximately $38 million of the Partnership's outstanding notes
payable.
F-100
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Boards of Directors
Contemporary Group
We have audited the accompanying combined balance sheets of Contemporary
Group as of December 31, 1997 and 1996 and the related combined statements of
operations, cash flows and stockholders' equity for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Contemporary Group at December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
New York, New York
May 22, 1998
F-101
<PAGE>
CONTEMPORARY GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1996 1997
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash .............................................................. $ 2,972,409 $10,427,805
Accounts receivable ............................................... 4,067,444 7,672,187
Notes receivable - related party .................................. -- 1,000,000
Prepaid expenses and other current assets ......................... 272,105 210,640
------------ -----------
Total current assets ............................................... 7,311,958 19,310,632
Property and equipment, at cost, less accumulated depreciation and
amortization of $2,723,986 in 1996 and $3,264,972 in 1997 ......... 2,438,210 2,813,902
Reimbursable event costs ........................................... 474,469 152,617
Deferred event expenses ............................................ 250,973 402,460
Investment in Riverport ............................................ 4,934,513 5,436,717
Other assets ....................................................... 120,256 199,518
------------ -----------
Total assets ....................................................... $ 15,530,379 $28,315,846
============ ===========
LIABILITIES AND COMBINED STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation and bonuses .................................. $ 2,906,153 $ 6,721,459
Accrued expenses and other current liabilities .................... 1,994,036 6,169,861
Accounts payable .................................................. 1,733,676 1,347,539
Current portion of note payable ................................... 667,138 1,075,000
------------ -----------
Total current liabilities .......................................... 7,301,003 15,313,859
Deferred revenue and other liabilities ............................. 2,586,880 5,570,295
Note payable, less current portion ................................. 1,659,723 739,424
Combined stockholders' equity ...................................... 3,982,773 6,692,268
------------ -----------
Total liabilities and combined stockholders' equity ................ $ 15,530,379 $28,315,846
============ ===========
</TABLE>
See accompanying notes.
F-102
<PAGE>
CONTEMPORARY GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1995 1996 1997
-------------- -------------- ----------------
<S> <C> <C> <C>
Operating revenues:
Event promotion revenue ..................... $39,159,137 $38,023,454 $ 48,057,060
Marketing revenue ........................... 7,670,138 12,969,621 30,195,359
Other event revenue ......................... 8,813,999 8,859,218 10,800,118
----------- ----------- ------------
55,643,274 59,852,293 89,052,537
Cost of revenue .............................. 44,240,953 46,410,935 66,940,088
----------- ----------- ------------
11,402,321 13,441,358 22,112,449
Operating expenses:
Salary and bonus expense .................... 5,944,644 8,010,991 18,992,476
Depreciation and amortization ............... 559,980 566,573 540,986
General and administrative expenses ......... 3,468,742 3,767,111 4,887,615
----------- ----------- ------------
9,973,366 12,344,675 24,421,077
Income (loss) from operations ................ 1,428,955 1,096,683 (2,308,628)
Other income (expense):
Interest income ............................. 226,024 158,512 201,310
Interest expense ............................ (140,773) (213,658) (192,130)
Loss on asset disposal ...................... -- -- (84,261)
Equity in income of Riverport ............... 1,332,898 822,716 1,002,204
----------- ----------- ------------
1,418,149 767,570 927,123
----------- ----------- ------------
Income before income taxes ................... 2,847,104 1,864,253 (1,381,505)
Federal and state taxes ...................... 20,677 35,367 --
----------- ----------- ------------
Net income (loss) ............................ $ 2,826,427 $ 1,828,886 $ (1,381,505)
=========== =========== ============
</TABLE>
See accompanying notes.
F-103
<PAGE>
CONTEMPORARY GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1995 1996 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .................................................. $ 2,826,427 $ 1,828,886 $ (1,381,505)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .............................. 559,980 566,573 540,986
Loss on asset disposal ..................................... -- -- 84,261
Non cash interest expense .................................. 142,068 148,113 154,701
Equity in income of Riverport, net of distributions
received ................................................. (82,897) (222,716) (502,204)
Changes in operating assets and liabilities:
Accounts receivable ...................................... (1,451,090) (659,486) (3,604,743)
Prepaid expenses and other current assets ................ (331,184) 225,754 61,465
Reimbursable event costs ................................. (75,913) (361,599) 321,852
Deferred event expenses .................................. (15,608) (45,150) (151,487)
Other assets ............................................. (1,575) (29,923) (79,262)
Accounts payable ......................................... 398,369 970,553 (386,137)
Accrued compensation and bonuses ......................... 665,488 954,175 3,815,306
Accrued expenses and other current liabilities ........... 907,053 301,652 4,175,825
Deferred revenue ......................................... (1,569,486) 245,216 3,227,827
Other liabilities ........................................ -- 162,860 (244,412)
------------ ------------ ------------
Net cash provided by operating activities ................... 1,971,632 4,084,908 6,032,473
INVESTING ACTIVITIES
Loan to related party ....................................... -- -- (1,000,000)
Purchase of property and equipment .......................... (281,306) (1,159,382) (1,063,848)
Proceeds from sale of property and equipment ................ -- -- 62,909
------------ ------------ ------------
Net cash used in investing activities ....................... (281,306) (1,159,382) (2,000,939)
FINANCING ACTIVITIES
Borrowings .................................................. 226,970 626,970 --
Payments of notes payable ................................... (75,000) (336,802) (667,138)
Proceeds received from capital contributions ................ -- -- 5,000,000
Distributions paid .......................................... (2,578,000) (2,993,000) (909,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities ......... (2,426,030) (2,702,832) 3,423,862
------------ ------------ ------------
Net increase in cash ........................................ (735,704) 222,694 7,455,396
Cash at beginning of period ................................. 3,485,419 2,749,715 2,972,409
------------ ------------ ------------
Cash at end of period ....................................... $ 2,749,715 $ 2,972,409 $ 10,427,805
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ...................................... $ 24,000 $ 143,271 $ 37,421
============ ============ ============
Cash paid for income taxes .................................. $ 45,805 $ 34,550 $ 27,077
============ ============ ============
</TABLE>
See accompanying notes.
F-104
<PAGE>
CONTEMPORARY GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<S> <C>
Balance, January 1, 1995 ................................. $ 4,898,460
Distributions to stockholders ........................... (2,578,000)
Net income for the year ended December 31, 1995 ......... 2,826,427
------------
Balance, December 31, 1995 ............................... 5,146,887
Distributions to stockholders ........................... (2,993,000)
Net income for the year ended December 31, 1996 ......... 1,828,886
------------
Balance, December 31, 1996 ............................... 3,982,773
Distributions to stockholders ........................... (909,000)
Capital contributions ................................... 5,000,000
Net loss for the year ended December 31, 1997 ........... (1,381,505)
------------
Balance, December 31, 1997 ............................... $ 6,692,268
============
</TABLE>
See accompanying notes.
F-105
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The accompanying combined financial statements include the accounts of
Contemporary International Productions Corporation, Contemporary Productions
Incorporated, Contemporary Marketing, Inc. ("CMI"), Contemporary Sports
Incorporated, Innovative Training and Education Concepts Corporation, n/k/a
Contemporary Group, Inc., Contemporary Investments Corporation ("CIC"),
Contemporary Investments of Kansas, Inc., Continental Entertainment Associates,
Inc., Dialtix, Inc., and Capital Tickets L.P. (collectively, the "Contemporary
Group" or the "Companies"). Intercompany transactions and balances among these
companies have been eliminated in combination. The Companies are subject to
common ownership and to the transaction described in Note 8.
The Contemporary Group is a live entertainment and special events
producer, venue operator and consumer marketer. Income from operations
originates from the operation of the concert division which earns promotion
income in two ways: either a fixed fee for organizing and promoting an event or
an arrangement that entitles it to a profit percentage based on a predetermined
formula. The Companies recognize revenue from the promotion of events when
earned, which is generally upon exhibition. The Companies record commissions on
booking acts as well as sponsorship and concession income as other event
revenues.
CIC is a 50% partner in Riverport Performing Arts Centre Joint Venture
("Riverport"), a Missouri general partnership which operates a 20,000 seat
outdoor amphitheater located in St. Louis, Missouri. The investment in
Riverport is recorded under the equity method of accounting.
Income Taxes
As of December 31, 1997, all of the entities combined are either "S
Corporations" or partnerships and therefore no tax provision has been provided.
In 1996 and 1995, certain of the entities were "C Corporations" for which a tax
provision has been provided.
For the year ended December 31, 1996 and 1995, with respect to the "C
Corporations," the total provision for income taxes is $35,367 and $20,677
respectively.
Certain of the "C Corporations" filed elections to be treated as "S
Corporations" beginning January 1, 1997. Therefore, with respect to such
corporations, no provision for income taxes has been provided for the year
ended December 31, 1997. These Companies have subsequently revoked the election
to be taxed as "S Corporations", effective January 1, 1998.
Accounts Receivable
Accounts receivable consist of amounts due from ticket vendors, venue box
offices and customers of marketing services. Management considers these
accounts receivable as of December 31, 1997, 1996 and 1995 to be collectible;
accordingly, no allowance for doubtful accounts is recorded.
Revenue Recognition
Deferred revenue relates primarily to an advance on future concession
revenues which is evidenced by a noninterest bearing note payable and advances
on marketing services. Payments collected in advance are recognized as income
as events occur or services are provided. Reimbursable event costs represent
amounts paid by the Companies on behalf of co-promoters and other parties with
interests in the events which will be reimbursed by such parties.
Sales under long-term contracts for the Company's marketing division are
recorded under the percentage-of-completion method, wherein revenues and
estimated costs are recorded as the work is performed.
F-106
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Significant Customer
CMI's most significant customer is AT&T, which provided approximately 23%
and 12% of the Companies' combined revenues for the years ended December 31,
1997 and 1996, respectively. In March 1998, AT&T has indicated that it will no
longer be using the services of CMI.
Advertising Costs
Advertising costs are expensed as incurred. For the year ended December
31, 1997, 1996 and 1995, advertising costs were $115,634 and $71,879 and
$44,226, respectively.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed on
either the straight-line method or accelerated methods over the estimated
useful lives of the assets or the term of the related lease as follows:
<TABLE>
<S> <C>
Furniture, fixtures and equipment ......... 5-7 years
Land improvements ......................... 15 years
Leasehold improvements .................... 10 years
</TABLE>
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassification
Certain prior year amounts in the financial statements have been
reclassified to conform with the current year's presentation.
2. INVESTMENTS
The following is a summary of the financial position and results of
operations of Riverport as of and for the year ended December 31, 1995, 1996
and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Current assets .................................. $ 350,532 $ 473,275 $ 284,424
Property and equipment .......................... 12,388,989 11,815,552 11,188,826
Other assets .................................... 27,573 16,553 --
----------- ----------- -----------
Total assets .................................... $12,767,094 $12,305,380 $11,473,250
=========== =========== ===========
Current liabilities ............................. $ 1,524,364 $ 1,993,981 $ 318,028
Other liabilities ............................... 1,819,136 442,374 281,789
Partners' capital ............................... 9,423,594 9,869,025 10,873,433
----------- ----------- -----------
Total liabilities and partners' capital ......... $12,767,094 $12,305,380 $11,473,250
=========== =========== ===========
Revenue ......................................... $15,256,314 $11,693,138 $14,247,109
Net operating income ............................ $ 3,200,738 $ 1,970,887 $ 2,616,839
Net income ...................................... $ 2,665,796 $ 1,645,431 $ 2,004,408
</TABLE>
F-107
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
During the years ended December 31, 1997, 1996 and 1995, CIC received a
cash distribution of $500,000, $600,000 and $1,250,000, respectively, from
Riverport.
3. NOTES PAYABLE
In November 1995, the Company obtained a $750,000 unsecured line of credit
with a bank which matured in May 1996. The note bore a rate of interest based
on the prime lending rate (8.75% in 1995). At December 31, 1995, $226,970 was
outstanding under this line of credit.
At December 31, 1997, 1996 and 1995, CIC held a $2,322,500 non
interest-bearing note payable to its partner in Riverport. The carrying value
of the note was $1,814,424, $1,734,723 and $1,661,610 at December 31, 1997,
1996 and 1995, respectively, which includes imputed interest at a rate of
approximately 9%. The note, which was payable in installments through December
1, 2000 and was secured by CIC's investment in Riverport, was repaid in 1998 in
connection with the transaction described in Note 8.
At December 31, 1996, the Companies had a $592,138 bank note payable which
bore interest based on the prime lending rate (8.25% in 1996, 8.5% in 1997) and
was repaid in full during 1997.
4. COMMON STOCK
The Companies' stock and tax status for 1997 are as follows:
<TABLE>
<CAPTION>
TAX SHARES SHARES PAR
STATUS AUTHORIZED ISSUED VALUE
------------- ------------ ---------- ------
<S> <C> <C> <C> <C>
Contemporary International Productions
Corporation ................................. S-Corp. 30,000 10 $ 1
Contemporary Productions Incorporated ......... S-Corp. 30,000 100 $ 1
Contemporary Marketing, Inc. .................. S-Corp. 30,000 100 $ 1
Contemporary Sports, Incorporated ............. S-Corp. 30,000 100 $ 1
Innovative Training and Education
Concepts Corporation n/k/a
Contemporary Group, Inc. .................... S-Corp. 30,000 100 $ 1
Contemporary Investments Corporation .......... S-Corp. 30,000 200 $ 1
Contemporary Investments of Kansas, Inc. S-Corp. 30,000 30,000 $ 1
Continental Entertainment Associates, Inc. C-Corp. 300 6 $100
Dialtix, Inc. ................................. S-Corp. 300 6 $100
Capital Tickets L.P. .......................... Partnership N/A N/A N/A
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Leases
The Companies lease office facilities and concert venues under
noncancellable leases which expire at various dates through 2004. Such leases
contain various operating escalations and renewal options.
Total rent expense for the years ended December 31, 1997, 1996 and 1995
was $705,489, $818,123 and $734,785, respectively.
F-108
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under noncancellable operating leases as of
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 ......................... $ 858,757
1999 ......................... 863,757
2000 ......................... 440,050
2001 ......................... 264,000
Thereafter ................... 317,000
----------
$2,743,564
==========
</TABLE>
Compensation
During 1996, CMI entered into an employment agreement with one of its
employees which provided her rights to future cash payments based on the fair
value of CMI, as defined. These rights would vest on January 1, 2002 or upon
the occurrence of certain transactions, including a change of control. On
December 31, 1997, in connection with an amendment to her employment agreement,
the rights became fully vested and CMI paid this employee $1,329,284. In
addition, she is entitled to receive as a bonus $2,854,899 under the amendment,
which will be paid in 1998 and is accrued at December 31, 1997.
Litigation
The Companies are party to various legal proceedings generally incidental
to their businesses. Although the ultimate disposition of these proceedings is
not presently determinable, management, after discussions with counsel, does
not expect the outcome of these proceedings to have a material adverse effect
on the financial condition of the Companies.
6. EMPLOYEE RETIREMENT PLAN
In January 1992, the Companies began a retirement plan for their employees
under Section 401(k) of the Internal Revenue Code. All employees are eligible
to participate once they obtain the minimum age requirement of 21 years and
have satisfied the service requirement of one year with the Companies.
Participant contributions are subject to the limitations of Section 402(g) of
the Internal Revenue Code. The Companies contribute to participant employees'
accounts at the rate of 25% of the first 5% of the participating employees'
contributions. During the years ended December 31, 1997, 1996 and 1995, the
Companies contributions totaled approximately $37,769, $25,600 and $18,887,
respectively.
7. RELATED PARTY TRANSACTIONS
During 1997, the Company loaned $1,000,000 to its co-presidents. The loans
which bore a rate of interest of approximately 5.8% were repaid in full in
early 1998.
8. SUBSEQUENT EVENTS
In February 1998, the owners of the Companies sold 100% of the capital
stock of Contemporary International Productions Corporation and the assets of
the remaining companies comprising the Contemporary Group, excluding cash and
1997 receivables, to SFX Entertainment, Inc. for an aggregate consideration of
$62,300,000 in cash and the issuance of preferred stock which was converted
into 1,402,850 shares of SFX Entertainment Class A Common Stock. In connection
with this transaction, SFX Entertainment and its affiliates also acquired the
50% interest of Riverport not owned by CIC for $12,585,000.
F-109
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Riverport Performing Arts Centre, Joint Venture:
We have audited the accompanying balance sheets of Riverport Performing
Arts Centre, Joint Venture (a Missouri General Partnership) as of December 31,
1997 and 1996, and the related statements of income and changes in partners'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Joint Venture's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Riverport Performing Arts
Centre, Joint Venture as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 27, 1998
F-110
<PAGE>
RIVERPORT PERFORMING ARTS CENTRE, JOINT VENTURE
BALANCE SHEETS -- AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 202,251 $ 76,231
Accounts receivable ............................... -- 324,275
Prepaid expenses and other current assets ......... 82,173 72,769
------------ ------------
Total current assets ............................... 284,424 473,275
------------ ------------
FACILITY:
Land and leasehold interest ....................... 5,156,342 5,156,342
Buildings and improvements ........................ 8,516,251 8,449,225
Furniture, fixtures and equipment ................. 2,293,356 2,218,987
Less- Allowance for depreciation .................. (4,777,123) (4,009,002)
------------ ------------
11,188,826 11,815,552
------------ ------------
OTHER ASSETS--Deferred financing fees, net ......... -- 16,553
------------ ------------
$ 11,473,250 $ 12,305,380
============ ============
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt .............. $ 160,585 $ 1,376,762
Accounts payable and accrued expenses ............. 120,043 453,804
Deferred income ................................... 37,400 163,415
------------ ------------
Total current liabilities .......................... 318,028 1,993,981
LONG-TERM DEBT ..................................... 281,789 442,374
------------ ------------
599,817 2,436,355
PARTNERS' EQUITY ................................... 10,873,433 9,869,025
------------ ------------
$ 11,473,250 $ 12,305,380
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-111
<PAGE>
RIVERPORT PERFORMING ARTS CENTRE, JOINT VENTURE
STATEMENTS OF INCOME AND CHANGES IN PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
REVENUES:
Show admission ..................................... $ 9,901,214 $ 8,053,939
Sponsorships and promotions ........................ 1,113,100 914,690
Concession rental .................................. 1,970,742 1,724,060
Parking ............................................ 1,122,979 843,283
Other .............................................. 139,074 157,166
------------ ------------
Operating revenues ............................... 14,247,109 11,693,138
------------ ------------
EXPENSES:
Talent ............................................. 5,825,962 4,382,735
Other show expenses ................................ 1,866,910 1,706,317
Advertising and marketing .......................... 1,037,048 887,673
Producer fees and commissions ...................... 1,187,253 1,071,946
General and administrative ......................... 1,713,097 1,673,580
------------ ------------
Operating expenses ............................... 11,630,270 9,722,251
------------ ------------
Net operating income ............................. 2,616,839 1,970,887
------------ ------------
OTHER EXPENSES (INCOME):
Depreciation and amortization ...................... 779,278 767,258
Interest, net ...................................... 13,167 112,947
Other income ....................................... (180,014) (554,749)
------------ ------------
Other expenses, net .............................. 612,431 325,456
------------ ------------
Net income ....................................... 2,004,408 1,645,431
PARTNERS' EQUITY AT THE BEGINNING OF PERIOD ......... 9,869,025 9,423,594
DISTRIBUTION TO PARTNERS ............................ (1,000,000) (1,200,000)
------------ ------------
PARTNERS' EQUITY AT THE END OF THE PERIOD ........... $ 10,873,433 $ 9,869,025
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-112
<PAGE>
RIVERPORT PERFORMING ARTS CENTRE, JOINT VENTURE
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 2,004,408 $ 1,645,431
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization ............................... 779,278 767,258
Change in accounts receivable ............................... 324,275 (215,712)
Change in prepaid expenses and other current assets ......... (4,008) (3,606)
Change in accounts payable and accrued expenses ............. (333,761) 284,945
Change in deferred income ................................... (126,015) (31,505)
------------ ------------
Net cash provided by operating activities .................. 2,644,177 2,446,811
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Facility additions ............................................ (141,395) (182,801)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt ............................................. (1,376,762) (1,160,585)
Distribution to Partners ...................................... (1,000,000) (1,200,000)
------------ ------------
Net cash used in financing activities ...................... (2,376,762) (2,360,585)
------------ ------------
Change in cash and cash equivalents ........................ 126,020 (96,575)
CASH AND CASH EQUIVALENTS, beginning of year ................... 76,231 172,806
------------ ------------
CASH AND CASH EQUIVALENTS, end of year ......................... $ 202,251 $ 76,231
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-113
<PAGE>
RIVERPORT PERFORMING ARTS CENTRE, JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SIGNIFICANT ACCOUNTING POLICIES:
Organization
The Riverport Performing Arts Centre, Joint Venture (the Joint Venture) is
a Missouri General Partnership between Contemporary Investments Corporation
(Contemporary) and Sverdrup/BRC Joint Venture (formerly Sverdrup/MDRC Joint
Venture). The partners each hold a 50% interest in the equity and operations of
the Joint Venture. The term of the Joint Venture continues until
December 31, 2045. The Joint Venture is the developer, owner and operator of a
20,000 seat outdoor amphitheater located in St. Louis, Missouri. The Joint
Venture contracts with popular musical performing artists for the entertainment
of its guests. Entertainment is provided during the months of April through
October to guests primarily from the St. Louis metropolitan area.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of investments with a maturity of three months or
less when purchased. Cash equivalents are carried at cost, which approximates
market. Interest income of $61,199 and $56,708 for 1997 and 1996, respectively,
is netted against interest expense in the accompanying statements of income.
Depreciation and Amortization
Depreciation is provided using the straight-line method over estimated
useful lives of 5 to 20 years. Deferred financing fees are amortized over the
life of the related debt.
Leasehold Interest
The facility was constructed on land obtained through a leasehold interest
that expires on
April 25, 2011. The Sverdrup/BRC Joint Venture sold to Contemporary an
undivided 50% interest in the leasehold interest. Concurrently, both
Sverdrup/BRC Joint Venture and Contemporary contributed their undivided 50%
interests in the leasehold interest into the Joint Venture. Ground rent is $1
per year under the lease with the Joint Venture assigned as landlord.
Deferred Income
Deferred income reflects advance sales of season tickets for the
subsequent operating season and is amortized into show admission revenues as
the subsequent operating season progresses.
Income Taxes
Income taxes have not been provided for in the financial statements since
the Joint Venture is organized as a partnership, and each partner is liable for
its own tax payments.
F-114
<PAGE>
RIVERPORT PERFORMING ARTS CENTRE, JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. LONG-TERM DEBT
Notes payable outstanding at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -------------
<S> <C> <C>
Mortgage note due in installments through 1997, bearing
interest at prime plus 1/2% which averaged 8.875% during
1997 and 1996 .............................................. $ -- $1,216,178
Noninterest-bearing note due in installments through 2000..... 442,374 602,958
-------- ----------
442,374 1,819,136
Less-Current maturities ...................................... 160,585 1,376,762
-------- ----------
$281,789 $ 442,374
======== ==========
</TABLE>
The mortgage note contains covenants that require the Joint Venture to
maintain certain financial ratios and also prohibit certain transactions. The
mortgage note is secured by buildings, improvements, furniture, fixtures and
equipment, limited to the remaining term of the leasehold interest expiring
April 25, 2011. The mortgage note was paid off on September 25, 1997. The
noninterest-bearing note is secured by all concession equipment. Cash paid for
interest totaled $79,391 and $173,172 for 1997 and 1996, respectively.
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998 ......... $160,585
1999 ......... 160,585
2000 ......... 121,204
--------
$442,374
========
</TABLE>
3. CONCESSION RENTAL:
The Joint Venture rents certain premises at its location for the sale of
concessions under a lease that expires in 2000. Rental income is based on a
percentage of gross receipts for some products sold and gross margin for other
products sold.
4. RELATED-PARTY TRANSACTIONS
Contempro Group, Inc., an affiliate of Contemporary, provides various
services to the Joint Venture. These services include marketing, media
placement, sales and show production. Approximately $2,235,000 and $1,766,000
was paid for these services in 1997 and 1996, respectively.
In addition to the payments described above, the Joint Venture also
compensates Contempro Group, Inc. as an agent for the procurement of these
services.
Sverdrup Investments, Inc., an affiliate of Sverdrup/BRC Joint Venture,
was paid $36,000 for accounting services in 1997 and $147,000 for accounting
and landscaping services in 1996.
Riverport Trust, an affiliate of Sverdrup/BRC Joint Venture, provides
ground maintenance to the tenants of the Riverport complex. The fees charged
for these services is based on the total space occupied by the tenant. The
Joint Venture paid approximately $62,000 and $73,000 for these services in 1997
and 1996, respectively.
The Joint Venture had liabilities for related-party transactions and
pass-through costs to affiliates of Contemporary totaling approximately $56,000
and $416,000 as of December 31, 1997 and 1996, respectively. The Joint Venture
also had receivables for income collected by Contemporary totaling
approximately $273,000 as of December 31, 1996.
F-115
<PAGE>
RIVERPORT PERFORMING ARTS CENTRE, JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CONTINGENCIES:
From time to time, the Joint Venture is a party to certain lawsuits and
other claims related to the normal conduct of its business. Management believes
that liabilities, if any, resulting from the resolution of pending or
threatened proceedings would not materially affect the financial condition
or results of operations of the Joint Venture.
6. SUBSEQUENT EVENT:
On February 27, 1998, Sverdrup/BRC Joint Venture and Contemporary sold
their 50% interests in the equity and operations of the Joint Venture to SFX
Entertainment, Inc. and Contemporary Acquisition Corporation, respectively.
F-116
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Album Network, Inc.
We have audited the accompanying combined balance sheets of The Album
Network, Inc. and Affiliated Companies as of September 30, 1997 and 1996, and
the related combined statements of operations and stockholders' deficit and
cash flows for the years then ended. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of The Album Network,
Inc. and Affiliated Companies at September 30, 1997 and 1996, and the combined
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
November 20, 1997
New York, New York
F-117
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------
1996 1997
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 160,453 $ 272,423
Accounts receivable, less allowance for doubtful
accounts of $153,728 in 1997and $95,450 in 1996 ................... 2,148,159 2,229,237
Officers' loans receivable ......................................... 423,447 390,794
Prepaid expenses and other current assets .......................... 125,558 234,914
------------ ------------
Total current assets ................................................ 2,857,617 3,127,368
Property, plant and equipment, at cost, less accumulated depreciation
of $1,056,689 in 1997 and $ 914,513 in 1996 ........................ 278,898 303,614
Deferred software costs, less accumulated amortization of $106,639 in
1997 and $45,768 in 1996 ........................................... 172,302 262,061
Other noncurrent assets ............................................. 39,477 37,033
------------ ------------
Total assets ........................................................ $ 3,348,294 $ 3,730,076
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accrued officers' bonuses .......................................... $ 1,200,000 $ 1,251,000
Accounts payable and other accrued expenses ........................ 1,081,469 1,208,424
Officers' loans payable ............................................ 650,000 489,085
Unearned subscription income ....................................... 530,255 406,529
Taxes payable and other current liabilities ........................ 339,551 224,011
Current portion of long-term debt .................................. 636,723 506,228
------------ ------------
Total current liabilities ........................................... 4,437,998 4,085,277
Long-term debt ...................................................... 1,294,133 1,051,881
Deferred income taxes ............................................... 279,434 114,178
Combined stockholders' deficit ...................................... (2,663,271) (1,521,260)
------------ ------------
Total liabilities and stockholders' deficit ......................... $ 3,348,294 $ 3,730,076
============ ============
</TABLE>
See accompanying notes.
F-118
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 169,498
Accounts receivable, less allowance for doubtful
accounts of $157,682 ................................................... 2,268,205
Officers' loans receivable .............................................. 406,421
Prepaid expenses and other current assets ............................... 133,293
------------
Total current assets ..................................................... 2,977,417
Property, plant and equipment, at cost, less accumulated depreciation
of $1,098,747 ........................................................... 307,096
Deferred software costs, less accumulated amortization of $127,116 ....... 282,453
Other noncurrent assets .................................................. 9,525
------------
Total assets ............................................................. $ 3,576,491
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and other accrued expenses ............................. $ 1,346,095
Officers' loans payable ................................................. 717,336
Unearned subscription income ............................................ 558,358
Taxes payable and other current liabilities ............................. 749,108
Current portion of long-term debt ....................................... 635,464
------------
Total current liabilities ................................................ 4,006,361
Long-term debt ........................................................... 939,200
Deferred income taxes .................................................... 53,575
Combined stockholders' deficit ........................................... (1,422,645)
------------
Total liabilities and stockholders' deficit .............................. $ 3,576,491
============
</TABLE>
See accompanying notes.
F-119
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS AND
STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1996 1997
---------------- ----------------
<S> <C> <C>
OPERATING REVENUES
Advertising revenue ......................................... $ 7,040,465 $ 7,619,751
Research services revenue ................................... 2,453,026 2,441,703
Direct mail & subscription revenue .......................... 1,791,887 1,837,248
Broadcast revenue ........................................... 2,085,714 2,235,788
Consulting revenue .......................................... 720,000 470,000
Other revenue ............................................... 675,790 1,152,448
------------ ------------
14,766,882 15,756,938
Direct costs of revenue ..................................... 4,408,997 4,107,328
------------ ------------
10,357,885 11,649,610
OPERATING EXPENSES
Officers' salary expense .................................... 3,384,870 3,662,427
Other salary expense ........................................ 3,956,910 3,949,715
Depreciation and amortization ............................... 183,976 203,047
General and administrative expenses ......................... 2,524,704 2,483,197
------------ ------------
10,050,460 10,298,386
------------ ------------
Income from operations ...................................... 307,425 1,351,224
OTHER INCOME (EXPENSE)
Interest income--officers' loans ............................ 35,000 41,600
Interest income--third party ................................ 6,961 1,295
Interest expense--officers' loans ........................... (35,000) (55,940)
Interest expense--third party ............................... (256,164) (175,490)
------------ ------------
Income before income taxes .................................. 58,222 1,162,689
INCOME TAXES
Provision for income taxes .................................. 211,832 20,678
------------ ------------
Net income (loss) ........................................... (153,610) 1,142,011
Combined stockholders' deficit at beginning of year ......... (2,509,661) (2,663,271)
------------ ------------
Combined stockholders' deficit at end of year ............... $ (2,663,271) $ (1,521,260)
============ ============
</TABLE>
See accompanying notes.
F-120
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT OF OPERATIONS AND
STOCKHOLDERS' DEFICIT
THREE MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
OPERATING REVENUES
Advertising revenue ........................................... $ 1,605,422
Research services revenue ..................................... 604,961
Direct mail & subscription revenue ............................ 521,851
Broadcast revenue ............................................. 825,686
Other revenue ................................................. 97,437
------------
3,655,357
Direct costs of revenue ....................................... 1,056,785
------------
2,598,572
OPERATING EXPENSES
Officers' salary expense ...................................... 209,424
Other salary expense .......................................... 1,090,662
Depreciation and amortization ................................. 62,535
General and administrative expenses ........................... 1,034,159
------------
2,396,780
------------
Income from operations ........................................ 201,792
OTHER INCOME (EXPENSE)
Interest income--officers' loans .............................. 4,171
Interest income--third party .................................. 169
Interest expense--officers' loans ............................. (15,596)
Interest expense--third party ................................. (26,921)
------------
Income before income taxes .................................... 163,615
INCOME TAXES
Provision for income taxes .................................... 65,000
------------
Net income (loss) ............................................. 98,615
Combined stockholders' deficit at beginning of period ......... (1,521,260)
------------
Combined stockholders' deficit at end of period ............... $ (1,422,645)
============
</TABLE>
See accompanying notes.
F-121
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1996 1997
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ......................................................... $ (153,610) $1,142,011
Adjustment to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization .................................... 183,976 203,047
Provision for doubtful accounts .................................. 13,584 58,278
Changes in operating assets and liabilities:
Accounts receivable ............................................. (246,873) (139,356)
Prepaid expenses and other current assets ....................... 154,120 (109,356)
Other non current assets ........................................ (3,378) 2,444
Accounts payable and accrued expenses ........................... 69,816 126,955
Unearned subscription income .................................... 101,623 (123,726)
Accrued officers' bonus ......................................... 639,000 51,000
Deferred income taxes ........................................... 39,268 (165,256)
Taxes payable and other current liabilities ..................... 143,423 (115,540)
---------- ----------
Net cash provided by operating activities .......................... 940,949 930,501
---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment ................................. (65,731) (166,892)
Deferred software costs ............................................ (97,463) (150,630)
---------- ----------
Net cash used in investing activities .............................. (163,194) (317,522)
---------- ----------
FINANCING ACTIVITIES
Payments on long term debt ......................................... (860,236) (527,747)
Proceeds from additional debt borrowings ........................... 52,500 155,000
Proceeds from (repayments of) officers' loans, net ................. 61,355 (128,262)
---------- ----------
Net cash used in financing activities .............................. (746,381) (501,009)
---------- ----------
Net increase in cash and cash equivalents .......................... 31,374 111,970
Cash and cash equivalents at beginning of year ..................... 129,079 160,453
---------- ----------
Cash and cash equivalents at end of year ........................... $ 160,453 $ 272,423
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ............................................. $ 304,726 $ 190,168
========== ==========
Cash paid for income taxes ......................................... $ 21,375 $ 26,316
========== ==========
</TABLE>
See accompanying notes.
F-122
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES
Net income ......................................................... $ 98,615
Adjustment to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization .................................... 62,535
Provision for doubtful accounts .................................. 3,954
Changes in operating assets and liabilities:
Accounts receivable ............................................. (42,922)
Prepaid expenses and other current assets ....................... 101,621
Other non current assets ........................................ 27,508
Accounts payable and accrued expenses ........................... 137,671
Unearned subscription income .................................... 151,829
Accrued officers' bonus ......................................... (1,251,000)
Deferred income taxes ........................................... (60,603)
Taxes payable and other current liabilities ..................... 525,097
------------
Net cash used in operating activities .............................. (245,695)
INVESTING ACTIVITIES
Purchase of property and equipment ................................. (45,540)
Deferred software costs ............................................ (40,869)
------------
Net cash used in investing activities .............................. (86,409)
FINANCING ACTIVITIES
Payments on long term debt ......................................... (112,681)
Proceeds from additional debt borrowings ........................... 129,236
Proceeds from officers' loans, net ................................. 212,624
------------
Net cash provided by financing activities .......................... 229,179
------------
Net decrease in cash and cash equivalents .......................... (102,925)
Cash and cash equivalents at beginning of year ..................... 272,423
------------
Cash and cash equivalents at end of year ........................... $ 169,498
============
</TABLE>
See accompanying notes.
F-123
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Combination
The accompanying combined financial statements include the accounts of The
Album Network, Inc., The Network 40, Inc., The Urban Network, Inc. and
In-the-Studio (collectively, the "Companies"). Intercompany transactions and
balances among the Companies have been eliminated in combination.
On August 27, 1997, the board of directors and shareholders of the
Companies approved a plan of agreement and merger which provided that The Urban
Network, Inc. merge into The Album Network, Inc. (the "Company") effective
September 24, 1997. The Companies accounted for the transaction as a merger of
companies under common control.
The Companies publish six music trade magazines, produce rock, urban and
top 40 programming specials and manufacture compact disc samplers. They also
serve as product marketing advisors to contemporary music talent and their
managers in providing creative content and innovative marketing campaigns. In
addition, the Companies provide research services for radio station program
directors and record label executives. The Companies publishes five print
periodicals for rock and top 40 music broadcasters, retailers and music
industry executives. The weekly publications are the "Album Network" and the
"Network 40". The monthly publications are the "Virtually Alternative" and
"Totally Adult" and the quarterly publication is titled "AggroActive."
Additionally, "The Urban Network" trade magazine is published each week.
Revenue Recognition
The Companies' magazines generate revenue from advertising sales,
complemented by subscription sales and incremental direct mail revenue.
Unearned subscription income represents revenues on subscriptions for
which publications have not been delivered to customers as of the balance sheet
date. Unearned subscription income at September 30, 1996 also includes unearned
income on certain advertising and direct mail packages.
Revenue from research services is recognized straight-line over the
license term or upon the sale of computer software developed for licensees and
other customers. Advertising and broadcast revenues are recognized when
advertisements are run or aired.
Furniture and Equipment
Furniture and equipment are valued at cost less accumulated depreciation.
Depreciation is provided on the straight-line and declining balance methods
over the estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Computer hardware ............... 5 years
Software ........................ 5 years
Furniture and equipment ......... 5-7 years
Leasehold improvements .......... 5 years
</TABLE>
Deferred Software Costs
Costs incurred to produce software masters and subsequent enhancements to
such software are capitalized and amortized over the remaining economic life of
the master (generally, five years). Costs of maintenance and customer support
are charged to expense when incurred.
Cash and Cash Equivalents
The Companies consider all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
F-124
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
Each of the affiliated Companies file a separate tax return. The Album
Network, Inc. and the Urban Network, Inc. are "C Corporations." The Network 40,
Inc. has elected to be taxed as an "S Corporation". The "S Corporation"
election is effective for both federal and state tax purposes. Accordingly all
items of income, loss, deduction or credit are reported by the shareholders on
their respective personal income tax returns. The corporate tax rate for S
Corporations in California is one and one-half percent (1.5%).
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company maintains bank balances with City National Bank in excess of
the federally insured limit of $100,000.
Reclassification
Certain amounts in the financial statements have been reclassified to
conform with the current presentations.
Interim Financial Information
Financial information as of December 31, 1997 and for the three months
ended December 31, 1997 is unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of the results for such period
have been included, all adjustments are of a normal and recurring nature.
Interim results are not necessarily indicative of results for a full year.
2. RELATED PARTY TRANSACTIONS
Officers' Loans
The Companies have several loan agreements outstanding with its officers
in order to satisfy the cash flow needs of operations. The interest rates on
the loans to and from the officers range from approximately 10% to 12%.
At October 1, 1995, the officers owed the Companies $471,918 and the
Companies owed the officers $637,116. During the year ended September 30, 1996,
the officers repaid $48,471 and loaned the Companies an additional $12,884.
At October 1, 1996, the officers owed the Companies $423,447 and the
Companies owed the officers $650,000. During the year ended September 30, 1997,
the officers repaid $32,653 to the Companies and the Companies repaid $160,915
to the officers.
F-125
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT
A summary of long-term debt as of September 30, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Note payable to City National Bank, collateralized by certain
equipment and personally guaranteed by the stockholders; payable
in monthly installments of $2,917 plus interest at 10.5%; due
May 1999 .......................................................... $ 96,994 $ 62,740
Note payable to City National Bank, personally guaranteed by the
stockholders; payable in monthly installments of $41,233 plus
interest at 8.75% through January 22, 1997 and at 8.25% thereafter;
due December 2000.(A) ............................................. 1,821,862 1,415,369
Other .............................................................. 12,000 80,000
---------- ----------
1,930,856 1,558,109
Less current portion ............................................... 636,723 506,228
---------- ----------
Long-term debt ..................................................... $1,294,133 $1,051,881
========== ==========
</TABLE>
- ----------
(A) In September 1995 The Album Network, Inc., The Network 40, Inc. and The
Urban Network, Inc. entered into a loan agreement with City National Bank
for $2,330,000 in connection with a redemption of common stock. Interest
was set at 8.75% per year and principal and interest were payable in
monthly installments of $57,846 through September 1999. In January 1997,
the loan agreement was revised. Interest was reset at 8.25% and monthly
payments of $41,233 were extended through December 2000. The principal
balance at the date of revision was $1,687,560.
4. COMMON STOCK
The Companies' stock and tax status at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED
TAX SHARES AND
STATUS AUTHORIZED OUTSTANDING
------------- ------------ ------------
<S> <C> <C> <C>
The Album Network, Inc. ......... C-Corp. 1,000,000 220
The Network 40, Inc. ............ S-Corp. 100,000 825
The Urban Network, Inc. ......... C-Corp. 100,000 825
In-the-Studio ................... Partnership n/a n/a
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Leases
The Companies lease an office facility under noncancellable leases which
expire in February 1998.
Total rent expense for the years ended September 30, 1997 and 1996 under
operating leases was $262,812 and $256,026, respectively.
Future minimum lease payments under noncancellable operating leases as of
September 30, 1997 total $121,155, all of which is payable in 1998.
Other Matters
As of September 30, 1997, approximately $80,000 was drawn on lines of
credit with City National Bank. There were no amounts drawn as of September 30,
1996.
F-126
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
F-127
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE RETIREMENT PLAN
In January 1997, the Companies began a retirement plan for their employees
under Section 401(k) of the Internal Revenue Code. All employees are eligible
to participate once they obtain the minimum age requirement of 21 years, and
have satisfied the service requirement of one year with the Companies.
Participant contributions are subject to the limitations of Section 402 (g) of
the Internal Revenue Code. The Companies contribute monthly to participating
employees accounts at the rate of 10% of the participating employees
contributions. During the year ended September 30, 1997, the Companies
contributions totaled approximately $14,000.
8. SUBSEQUENT EVENTS (UNAUDITED)
On February 27, 1998, the Company was acquired by SFX Entertainment Inc.
F-128
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
BG Presents, Inc.
We have audited the accompanying consolidated balance sheets of BG
Presents, Inc. and Subsidiaries as of January 31, 1997 and 1998, and the
related consolidated statements of income, cash flows and stockholders' equity
for each of the three years in the period ended January 31, 1998. These
financial statements are the responsibility of management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BG Presents,
Inc. and subsidiaries at January 31, 1997 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1998, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
New York, New York
March 20, 1998
F-129
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31
------------------------------
1997 1998
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $11,819,831 $ 5,380,984
Accounts receivable--trade ......................................... 3,164,543 5,460,915
Accounts receivable--related parties ............................... 1,347,150 776,174
Investments ........................................................ 370,000 --
Inventories ........................................................ 236,078 227,766
Prepaid assets ..................................................... 450,883 3,001,450
Income tax receivable .............................................. 418,528 --
Deferred income taxes .............................................. 94,000 --
Other current assets ............................................... -- 118,455
----------- -----------
Total current assets ................................................ 17,901,013 14,965,744
Property and equipment, net ......................................... 9,661,910 8,904,509
Goodwill, net of accumulated amortization of $238,400 and
$357,600 at January 31, 1997 and 1998, respectively................. 1,549,600 1,430,400
Other assets (Note 6) ............................................... 167 4,100,011
----------- -----------
Total assets ........................................................ $29,112,690 $29,400,664
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--current portion ..................................... $ 722,966 $ 879,040
Lease commitment--current portion .................................. 35,676 --
Accounts payable ................................................... 3,229,054 1,816,959
Deferred revenue ................................................... 1,362,533 1,480,145
Accrued liabilities and other current liabilities .................. 3,721,749 3,753,613
----------- -----------
Total current liabilities ........................................... 9,071,978 7,929,757
Lease commitment, less current portion .............................. 6,704,719 --
Notes payable, less current portion ................................. 5,233,709 11,134,834
Deferred income taxes ............................................... 2,617,000 2,617,000
Stockholders' equity:
Common stock, no par value; 10,000,000 shares authorized;
1,000,000 shares issued and outstanding in 1997 and 1998 ......... 1,198,947 1,198,947
Retained earnings .................................................. 4,286,337 6,520,126
----------- -----------
Total stockholders' equity .......................................... 5,485,284 7,719,073
----------- -----------
Total liabilities and stockholders' equity .......................... $29,112,690 $29,400,664
=========== ===========
</TABLE>
See accompanying notes.
F-130
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
-------------------------------------------------
1996 1997 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
REVENUES
Concert revenues ................................. $ 62,996,606 $ 74,981,534 $ 75,898,464
Contract management .............................. 7,844,248 10,255,060 23,632,596
Concessions/merchandise .......................... 5,536,287 7,094,593 6,021,845
------------ ------------ ------------
76,377,141 92,331,187 105,552,905
Cost of revenues ................................. 54,383,763 69,916,840 81,092,377
------------ ------------ ------------
21,993,378 22,414,347 24,460,528
EXPENSES
General and administrative ....................... 17,614,296 17,602,501 18,866,259
Depreciation and amortization .................... 1,441,439 1,474,414 1,026,684
------------ ------------ ------------
Income from operations ........................... 2,937,643 3,337,432 4,567,585
OTHER INCOME (EXPENSE)
Interest expense ................................. (1,324,219) (1,257,758) (916,723)
Interest income .................................. 307,756 295,057 294,888
Miscellaneous .................................... 535,191 289,222 (24,300)
------------ ------------ ------------
Income before provision for income taxes ......... 2,456,371 2,663,953 3,921,450
Provision for income taxes ....................... 1,160,718 1,272,190 1,687,661
------------ ------------ ------------
Net income ....................................... $ 1,295,653 $ 1,391,763 $ 2,233,789
============ ============ ============
</TABLE>
See accompanying notes.
F-131
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
---------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................................... $ 1,295,653 $ 1,391,763 $ 2,233,789
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment ................................................. 1,322,239 1,355,214 907,484
Amortization of goodwill .................................... 119,200 119,200 119,200
Loss on sale of property and equipment ...................... 13,603 -- --
Changes in operating assets and liabilities:
Accounts receivable--trade ................................ 524,566 (1,356,263) (2,296,372)
Accounts receivable--related parties ...................... (496,971) (821) 570,976
Inventories ............................................... (228,294) (7,784) 8,312
Prepaid assets and other .................................. (322,524) 478,391 (2,550,567)
Income tax receivable ..................................... (50,888) (328,390) 300,073
Accounts payable and accrued expenses ..................... (491,982) 3,128,476 (1,380,231)
Deferred income taxes ..................................... 1,139,000 45,000 94,000
Deferred revenue .......................................... (67,859) 379,748 117,612
Other ..................................................... 288,367 160 74,347
------------ ------------ ------------
Net cash provided by (used in) operating activities .......... 3,044,110 5,204,694 (1,801,377)
INVESTING ACTIVITIES
Purchase of SAP limited partnership interest ................. (4,250,000) -- --
Proceeds from sale of equipment .............................. 13,150 -- --
Capital expenditures, including White River
Amphitheatre ................................................ (469,447) (367,678) (4,247,528)
Other ........................................................ (644,496) (247,000) 293,254
------------ ------------ ------------
Net cash used in investing activities ........................ (5,350,793) (614,678) (3,954,274)
FINANCING ACTIVITIES
Payments of notes payable .................................... (444,985) (775,756) --
Borrowings on notes payable .................................. -- 1,000,000 6,057,199
Payments of lease commitments ................................ (395,330) (405,275) (6,740,395)
Retirement of stock .......................................... -- (21,053) --
------------ ------------ ------------
Net cash used in financing activities ........................ (840,315) (202,084) (683,196)
Net increase (decrease) in cash and cash equivalents ......... (3,146,998) 4,387,932 (6,438,847)
Cash and cash equivalents at beginning of year ............... 10,578,897 7,431,899 11,819,831
------------ ------------ ------------
Cash and cash equivalents at end of year ..................... $ 7,431,899 $ 11,819,831 $ 5,380,984
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ....................................... $ 1,324,219 $ 1,257,664 $ 1,092,356
Cash paid for income taxes ................................... 888,738 1,280,000 1,325,000
</TABLE>
See accompanying notes.
F-132
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
<TABLE>
<S> <C>
Balance--January 31, 1995 .............................. $2,818,921
Net income for the year ended January 31, 1996 ......... 1,295,653
----------
Balance--January 31, 1996 .............................. 4,114,574
Net income for the year ended January 31, 1997 ......... 1,391,763
Repurchase and retirement of stock ..................... (21,053)
----------
Balance--January 31, 1997 .............................. 5,485,284
Net income for the year ended January 31, 1998 ......... 2,233,789
----------
Balance--January 31, 1998 .............................. $7,719,073
==========
</TABLE>
See accompanying notes.
F-133
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Business and Principles of Consolidation
BG Presents, Inc. ("BGP" or the "Company") is a holding company for
various operating subsidiaries which principally promote and manage musical and
special events in the San Francisco Bay Area. In addition, the Company owns the
Shoreline Amphitheatre in Mountain View, California. Bill Graham Enterprises,
Inc. ("BGE"), Bill Graham Presents, Inc. ("BGPI"), Bill Graham Management, Inc.
("BGM"), AKG, Inc. ("AKG"), Shoreline Amphitheatre, Ltd. ("SAL"), Fillmore
Fingers, Inc. ("FF"), and Shoreline Amphitheatre Partners ("SAP" and,
collectively, the "Companies") are wholly-owned subsidiaries of the Company.
The accompanying consolidated financial statements include the accounts of the
Company and all of its wholly-owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.
BGE and BGPI earn promotion income in two ways: either a fixed fee for
organizing and promoting an event, or an arrangement that entitles them to a
profit percentage based on a predetermined formula. In addition, the Companies
earn revenue from merchandise and concessions sold during events which they
promote. BGM manages the careers of various artists and records a percentage of
the artists' gross sales from publishing rights, record sales, and tours as
contract management revenue.
AKG operates the Fillmore, Warfield, and Punchline theatres located in San
Francisco, which generate revenue from food and beverage sales, sponsorships,
and ticket sales. Bill Graham Special Events, a division of AKG, records
management/contract fees from organizing corporate and other parties at various
venues in the San Francisco Bay Area. FF provides table service (food and
beverage) for two theatres located in Los Angeles owned by third parties.
Revenue Recognition
Revenue from talent management and the sales of tickets is recognized when
earned. Cash received from the sale of tickets for events not yet performed is
deferred. Revenue from the direct sale of compact discs is recognized upon the
date of sale. The Company's revenue included $305,017, $14,562,000 and
$13,483,683 during the fiscal years ended January 31, 1996, 1997 and 1998,
respectively, from various gymnastics tours, ice skating tours and television
specials.
Cash and Cash Equivalents
The Company considers all investments purchased with an original maturity
date of three months or less to be cash equivalents. At January 31, 1996, 1997
and 1998, the Companies had cash balances in excess of the federally insured
limits of $100,000 per institution.
Use of Estimates
Generally accepted accounting principles require management to make
assumptions in estimates that affect the amount reported in the financial
statements for assets, liabilities, revenues, and expenses. In addition,
assumptions and estimates are used to determine disclosure for contingencies,
commitments, and other matters discussed in the notes to the financial
statements. Actual results could differ from those estimates.
Accounts Receivable
The Company's accounts receivable are principally due from ticket service
and merchandising companies in the San Francisco Bay Area. In addition, related
party receivables include amounts due from owners of the Company and from
affiliated companies. Management believes that all accounts receivable as of
January 31, 1996, 1997 and 1998 were fully collectible; therefore, no allowance
for doubtful accounts was recorded.
F-134
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(CONTINUED)
Property and Equipment
Property and equipment are recorded at cost and depreciated over their
estimated useful lives, which range from 3 to 40 years. Leasehold improvements
are amortized on the straight-line basis over the shorter of the lease term or
estimated useful lives of the assets. Maintenance and repairs are charged to
expense as incurred.
Goodwill
The Company amortizes goodwill over a 15 year period.
Income Taxes
The Companies account for income taxes under the liability method, whereby
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Inventories
Inventories, which consist principally of compact discs and beverage
items, are stated at first-in, first-out (FIFO) cost, which is not in excess of
market.
Advertising and Promotion Costs
The Company expenses all advertising and promotion costs as incurred,
except in instances where management believes these costs generate a direct
response from customers. Advertising expenses were $3,408,322, $4,319,291 and
$4,519,049 for the fiscal years ended January 31, 1996, 1997 and 1998,
respectively.
2. INCOME TAXES
The provision for income taxes for the fiscal years ended January 31, 1997
and 1998 is summarized as follows:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Current:
Federal ................... $ 984,500 $1,304,837
State ..................... 285,800 378,824
---------- ----------
1,270,300 1,683,661
Deferred:
Federal ................... 1,500 3,100
State ..................... 400 900
---------- ----------
1,900 4,000
---------- ----------
$1,272,200 $1,687,661
========== ==========
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company's net
deferred tax liabilities as of January 31, 1997 and 1998 are primarily the
result of the difference between the book basis of depreciable assets and the
related tax basis.
The difference between the tax provision at Federal statutory rates and
the effective rate is due to state taxes, amortization of goodwill and other
nondeductible items.
F-135
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment as of January 31, 1997 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1997 1998
---------------- ----------------
<S> <C> <C>
Buildings ....................... $ 8,234,231 $ 8,251,729
Leasehold improvements .......... 10,326,553 10,403,033
Equipment ....................... 2,166,037 2,184,855
Office furniture ................ 693,068 711,235
Computer equipment .............. 330,367 343,493
Vehicle ......................... 61,211 67,205
------------- -------------
21,811,467 21,961,550
Accumulated depreciation and
amortization ........................... (12,783,510) (13,528,140)
------------- -------------
9,027,957 8,443,410
Land ............................ 633,953 633,953
------------- -------------
$ 9,661,910 $ 9,067,363
============= =============
</TABLE>
4. PENSION PLAN
The Company sponsors a 401(k) Tax Advantage Savings Plan that covers
employees who have one year of service, have worked at least 1,000 hours, are
21 years of age or older, and are not covered by a union contract. At its
discretion, the Company may contribute a percentage of gross pay to the plan,
up to a maximum gross pay of $150,000 per participant. In addition, the Company
makes a matching contribution of 25% of each participant's account up to $400
of their salary deferral each year, for a maximum company matching contribution
of $100. Total contributions to the plan were approximately $182,000, $186,000
and $213,049 for the years ended January 31, 1996, 1997 and 1998, respectively.
F-136
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE
Notes payable as of January 31, 1997 and 1998 consists of the following:
<TABLE>
<CAPTION>
1997 1998
------------- ---------------
<S> <C> <C>
Note payable to Midland Loan Services LP; monthly
payments of $16,574, including interest at the bank's
index rate plus 3.5% (8.4% and 8.375% at January 31,
1997 and 1998, respectively; matures May 1, 2004;
secured by deed .......................................... $2,215,001 $ 2,193,732
Note payable to Sanwa Bank; quarterly payments range
from $75,000 to $200,000, interest accrued monthly at
the bank's prime rate plus 0.5% (8.75% and 8.75% at
January 31, 1997 and 1998, respectively); matures
January 31, 2001 ......................................... 2,925,000 2,425,000
Note payable to Sanwa Bank; monthly payments of
$16,666, including interest at a rate of London Inter-
Bank Offered Rate (LIBOR) plus 2.5%; matures
January 31, 2002; secured by assets of the Company
(excluding the office building) .......................... 816,674 616,682
Note payable to Sanwa Bank; monthly payments range
from $12,000 to $25,000, interest accrued monthly at the
bank's index rate plus 2.375%; matures March 1, 2007;
secured by deed .......................................... -- 6,778,460
---------- -----------
5,956,675 12,013,874
Less current portion ....................................... (722,966) (879,040)
---------- -----------
$5,233,709 $11,134,834
========== ===========
</TABLE>
The first note payable with Sanwa Bank also provided for a line-of-credit
of up to $1,000,000 that expired on April 30, 1997. At January 31, 1998, there
were no borrowings outstanding against this credit line.
F-137
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE (CONTINUED)
At January 31, 1998, the Company has a $3,000,000 unused line-of-credit
with a bank to be drawn upon as needed, with interest at the bank's prime rate
plus 0.5%. In addition, the Company may use up to $1,500,000 of the line for
letters-of-credit. This line-of-credit is secured by the assets of the Company.
Maturities of long-term debt are approximately as follows:
<TABLE>
<S> <C>
Year ended January 31:
1999 ........................... $ 879,040
2000 ........................... 893,998
2001 ........................... 1,851,908
2002 ........................... 227,764
2003 ........................... 246,791
Thereafter ..................... 7,914,373
-----------
$12,013,874
===========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases nightclubs, theaters and storage space pursuant to
noncancellable operating leases. Certain leases require contingent rentals to
be paid based on a percentage of gross sales of tickets, merchandise, and food
and beverage. These leases expire on various dates through June 2021.
At January 31, 1998, the future minimum operating lease payments under
noncancelable operating leases are as follows:
<TABLE>
<S> <C>
Year ended January 31:
1999 ........................... $ 543,354
2000 ........................... 547,211
2001 ........................... 485,961
2002 ........................... 451,694
2003 ........................... 425,633
Thereafter ..................... 2,367,353
----------
$4,821,206
==========
</TABLE>
Total minimum rental expense included in operating expenses for the years
ended January 31, 1996, 1997 and 1998 was $810,956, $438,500 and $706,219,
respectively, and the contingent rental expense was $541,334, $627,222 and
$725,787, respectively. Included in cost of revenues is $6,145,944, $6,392,616
and $7,265,769 of contingent rentals paid based on gross sales for the years
ended January 31, 1996, 1997 and 1998, respectively.
Shoreline Amphitheater Lease and Agreement
The Shoreline Amphitheater Lease and Agreement, as amended, provides for,
among other things, that the City of Mountain View, California (the "City")
owns certain real property (the "Site") which it has leased to the Company for
the purpose of constructing and operating the amphitheater. The lease
terminates after 35 years on November 30, 2021, and the Company has the option
to extend for three additional five-year periods.
F-138
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense charged to operations for the years ended January 31, 1996,
1997 and 1998 amounted to $594,002, $396,789 and $613,933, respectively.
As of the year ended January 31, 1997, the Company was obligated to pay
the City $93,200 monthly, which related to $9,500,000 of funds provided the
Company by the City pursuant to the lease. Prior to the refinancing of this
arrangement as a $6.9 million note payable to Sanwa Bank (see Note 5), the
Company had accounted for this obligation as a long-term liability amortizable
on a monthly basis over the 20-year period commencing August 1, 1986. The
principal and interest (10.24%) on this liability were being amortized monthly.
At January 31, 1997, the outstanding balance amounted to $6,740,395, of which
$35,676 was current.
Seattle White River Amphitheatre
The Company has committed payments for the construction of an amphitheatre
in the Seattle, Washington market totaling $10 million. Through January 31,
1998, the Company has paid $3,921,812 toward this project. This amount is
included in other assets on the balance sheet. The Company has also capitalized
interest pertaining to the capital expenditures for the amphitheatre of
$175,633 at January 31, 1998, which is also included in other assets on the
balance sheet.
Employment Contracts
The Company has entered into employment contracts with certain key
employees which amount to $2,300,000 per year. These contracts are in effect
until the first note payable to Sanwa Bank (see Note 5) is paid in full or six
years, whichever comes first. According to these agreements, compensation and
other benefits will cease if discharged with just cause, death or disability,
and resignation of employment. Benefits do not cease if discharged without just
cause.
Contingencies
The Company is involved in various legal and other matters arising in the
normal course of business. Based upon information available to management, its
review of these matters to date and consultation with counsel, management
believes that any liability relating to these matters would not have a material
effect on the Company's financial position and results of operations.
7. SUBSEQUENT EVENTS
Acquisition of Companies by SFX Entertainment, Inc.
On February 24, 1998, the stockholders of the Company sold all of the
outstanding capital stock of the Companies to SFX Entertainment, Inc. for cash
consideration of $60.8 million (including the repayment of $12 million in the
Companies' debt and the issuance of 562,640 shares of common stock of SFX
Entertainment, Inc.). The Company has agreed to have net working capital, as
defined, at the closing at least equal to the Company's debt.
F-139
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Concert/Southern Promotions
We have audited the accompanying combined balance sheet of
Concert/Southern Promotions and Affiliated Companies as of December 31, 1997,
and the related combined statements of operations, cash flows and stockholders'
equity for the year then ended. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Concert/Southern
Promotions and Affiliated Companies at December 31, 1997, and the combined
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
March 13, 1998
F-140
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 612,967
Accounts receivable ........................................ 185,437
Due from owners (Note 3) ................................... 332,754
Prepaid expenses and other current assets .................. 115,844
----------
Total current assets ........................................ 1,247,002
Investments in equity investees (Note 2) .................... 895,790
Property and equipment:
Land ....................................................... 19,638
Leasehold improvements ..................................... 286,998
Furniture and equipment .................................... 496,265
----------
802,901
Accumulated depreciation and amortization .................. 460,483
----------
342,418
----------
Total assets ................................................ $2,485,210
==========
LIABILITIES AND COMBINED STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ...................... $ 229,558
Deferred income ............................................ 368,150
----------
Total current liabilities ................................... 597,708
Combined stockholders' equity (Note 4) ...................... 1,887,502
----------
Total liabilities and combined stockholders' equity ......... $2,485,210
==========
</TABLE>
See accompanying notes.
F-141
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Operating revenues:
Concert revenue ............................. $14,796,977
Cost of concerts ............................ 9,877,586
-----------
4,919,391
Operating expenses:
Salaries--officers .......................... 364,000
Bonuses--officers ........................... 564,767
Salaries--other ............................. 367,356
Rent expense ................................ 207,220
Legal and accounting fees ................... 201,435
Depreciation and amortization ............... 78,682
General and administrative expenses ......... 1,367,304
-----------
3,150,764
-----------
Income from operations ....................... 1,768,627
Other income:
Interest income ............................. 59,624
Losses from equity investees ................ (79,629)
-----------
Net income ................................... $ 1,748,622
===========
</TABLE>
See accompanying notes.
F-142
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income ...................................................................... $ 1,748,622
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 78,682
Losses from equity investees ................................................. 79,629
Changes in operating assets and liabilities:
Accounts receivable ......................................................... 1,000,781
Prepaid expenses and other current assets ................................... 69,896
Accounts payable and accrued expenses ....................................... (452,361)
Deferred income ............................................................. 368,150
Net cash provided by operating activities ....................................... 2,893,399
FINANCING ACTIVITIES
Due to/from owner ............................................................... (398,080)
Distributions paid to stockholder ............................................... (2,722,827)
------------
Net cash used in financing activities ........................................... (3,120,907)
------------
Net decrease in cash and cash equivalents ....................................... (227,508)
Cash and cash equivalents at beginning of year .................................. 840,475
------------
Cash and cash equivalents at end of year ........................................ $ 612,967
============
</TABLE>
See accompanying notes.
F-143
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Balance, January 1, 1997 ............. $ 2,861,707
Distributions to stockholder ......... (2,722,827)
Net income ........................... 1,748,622
------------
Balance, December 31, 1997 ........... $ 1,887,502
============
</TABLE>
See accompanying notes.
F-144
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Combination
The accompanying combined financial statements include the accounts of
Southern Promotions, Inc., High Cotton, Inc., Buckhead Promotions, Inc.,
Northern Exposure, Inc., Pure Cotton, Inc., Cooley and Conlon Management, Inc.
("CCMI") and Interfest, Inc. and their wholly-owned subsidiaries:
Concert/Southern Chastain Promotions ("Concert/Southern"), Roxy Ventures,
Cotton Club and Midtown Music Festival (collectively, the "Companies").
Intercompany transactions and balances among these companies have been
eliminated in combination. The Companies are presented on a combined basis to
reflect common ownership by Alex Cooley, Peter Conlon and Stephen Selig III.
Concert/Southern is the predominant musical event promoter in the Atlanta,
Georgia region, and through Chastain Joint Ventures ("Chastain Ventures") is
the operator, pursuant to a long-term lease with the City of Atlanta, of the
Chastain Park Amphitheater. Chastain Ventures is owned equally by
Concert/Southern and the Atlanta Symphony Orchestra, and is accounted for by
Concert/Southern on the equity method. Buckhead Promotions and Northern
Exposure equally own Roxy Ventures which holds a long-term lease for the Roxy
Theatre, and Pure Cotton holds a long-term lease for the Cotton Club.
Interfest, Inc. promoted the three-day Midtown Music Festival held in downtown
Atlanta during 1997. In addition, High Cotton owns 52.6% of HC Properties,
Inc., a real estate investment company which is accounted for on the equity
method.
The Companies record revenue when earned. Concert revenue includes
ticketing, concession, and sponsorship revenue. Deferred income relates
primarily to deposits received in advance of the concert season.
Property and Equipment
Land, leasehold improvements, and furniture and equipment are stated at
cost. Depreciation of furniture and equipment is provided primarily by the
straight-line method over the estimated useful lives of the respective classes
of assets. Leasehold improvements are amortized over the life of the lease or
of the improvement, whichever is shorter.
Income Taxes
The Companies have been organized as either partnerships or corporations
which have elected to be taxed as "S Corporations." The "S Corporation"
elections are effective for both federal and state tax purposes. Accordingly,
all items of income, loss, deduction or credit are reported by the partners or
shareholders on their respective personal income tax returns and, therefore, no
current or deferred federal or state taxes have been provided in the
accompanying combined financial statements.
The difference between the tax basis and the reported amounts of the
Companies' assets and liabilities was $16,576 at December 31, 1997.
Risks and Uncertainties
Accounts receivable are due from ticket vendors and venue box offices.
These amounts are typically collected within 20 days of a performance.
Management considers accounts receivable to be fully collectible; accordingly,
no allowance for doubtful accounts is required.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-145
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS IN EQUITY INVESTEES
The following is a summary of the financial position and results of
operations of the Companies' equity investees as of and for the period ended
December 31, 1997:
<TABLE>
<CAPTION>
CHASTAIN
PARK AMPHITHEATER HC PROPERTIES
------------------- --------------
(50% OWNED) (52.6% OWNED)
<S> <C> <C>
Current assets ......................... $ 322,527 $ 51,820
Property and equipment ................. 468,145 810,480
Other assets ........................... -- 415,145
--------- ----------
Total assets ........................... $ 790,672 $1,277,445
========= ==========
Current liabilities .................... $ 129,953 $ 1,927
Partners' capital ...................... 660,719 1,275,518
--------- ----------
Total liabilities and partners' capital $ 790,672 $1,277,445
========= ==========
Revenue ................................ $ 653,251 $ 87,407
Expenses ............................... 747,055 165,328
--------- ----------
Net income (loss) ...................... $ (93,804) $ (77,921)
========= ==========
</TABLE>
3. RELATED PARTY TRANSACTIONS
The Companies have an arrangement with Stephen Selig III whereby the cash
receipts of Concert/Southern, Buckhead Promotions and Roxy Ventures are
transferred to the Selig Enterprises, Inc. Master Cash Account (the "Master
Account"). All subsequent payments made by the Companies are funded by the
Master Account. Accordingly, the Companies' cash held by the Master Account of
$281,058 is recorded as due from owner.
In addition, CCMI has recorded a receivable from its stockholders of
$51,696.
4. STOCKHOLDERS' EQUITY
The Companies' stocks are as follows:
<TABLE>
<CAPTION>
SHARES SHARES PAR
AUTHORIZED ISSUED VALUE
------------ -------- ------
<S> <C> <C> <C>
Southern Promotions ......... 1,000,000 5,000 $1
High Cotton ................. 10,000 550 1
Buckhead Promotions ......... 1,000,000 500 1
Northern Exposure ........... 1,000,000 1,000 1
Pure Cotton ................. 100,000 500 1
CCMI ........................ 10,000 1,000 1
Interfest ................... 100,000 500 1
-----
9,050
=====
</TABLE>
F-146
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
Leases
The following is a schedule of future minimum rental payments under
operating leases (principally office and venue facilities) that have initial or
remaining lease terms in excess of one year as
of December 31, 1997:
<TABLE>
<S> <C>
Year ended December 31:
1998 ................ $ 222,539
1999 ................ 183,198
2000 ................ 188,991
2001 ................ 133,350
2002 ................ 136,350
Thereafter .......... 174,375
----------
Total ............... $1,038,803
==========
</TABLE>
Certain office facilities have renewal and escalation clauses.
Legal Matters
On October 10, 1997, Concert/Southern settled a lawsuit agreeing to pay
$100,000. Such amount has been provided for in the accompanying combined
statement of operations.
The Companies have also been named in various other lawsuits arising in
the normal course of business. It is not possible at this time to assess the
probability of any liability against the Companies as a result of these
lawsuits. Management has stated that all cases will be vigorously defended.
6. SUBSEQUENT EVENTS
On March 4, 1998, SFX Entertainment Inc. acquired the Companies for a
total cash purchase price of $16,900,000 (including a working capital payment
of $300,000).
Prior to the sale of the Companies to SFX, the sole shareholder of High
Cotton received a distribution of High Cotton's interest in HC Properties, Inc.
F-147
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Falk Associates Management Enterprises, Inc.
We have audited the accompanying combined balance sheets of Falk
Associates Management Enterprises, Inc. as of December 31, 1996 and 1997, and
the related combined statements of operations and stockholders' equity
(deficit) and cash flows for the years then ended. These financial statements
are the responsibility of management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Falk Associates Management Enterprises, Inc. at December 31, 1996 and 1997, and
the combined results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
April 10, 1998
F-148
<PAGE>
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------- MARCH 31
1996 1997 1998
------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ..................................................... $ 964,265 $ 34,586 $ 691,718
Cash surrender value of officers' life insurance ......... 73,336 115,436 125,436
Accounts receivable ...................................... 641,204 614,051 663,484
Current portion of stockholder loan receivable ........... 92,669 116,524 237,528
Other current assets ..................................... 13,428 33,456 24,904
---------- ------------ ------------
1,784,902 914,053 1,743,070
---------- ------------ ------------
Fixed assets, net of accumulated depreciation and
amortization ............................................. 85,200 63,714 62,377
Certificate of deposit, noncurrent ........................ 200,906 211,331 202,044
Accounts receivable ....................................... 514,051 -- --
Stockholder loan receivable ............................... 506,400 389,873 136,542
Other ..................................................... 58,900 7,119 7,119
---------- ------------ ------------
Total assets .............................................. $3,150,359 $ 1,586,090 $ 2,151,152
========== ============ ============
LIABILITIES AND COMBINED STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses .................... $ 221,952 $ 165,504 $ 898,054
Payroll taxes payable .................................... 907,446 -- --
Stockholder loan payable ................................. 95,000 95,000 95,000
Current portion of settlement agreement .................. 134,552 145,652 149,253
Current portion of deferred revenue ...................... 673,744 1,358,149 1,263,080
Current portion of long-term debt ........................ 309,313 310,162 310,472
---------- ------------ ------------
2,342,007 2,074,467 2,715,859
---------- ------------ ------------
Settlement agreement, less current portion ................ 658,756 513,103 473,103
Deferred revenue, less current portion .................... -- 1,031,250 937,500
Long-term debt, less current portion ...................... 46,548 36,200 33,428
Combined stockholders' equity (deficit) ................... 103,048 (2,068,930) (2,008,738)
---------- ------------ ------------
Total liabilities and combined stockholders' equity
(deficit) ................................................ $3,150,359 $ 1,586,090 $ 2,151,152
========== ============ ============
</TABLE>
See accompanying notes.
F-149
<PAGE>
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
COMBINED STATEMENTS OF OPERATIONS AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31
-------------------------------- -------------------------------
1996 1997 1997 1998
------------- ---------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Agent fees .................................... $6,364,503 $ 10,881,588 $1,219,282 $ 1,812,804
EXPENSES
Stockholders' salary expense .................. 4,732,430 10,594,773 1,173,341 1,289,251
Other salary expense .......................... 969,293 1,177,197 130,372 143,250
Depreciation and amortization ................. 113,486 115,309 29,897 14,053
Travel and entertainment ...................... 503,475 552,951 118,418 140,141
General and administrative expenses ........... 627,174 677,453 137,664 169,452
---------- ------------ ---------- ------------
6,945,858 13,117,683 1,589,692 1,756,147
---------- ------------ ---------- ------------
(Loss) income from operations ................. (581,355) (2,236,095) (370,410) 56,657
OTHER INCOME (EXPENSE)
Interest income -- stockholders' loan ......... 32,305 27,237 6,810 9,288
Interest income -- third party ................ 142,917 115,714 28,148 15,171
Interest expense -- third party ............... (91,996) (78,834) (21,414) (20,924)
Other income .................................. 2,200 -- -- --
---------- ------------ ---------- ------------
85,426 64,117 13,544 3,535
Net (loss) income ............................. (495,929) (2,171,978) (356,866) 60,192
Combined stockholders' equity at
beginning of year ............................ 598,977 103,048 103,048 (2,068,930)
---------- ------------ ---------- ------------
Combined stockholders' equity (deficit)
at end of year ............................... $ 103,048 $ (2,068,930) $ (253,818) $ (2,008,738)
========== ============ ========== ============
</TABLE>
See accompanying notes.
F-150
<PAGE>
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31 ENDED MARCH 31
---------------------------------- -----------------------------
1996 1997 1997 1998
-------------- ----------------- -------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income ............................. $ (495,929) $ (2,171,978) $ (356,866) $ 60,192
Adjustments to reconcile net (loss)
income to net cash provided by
(used in) operating activities:
Depreciation and amortization .............. 113,486 115,309 29,897 14,053
Non-cash interest expense .................. 75,702 65,447 16,399 13,601
Non-cash interest income ................... (32,188) (37,753) (9,402) 4,041
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable ................................ 17,538 541,204 47,786 (49,433)
Decrease (increase) in other
current assets ............................ 559 (20,028) (7,736) 8,552
Increase (decrease) in accounts
payable and accrued expenses .............. 71,526 (56,448) 325,813 732,550
Increase (decrease) in payroll taxes
payable ................................... 461,584 (907,446) (907,446) --
Increase (decrease) in deferred
revenue ................................... 479,319 1,715,655 229,918 (188,819)
---------- ------------- ---------- ----------
Net cash provided by (used in)
operating activities ......................... 691,597 (756,038) (631,637) 594,737
---------- ------------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets ...................... (70,467) (42,042) (20,441) (12,716)
Increase in cash surrender value of
officers' life insurance ..................... (31,336) (42,100) (10,000) (10,000)
---------- ------------- ---------- ----------
Net cash used in investing activities ......... (101,803) (84,142) (30,441) (22,716)
---------- ------------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of long-term debt .................... (300,000) (309,499) (102,432) (2,462)
Proceeds from long-term debt
borrowings ................................... 355,861 300,000 -- --
Proceeds from stockholder loan
receivable ................................... -- 120,000 120,000 137,573
Payment on settlement agreement ............... (200,000) (200,000) (50,000) (50,00)
---------- ------------- ---------- ----------
Net cash (used in) provided by financing
activities ................................... (144,139) (89,499) (32,432) 85,111
---------- ------------- ---------- ----------
Net increase (decrease) in cash ............... 445,655 (929,679) (694,510) 657,132
Cash at beginning of period ................... 518,610 964,265 964,265 34,586
---------- ------------- ---------- ----------
Cash at end of period ......................... $ 964,265 $ 34,586 $ 269,755 $ 691,718
========== ============= ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest ........................ $ 16,294 $ 13,386 $ 5,014 $ 7,324
========== ============= ========== ==========
</TABLE>
See accompanying notes.
F-151
<PAGE>
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The accompanying combined financial statements include the accounts of
Falk Associates Management Enterprises, Inc. ("FAME") and Financial Advisory
Management Enterprises, Inc. ("FINAD") (collectively, the "Companies").
Transactions and balances among the Companies have been eliminated in
combination. The Companies are subject to common ownership.
In exchange for a percentage fee or commission, FAME provides
representation services regarding the negotiation of professional sporting
contracts and marketing and endorsement contracts. FINAD provides financial
management services including, but not limited to, the implementation of
financial planning to meet clients' savings and financial goals, the receipt
and deposit of funds, cash flow budgeting and analysis, preparation of
financial statements and tax return services, in exchange for an annual fixed
fee and an additional percentage fee based on the dollar value of assets
managed and monitored.
Revenue Recognition
The Companies revenues arise primarily from percentage fees or commissions
received for the negotiation of professional sporting contracts and marketing
and endorsement contracts. The Companies recognize revenue ratably over the
period of the associated contract. Deferred revenue is recorded on the
accompanying combined balance sheets when funds are received in advance of the
performance period and is recognized over the period of performance.
Accounts Receivable
Accounts receivable consist of amounts due from professional athletes for
services rendered or for fees due related to prior performance that has been
contractually deferred to a later date. Management considers these accounts
receivable as of December 31, 1996 and 1997 to be collectible; accordingly, no
allowance for doubtful accounts is recorded.
Fixed Assets
Fixed assets are stated at cost. Depreciation and amortization of fixed
assets is provided on the straight-line method over the estimated useful lives
of the assets including 5 years for technical equipment, 7 years for furniture
and office equipment and 10 years for leasehold improvements.
Income Taxes
The Companies are cash-basis taxpayers and have elected to be taxed as S
Corporations for federal and state income tax purposes. All items of income,
loss and credits are reported by the Companies stockholders on their respective
personal income tax returns. Accordingly, no current and deferred federal
corporate income taxes have been provided in the accompanying combined
financial statements. However, since the Companies operate in the District of
Columbia ("D.C.") they are subject to D.C. income tax. No D.C. income tax
benefits have been provided on the Companies' D.C. net operating loss
carryforwards and other deductible temporary differences due to the uncertainty
of recognizing future tax benefits for these items.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
F-152
<PAGE>
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The Companies derive substantially all of its agent fees from the
representation services they provide regarding the negotiation of professional
sporting contracts and marketing and endorsement contracts for professional
athletes in the National Basketball Association ("NBA"). In March 1998, the NBA
Board of Governors voted to exercise the league's right to re-open its
Collective Bargaining Agreement (the "Agreement") with the National Basketball
Players Association. As a result, the Agreement will expire as of June 30,
1998. As a matter of Collective Bargaining, the Agreement, when it expires,
continues in place until it is replaced by a successor agreement, or until some
other labor remedies are utilized by one party or the other, meaning a strike
or a lockout or a moratorium collectively. Should there be a work stoppage due
to either a lockout or strike and NBA games are not played, it would be likely
that the Companies agent fees would be negatively impacted.
Significant Customer
The Companies three most significant sources of revenue provided a
majority of the Companies combined agent fees for the year ended December 31,
1996 and 1997, respectively.
Interim Financial Information
The interim financial data as of March 31, 1998 and for three-month
periods ended March 31, 1997 and 1998 is unaudited and certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. However, in
the opinion of Management, the interim data includes all adjustments,
consisting only of normal recurring adjustments necessary for a fair statement
of the results for the interim periods. The results of operations for the
interim periods are not necessarily indicative of the results to be expected
for the entire year.
2. FIXED ASSETS
Fixed assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Furniture and office equipment ......................... $ 150,739 $ 159,467
Technical equipment .................................... 169,112 200,300
Leasehold improvements ................................. 4,841 6,967
---------- ----------
324,692 366,734
Less accumulated depreciation and amortization ......... (239,492) (303,020)
---------- ----------
$ 85,200 $ 63,714
========== ==========
</TABLE>
3. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Time note (A) ................... $ 200,000 $ 200,000
Line of credit (B) .............. 100,000 100,000
Note payable (C) ................ 55,861 46,362
---------- ----------
Long term debt .................. 355,861 346,362
Less current maturities ......... (309,313) (310,162)
---------- ----------
Total long-term debt ............ $ 46,548 $ 36,200
========== ==========
</TABLE>
- ----------
(A) On December 31, 1996 and 1997, respectively, the Companies had
outstanding a six-month $200,000 time note (the "Time Note") with a
bank (the "Bank"). Interest was set at the prime rate which
approximated 8.25% at both December 31, 1996 and 1997, respectively.
Interest is payable monthly in arrears. The Companies may repay the
principal at any time during the
F-153
<PAGE>
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
six-month period ended June 30, 1998, with all remaining principal
and outstanding interest in full on June 30, 1998. The time note
contains covenants which, among other things, restrict the pledging
of assets without prior written approval of the Bank.
(B) On December 31, 1996 and 1997, respectively, the Companies had
outstanding a $100,000 one-year line of credit with the Bank which
was fully drawn as of those dates. Interest was set at the prime
rate which approximated 8.25% at both December 31, 1996 and 1997,
respectively. Interest is payable monthly in arrears. Principal and
any outstanding interest is payable in full at December 31, 1998.
The line of credit contains covenants which are similar to those in
the Time Note.
(C) In December 1996, the Companies entered into a five year $55,861
note payable with the Bank. Interest was fixed at 8.75%. Commencing
January 1997, the note became payable in 59 monthly installments
consisting of principal and interest with the final payment equal to
any remaining principal and interest due. The note is secured by
specific computer hardware and software which was purchased with the
proceeds of the note payable.
At December 31, 1997, the aggregate amounts of long-term debt due during
the next four years are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- ------------------------- -----------
<S> <C>
1998 ............... $310,162
1999 ............... 11,088
2000 ............... 12,098
2001 ............... 13,014
--------
$346,362
========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Companies are obligated under certain noncancellable operating leases.
Rent expense, principally for office space, amounted to approximately $149,400
and $167,300 for the years ended December 31, 1996 and 1997, respectively. In
March 1998, the Companies entered into a sublease for additional office space.
Future minimum rental payments under noncancellable operating leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 OPERATING LEASES
- ------------------------- -----------------
<S> <C>
1998 ............... $ 214,000
1999 ............... 244,000
2000 ............... 247,000
2001 ............... 250,000
2002 ............... 184,000
----------
$1,139,000
==========
</TABLE>
Settlement Agreement
In 1994, the Companies were party to a $1.9 million legal settlement
arising from a civil suit wherein they were jointly and severally liable to
make settlement payments over a seven year period. The carrying value of the
settlement agreement was approximately $793,300 and $658,800 at December 31,
1997 and 1996, respectively, discounted at a 8.25% interest rate.
Agreement and Memorandum of Understanding
In January 1992, an Agreement and Memorandum of Understanding (the
"Agreement") was executed between the Companies' principal stockholder and a
third party which formerly employed the principal stockholder. Under the terms
of the Agreement, the Companies are obligated to remit to the third party a
percentage of the Companies fees as received for the representation services
provided regarding the negotiation of professional sporting contracts and
marketing and endorsement
F-154
<PAGE>
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
contracts. Agreement terms are limited to those professional athletes who
became clients of the Companies at the time of the Companies formation and
generally does not give the third party any right to fees related to contract
renewals.
Stock Appreciation Rights
In December 1996, the Companies issued stock appreciation rights ("SARs")
to a stockholder and executive vice president of the Companies. The SARs are
exercisable only upon the occurrence of defined terms and conditions, including
the sale or merger of the Companies to a third party or upon termination of
employment. Accordingly, upon the exercise of the SAR's, the Companies will
record expense in the combined statement of operations equal to the fair value
of the SARs.
5. RELATED PARTY TRANSACTIONS
Stockholder Loan Receivable
In January 1993, the Companies entered into two eight-year promissory loan
notes with a stockholder of the Companies for face amounts of $384,000 and
$96,000. The loans accrue interest at a fixed rate of 5.7% with monthly
payments of principal and accrued interest commencing January 1, 1997.
Stockholder Loan Payable
In January 1993, the principle stockholder of the Companies made a $95,000
non-interest bearing advance to the Companies in connection with its formation.
This advance is due on demand and has been classified as a current liability in
the accompanying combined balance sheets.
Stockholders' Life Insurance
The Companies are the owners and beneficiaries of key-man life insurance
policies carried on the lives of its stockholders' with cash surrender values
totaling approximately $73,300 and $115,400 as of December 31, 1996 and 1997,
respectively. No loans are outstanding against the policies, but there is no
restriction in the policy regarding loans.
The life insurance contracts are accompanied by mandatory stock purchase
agreements relating to the amount of the proceeds of the life insurance. Upon
death, the insured's estate will be obligated to sell, and the Companies will
be obligated to purchase the insured's stock up to the value of the stock or
the proceeds of insurance, whichever is lesser. The purpose is to protect the
Companies against an abrupt change in ownership.
6. EMPLOYEE BENEFIT PLAN
During 1997, the Companies began sponsoring a deferred contribution plan
(the "Plan"). The Plan enables all full time employees who have completed one
year of service with the Companies to make voluntary contributions to the Plan
not to exceed the dollar limits as prescribed by the Internal Revenue Service.
Under the Plan, the Companies matches an employee's contribution up to a
maximum of 3% of their salary. The Companies contribution for the year ended
December 31, 1997 was approximately $40,800.
7. STOCKHOLDERS AGREEMENT
The stockholders of the Companies currently maintain a Stockholders
Agreement (the "Agreement") which place restrictions on the transfer (as
defined in the Agreement) of their stock.
8. SUBSEQUENT EVENT
On June 4, 1998 the stockholders of the Companies completed the sale of
the Companies to a subsidiary of SFX Entertainment, Inc. ("SFX") whereby SFX
acquired all of the outstanding capital
F-155
<PAGE>
FALK ASSOCIATES MANAGEMENT ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
stock of the Companies for a total purchase price of approximately $82.2
million (including approximately $7.9 million which the Companies received for
the reimbursement of certain taxes incurred and excluding $4.7 million of taxes
paid on behalf of the Companies which will be refunded to SFX in 1999) and the
issuance of 1.0 million shares of SFX's Class A Common Stock. The sale
agreement also provides for payments by SFX to the Companies for additional
amounts up to an aggregate of $15.0 million in equal annual installments over
five years contingent on the achievement of certain EBITDA (as defined) targets
and for additional payments by SFX if the companies EBITDA performance exceeds
the targets by certain amounts.
F-156
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Members
Blackstone Entertainment LLC
We have audited the accompanying combined balance sheets of Blackstone
Entertainment LLC as of December 31, 1996 and 1997, and the related combined
statements of income, members' equity and cash flows for the years then ended.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We have conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Blackstone Entertainment LLC at December 31, 1996 and 1997, and the combined
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
May 1, 1998 ERNST & YOUNG LLP
New York, New York
F-157
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
----------------------------- --------------
1996 1997 1998
------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including $50,000 and $55,000
of restricted cash at December 31, 1996 and 1997,
respectively ......................................... $ 2,025,731 $ 3,529,135 $16,664,490
Accounts receivable .................................... 551,776 275,820 1,154,574
Due from related parties ............................... 60,751 310,874 --
Due from members ....................................... 234,822 165,117 --
Other current assets ................................... 151,872 219,789 1,440,463
----------- ----------- -----------
Total current assets .................................... 3,024,952 4,500,735 19,259,527
Fixed assets, net ....................................... 14,680,344 13,394,676 12,856,629
Intangible assets, net .................................. 212,682 177,823 149,302
----------- ----------- -----------
Total assets ............................................ $17,917,978 $18,073,234 $32,265,458
=========== =========== ===========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .................. $ 819,690 $ 1,675,061 $ 1,859,872
Notes payable, current portion ......................... 1,427,172 1,388,806 8,940,357
Capital leases payable, current portion ................ 344,038 487,334 496,655
Deferred income ........................................ 545,537 547,270 14,601,337
Due to related parties ................................. 241,677 -- --
Loans payable to members ............................... 1,500,000 2,461,239 --
----------- ----------- -----------
Total current liabilities .............................. 4,878,114 6,559,710 25,898,221
Notes payable, net of current portion ................... 8,564,888 6,816,668 --
Capital leases payable, net of current portion .......... 1,080,959 693,061 405,813
Other ................................................... 50,825 -- --
----------- ----------- -----------
Total liabilities ....................................... 14,574,786 14,069,439 26,304,034
Members' equity ......................................... 3,343,192 4,003,795 5,961,424
----------- ----------- -----------
Total liabilities and members' equity ................... $17,917,978 $18,073,234 $32,265,458
=========== =========== ===========
</TABLE>
See accompanying notes.
F-158
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
1996 1997 1997 1998
-------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Gross revenues ............................. $ 48,824,066 $ 50,587,721 $21,451,061 $21,443,331
Operating costs and expenses:
Operating costs ........................... 35,631,428 35,806,833 13,640,379 15,192,627
Promotion expenses ........................ 2,596,861 2,837,208 1,863,062 947,315
General and administrative
expenses ................................ 4,634,399 5,756,993 2,179,883 2,437,189
Depreciation and amortization ............. 2,026,637 2,033,245 571,555 689,842
------------ ------------ ----------- -----------
Total operating costs and expenses ......... 44,889,325 46,434,279 18,254,879 19,266,973
Operating income (loss) .................... 3,934,741 4,153,442 3,196,182 2,176,358
Investment income .......................... 189,970 329,696 119,125 165,504
Interest expense ........................... (1,132,556) (1,071,731) (487,080) (384,233)
------------ ------------ ----------- -----------
Net income (loss) .......................... $ 2,992,155 $ 3,411,407 $ 2,848,227 $ 1,957,629
============ ============ =========== ===========
</TABLE>
See accompanying notes.
F-159
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30,
--------------------------------- --------------------------------
1996 1997 1997 1998
--------------- --------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ................................. $ 2,992,155 $ 3,411,407 $ 2,848,000 $ 1,957,629
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .................. 2,226,637 2,033,245 572,000 689,842
Other .......................................... 543 --
(Increase) decrease in assets:
Accounts receivable .............................. (180,773) 275,956 (975,000) (402,763)
Other current assets ............................. 284,240 (67,917) (133,000) (1,220,674)
Increase (decrease) in liabilities:
Deferred income ............................... (149,523) 1,733 11,901,000 14,054,067
Accounts payable and accrued
expenses .................................... (34,164) 855,371 676,000 184,811
Due to/from related parties and
members ..................................... (68,475) (422,095) (68,000) --
Other ......................................... (11,461) (50,825) (462,000) --
------------ ------------ ------------ ------------
Net cash provided by operating activities ......... 5,059,179 6,036,875 14,359,000 15,262,912
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets ....................... (1,678,666) (386,983) (15,000) (123,274)
------------ ------------ ------------ ------------
Net cash used in investing activities ............. (1,678,666) (386,983) (15,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable and consulting
agreement ........................................ (1,227,498) (1,986,586) (695,000) (765,117)
Payments on to capital leases ..................... (17,182) (370,337) (3,000) (277,927)
Changes in loans payable to members ............... (119,189) -- (11,000) (967,239)
Distributions to members .......................... (1,720,546) (1,789,565) (300,000) --
------------ ------------ ------------ ------------
Net cash used in financing activities ............. (3,084,415) (4,146,488) (1,009,000) (2,004,283)
------------ ------------ ------------ ------------
Net increase in cash and cash equivalents ......... 296,098 1,503,404 13,335,000 13,135,355
Cash and cash equivalents, beginning of
period ........................................... 1,729,633 2,025,731 1,925,000 3,529,135
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period .......... $ 2,025,731 $ 3,529,135 $ 15,260,000 $ 16,664,490
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Capital lease additions ........................... $ 125,735 $ 538,526 $ -- $ --
Cash paid during the year for interest ............ $ 1,301,210 $ 1,017,371 $ 431,778 $ 384,233
</TABLE>
See accompanying notes.
F-160
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
COMBINED STATEMENT OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
MEMBERS'
EQUITY
---------------
<S> <C>
Balance, January 1, 1996 ................... $ 2,071,583
Net income ................................. 2,992,155
Distributions to members ................... (1,770,546)
Capital contributions ...................... 50,000
------------
Balance, December 31, 1996 ................. 3,343,192
Net income .................................
Distributions to members ................... (2,750,804)
------------
Balance, December 31, 1997 ................. 4,003,795
Net loss ................................... 1,957,629
------------
Balance, June 30, 1998 (unaudited) ......... $ 5,961,424
============
</TABLE>
See accompanying notes.
F-161
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Blackstone Entertainment LLC ("the Company") was organized on October 1,
1997 as a Massachusetts Limited Liability Company. On that date, the net assets
of the following companies (collectively, "Don Law and Affiliates"), which had
been commonly controlled and functionally related, and a related parcel of land
located in Mansfield, Massachusetts were contributed in formation of the
Company:
- Great Woods, Inc.
- Time Trust Associates Joint Venture
- Harborlights Pavilion, Inc.
- NEXT, Inc.
- Don Law Company, Inc.
- Orpheum Management Corporation
- Black and Copper, Ltd.
- Andrew Trust LLC
These financial statements reflect the businesses subject to the
transaction described in Note 10 and accordingly, represent the combined
results of Blackstone Entertainment LLC and Don Law and Affiliates as a
predecessor. The net assets transferred to the Company have been recorded at
their historical book values.
Nature of Business
Great Woods, Inc., a Massachusetts corporation, managed and operated the
Great Woods Center for the Performing Arts in Mansfield, Massachusetts. Time
Trust Associates Joint Venture, a Massachusetts general partnership, held title
to the real estate on which the facility is situated.
Harborlights Pavilion, Inc., a Massachusetts corporation, managed and
operated the Harborlights Pavilion in Boston, Massachusetts.
NEXT, Inc., a Massachusetts corporation, operated a computerized ticketing
system for entertainment facilities and theaters throughout the New England
area.
Don Law Company, Inc., a Massachusetts corporation, promoted concerts and
other entertainment events throughout the New England area.
Orpheum Management Corporation, a Massachusetts corporation, managed the
Orpheum Theatre in Boston, Massachusetts.
Black and Copper, Ltd., a Massachusetts corporation, provided graphic
design, advertising, marketing and promotional services principally to its
related entities.
Andrew Trust LLC owned additional parcels of land surrounding the Great
Woods Center for the Performing Arts in Mansfield, Massachusetts.
Limited Liability Company
The Company's operating agreement provides that liability of its members is
limited to their capital invested in the Company. The Company's operating
agreement does not limit its term of existence, and provides for dissolution
upon the occurrence of certain events, one of which is the acquisition by one
member of all of the outstanding ownership interest.
F-162
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Member Classes and Priorities
The Company's operating agreement provides for one of its members to
receive a priority distribution of current year earnings and liquidation
proceeds to $2,250,000. The remaining members receive a matching distribution
subsequent to the priority distribution of $2,250,000. All additional proceeds
are then divided evenly among the members. The operating agreement provides for
both priorities to disappear upon the Company's attainment of certain
distribution levels.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, time deposits, commercial paper
and money market mutual funds. The Company invests its excess cash in highly
rated companies and financial institutions. These deposits have original
maturities that do not exceed three months. During the course of the year, the
Company maintained balances in financial institutions in excess of FDIC insured
limits. Included in cash and cash equivalents at December 31, 1996 and 1997 is
approximately $50,000 and $55,000, respectively, of restricted cash to be used
for future Orpheum Theatre renovations and improvements.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed over estimated
useful lives ranging from three to thirty-nine years utilizing straight-line
and accelerated methods. Depreciation expense charged to operations was
$1,992,321 and $1,798,386 during the years ended December 31, 1996 and 1997,
respectively.
Intangible Assets, Net
Intangible assets consisting of goodwill which is being amortized over
fifteen years using the straight-line method and organization costs incurred
when Harborlights Pavilion, Inc. and NEXT, Inc. were established are being
amortized over five years using the straight-line method. These assets are
shown on the combined balance sheets net of accumulated amortization of
$125,665 and $360,524 as of December 31, 1996 and 1997. Total amortization
expense charged to operations was $34,316 and $234,859 during the years ended
December 31, 1996 and 1997.
Revenue Recognition
All divisions, except for NEXT, recognize event-related revenue upon
completion of each performance. Advance ticket receipts for performances are
recorded as deferred revenue. Costs incurred which relate to future
performances are recorded as prepaid expenses. The NEXT division recognizes
revenues as tickets are sold and services are performed.
Income Taxes
The Company is treated as a partnership for federal and state income tax
purposes. The Company's earnings and losses are included in the members' income
tax returns in relation to their respective ownership interests; accordingly,
no provision is required for federal and state income taxes.
Advertising Expense
The Company expenses advertising costs as incurred. Advertising expense
amounted to approximately $1,849,000 and $2,061,000 during the years ended
December 31, 1996 and 1997, respectively.
F-163
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Year 2000 (unaudited)
The Company has addressed the risks associated with year 2000 compliance
with respect to its ticketing system based on consultation with its vendors.
Future costs associated with such compliance are not expected to be
significant.
Interim Financial Information
The interim financial data as of June 30, 1998 and for the six-month
periods ending June 30, 1997 and 1998 is unaudited and certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. However, in
the opinion of Management, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the results for the interim period. The results of operations for the
interim periods are not necessarily indicative of the results to be expected
for the entire year.
2. FIXED ASSETS, NET
Fixed assets, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1996 1997
--------------- ----------------
<S> <C> <C>
Performing art facilities .............. $ 21,454,305 $ 21,496,711
Land and site improvements ............. 2,133,905 2,327,127
Equipment under capital leases ......... 1,426,874 1,567,690
Machinery and equipment ................ 1,484,682 1,628,996
Furniture and fixtures ................. 494,480 522,372
Leasehold improvements ................. 243,982 244,982
Motor vehicles ......................... 156,135 189,663
------------- -------------
27,394,363 27,977,541
Less accumulated depreciation .......... (12,714,019) (14,582,865)
------------- -------------
$ 14,680,344 $ 13,394,676
============= =============
</TABLE>
F-164
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
1. The Company is obligated under a note payable to the FDIC
dated May 11, 1988 in the original amount of $10,600,000. On
May 9, 1995, the note was modified and extended to mature
February 15, 2005. At such time, a balloon payment of
approximately $3,500,000 will be required. The note is
payable in monthly principal installments of $44,167 plus
interest at 8.98% per annum. The note is collateralized by
substantially all assets of the Great Woods Inc. and Time
Trust Join Venture, including a mortgage on the real estate
and facility, and a security interest in all operating permits
and licenses, programming and concession contracts, and
insurance policies on the lives of two members. ........................ $7,752,942 $7,222,942
2. The Company is obligated to a concessionaire under an
unsecured five-year installment note in the original amount of
$1,600,000 which matures on June 30, 1998. The note is
payable in annual principal installments of $320,000 with
interest payable quarterly at 1.5% over the prime rate. ................ 640,000 320,000
3. The Company is obligated under a five-year installment note
dated May 18, 1994 payable to a bank in the original amount
of $1,600,000. The note is payable in monthly installments of
$33,136 including interest at 8.9% per annum and is
collateralized by all assets of the Harborlights Pavilion Inc. ......... 829,118 492,532
4. The Company is obligated to a concessionaire under an
unsecured installment note dated August 19, 1994 in the
original amount of $350,000 bearing interest at 1% over the
prime rate. The remaining outstanding principal balance and
any accrued interest is due November 1, 1998. The note is
personally guaranteed by the members of the Company. ................... 210,000 140,000
5. The Company is obligated to a concessionaire under an
unsecured and noninterest bearing note dated July 11, 1994 in
the original amount of $150,000. The note is due in annual
installments of $30,000 with the final installment due
October 15, 1998. ...................................................... 60,000 30,000
6. The Company is obligated under a note payable from
Andrew Trust LLC to a bank dated December 12, 1996 in
the original amount of $500,000. Interest is payable monthly
at 0.75% over the prime rate and the principal reaches
maturity on December 12, 1999. ......................................... 500,000 --
---------- ----------
9,992,060 8,205,474
Current maturities ..................................................... 1,427,172 1,388,806
---------- ----------
Long-term debt ......................................................... $8,564,888 $6,816,668
========== ==========
</TABLE>
F-165
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Maturities of long-term debt are as follows:
December 31:
<TABLE>
<S> <C>
1999 ................ $ 653,726
2000 ................ 530,000
2001 ................ 530,000
2002 ................ 530,000
2003 ................ 530,000
Thereafter .......... 4,042,942
----------
$6,816,668
==========
</TABLE>
The Company has an unsecured demand line of credit with a bank of
$2,000,000 which expires April 30, 1998. Interest is payable monthly at 1% over
the prime rate. The Company had no amounts outstanding under this line of
credit as of December 31, 1996 and 1997.
The bank note payable collaterialized by the assets of Harborlights
Pavilion, Inc. and the demand line of credit are subject to several financial
covenants which the company is currently in the process of renegotiating. For
the years ended December 31, 1996 and 1997, Harborlights Pavilion, Inc. failed
at least one of these financial covenants. Management anticipates that based
upon discussions with the bank, the loan will not be called.
4. CAPITAL LEASE OBLIGATIONS
The Company is obligated under capital lease agreements for certain
business equipment. The leases have been capitalized at the fair value of the
leased equipment with a corresponding liability recorded. Each payment is
allocated between a reduction of the liability and interest expense to yield a
constant periodic rate of interest on the remaining balance of the obligation.
At December 31, 1997, future minimum payments due on the lease agreements
are as follows:
Year ended December 31:
<TABLE>
<S> <C>
1998 ................................................ $ 564,474
1999 ................................................ 564,625
2000 ................................................ 155,095
2001 ................................................ 15,961
---------
1,300,155
Amount representing interest ........................ 119,760
---------
Present value of net minimum lease payments ......... 1,180,395
Current portion ..................................... 487,334
---------
Long-term portion ................................... $ 693,061
=========
</TABLE>
5. LOANS PAYABLE TO MEMBERS
The Company is obligated to members in the amount of $961,239 which
represents the balance of advances made by them in conjunction with the
transfer of assets on October 1, 1997. The loans are unsecured and noninterest
bearing, and are expected to be repaid during 1998.
The Company is obligated to two members for loans totaling $1,500,000 at
both December 31, 1996 and 1997. The loans are unsecured, bear interest at 6.5%
per annum, and have no formal repayment terms.
F-166
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Lease Commitments and Rent Expense
Total rent expense amounted to approximately $487,000 and $577,000 for the
years ended December 31, 1996 and 1997, respectively, of which $92,700 was paid
to an affiliate during 1996 and 1997. At December 31, 1997, the Company is
committed under the following noncancellable operating leases:
1) The Company is obligated under a five-year license agreement dated
March 31, 1994 for the lease of a parcel of real estate located on Fan Pier in
Boston, Massachusetts. The agreement provides for a minimum annual rent of
$250,000 through 1998. Additional rent is required based on the number of
tickets sold annually in excess of a 100,000 ticket base. The landlord has the
right to terminate the license agreement upon giving written notice by November
of each year, for termination in the following calendar year.
2) Under an agreement with the owner of the Orpheum Theatre, the Company
has exclusive booking and scheduling rights for the Theatre and sole
responsibility for granting concessions for the sale of food and refreshments
at the Theatre. Under the terms of the agreement, the Company is required to
pay a hall rental charge of $4,750 per performance for the period January 1998
through December 2000, plus additional amounts for artist rehearsals. The
Company is reimbursed for the hall rental charges by the shows' promoters and
earns commissions from the Theatre's owner based on the annual volume of rental
fees paid.
3) The company is obligated under three leases with an affiliate. During
1996 and 1997, the combined rent for these three leases was $92,700 each year.
4) The company is obligated under a one year lease for the NEXT, Inc.
premises for rent payments of $53,750 through December 31, 1998.
Other Commitments
The Company is obligated under a ten-year consulting agreement with the
former owner of a concert promotion business which was acquired in 1992. The
consulting agreement requires scheduled annual payments totaling of $828,000
over the next four years.
The Company is obligated under a consulting agreement with a member
requiring annual payments of $100,000 renewable annually.
7. PROFIT SHARING PLANS
The Company maintains 401(k) profit sharing plans covering eligible
employees who meet certain age and length of service requirements. Employees
may elect voluntary salary reductions; company contributions are made at the
discretion of the managing member. The Company did not make any matching
contributions during the years ended December 31, 1996 and 1997.
8. LITIGATION
Great Woods, Inc. is a defendant in several lawsuits that management
believes are without merit. In the event of an adverse judgment, management
believes its insurance coverage is sufficient to cover any potential losses.
9. EMPLOYMENT AGREEMENTS
Two employees have employment agreements pursuant to which they may
received contingent consideration upon the occurrence of specified events. One
of the employees is entitled to 0.6% of the
F-167
<PAGE>
BLACKSTONE ENTERTAINMENT LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
net proceeds from the sale, refinancing or other disposition of the Company or
its ownership interests. The other is entitled to 5% of the defined after tax
proceeds from the sale of Great Woods , Inc. less certain defined contingent
consideration paid prior to the date of sale. The Company is obligated under an
informal employment arrangement with the General Manager of the NEXT, Inc.
which provides for a base salary of $150,000 in addition to a bonus based on
performance. The arrangement is renewable annually.
In connection with employment agreements, certain employees were paid
$610,000 in 1997 in connection with the sale of membership interests by the
principal owner to the Company. Such amount was recorded as a charge to
earnings in 1997.
10. SUBSEQUENT EVENT
On July 2, 1998, SFX Entertainment, Inc. acquired the Company for
aggregate consideration of approximately $92.2 million, including the repayment
of approximately $7.0 million in debt.
F-168
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of Magicworks Entertainment Incorporated:
We have audited the accompanying balance sheets of Magicworks Entertainment
Incorporated (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related statements of income, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Magicworks Entertainment
Incorporated and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the two years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 23, 1998.
F-169
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------
1998 1997 1996
-------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .......................... $ 6,383,715 $ 5,410,837 $ 5,936,611
Accounts and notes receivable, net ................. 2,614,418 1,802,623 1,288,558
Inventories ........................................ 715,443 486,954 268,959
Advances and temporary deposits .................... 233,158 582,809 121,196
Due from affiliates ................................ -- -- 39,170
Prepaid show expenses .............................. 8,532,595 929,566 117,363
Other current assets ............................... 462,275 409,503 397,170
----------- ----------- -----------
TOTAL CURRENT ASSETS ............................. 18,941,604 9,622,292 8,169,027
PROPERTY AND EQUIPMENT, NET ......................... 2,104,950 2,098,785 2,048,255
INVESTMENTS IN PARTNERSHIPS ......................... 3,855,219 4,273,973 1,907,678
DEFERRED COSTS, NET ................................. 1,703,050 983,679 1,105,114
INTANGIBLE ASSETS, NET .............................. 374,167 399,167 325,745
OTHER ASSETS ........................................ 117,500 67,500 --
----------- ----------- -----------
TOTAL ASSETS ....................................... $27,096,490 $17,445,396 $13,555,819
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Borrowings under credit agreement .................. $ 3,100,000 $ -- $ --
Current portion of long-term debt .................. 306,635 299,557 302,956
Accounts payable ................................... 1,077,712 1,252,517 983,691
Accrued liabilities ................................ 530,108 532,648 228,808
Advance ticket sales ............................... -- 3,479,469 844,373
Deferred income taxes .............................. 9,770,271 -- 137,131
Due to affiliates .................................. 30,198 357,451 --
----------- ----------- -----------
TOTAL CURRENT LIABILITIES ........................ 14,814,924 5,921,642 2,496,959
DEFERRED INCOME TAXES ............................... -- -- 274,263
LONG-TERM DEBT, NET OF CURRENT PORTION .............. 5,810,422 6,047,163 6,177,492
----------- ----------- -----------
TOTAL LIABILITIES .................................. 20,625,346 11,968,805 8,948,714
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none issued .......................... -- -- --
Common stock, $.001 par value; 50,000,000 shares
authorized; 24,404,300 and 24,394,300 issued and
outstanding in 1997 and 1996, respectively ....... 24,427 24,404 24,394
Additional paid-in capital ......................... 4,160,326 4,078,618 4,151,026
Retained earnings .................................. 2,286,391 1,373,569 431,685
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY ....................... 6,471,144 5,476,591 4,607,105
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY .......................................... $27,096,490 $17,445,396 $13,555,819
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-170
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------- -----------------------------
1998 1997 1997 1996
------------- ------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Production ............................ $2,630,405 $3,134,762 $5,334,130 $ 4,649,009
Promotion ............................. 25,376,916 5,413,958 26,762,607 35,510,618
Merchandising ......................... 7,718,846 2,477,829 4,881,577 2,603,691
Other ................................. 1,145,778 951,159 1,984,589 3,629,858
---------- ---------- ----------- ------------
TOTAL REVENUES ...................... 36,871,945 11,977,708 38,962,903 46,393,176
---------- ---------- ----------- ------------
OPERATING EXPENSES
Production ............................ 2,187,153 47,658 1,533,922 4,046,160
Promotion ............................. 22,226,188 4,793,391 23,667,541 30,290,201
Salaries, wages, and benefits ......... 2,456,860 1,551,572 3,617,180 3,416,590
Merchandising ......................... 6,326,419 1,733,984 3,596,529 1,933,983
General and administrative ............ 2,030,748 2,803,211 4,673,482 3,373,100
---------- ---------- ----------- ------------
TOTAL OPERATING EXPENSES ............ 35,227,368 10,929,816 37,088,654 43,060,034
---------- ---------- ----------- ------------
INCOME FROM OPERATIONS ................. 1,644,577 1,047,892 1,874,249 3,333,142
OTHER INCOME (EXPENSE)
Interest income ....................... 74,473 89,768 135,372 280,708
Interest expense ...................... (610,537) (403,845) (686,275) (491,630)
---------- ---------- ----------- ------------
INCOME BEFORE PROVISION FOR
INCOME TAXES, PRO FORMA INCOME
TAXES AND INCOME FROM
INVESTMENTS IN UNCONSOLIDATED
PARTNERSHIPS ....................... 1,108,513 733,815 1,323,346 3,122,220
PROVISION FOR INCOME TAXES ............. (458,566) (600,616) (747,324) (597,216)
---------- ---------- ----------- ------------
INCOME BEFORE PRO FORMA INCOME
TAXES FOR PERIODS PRIOR TO JULY
29, 1996 AND INCOME FROM
INVESTMENTS IN UNCONSOLIDATED
PARTNERSHIPS ....................... 649,947 133,199 576,022 2,525,004
----------
PRO FORMA INCOME TAXES ................. -- -- -- (1,161,758)
---------- ---------- ----------- ------------
INCOME AND PRO FORMA INCOME
BEFORE INCOME FROM INVESTMENTS
IN UNCONSOLIDATED PARTNERSHIPS ..... 649,947 133,199 576,022 1,363,246
INCOME FROM INVESTMENTS IN
UNCONSOLIDATED PARTNERSHIPS ........... 262,875 806,225 540,977 40,759
---------- ---------- ----------- ------------
NET INCOME AND PRO FORMA NET INCOME $ 912,822 $ 939,424 $1,116,999 $ 1,404,005
========== ========== =========== ============
NET INCOME AND PRO FORMA NET INCOME
PER SHARE, BASIC AND DILUTED .......... $ 0.04 $ 0.04 $ 0.05 $ 0.06
========== ========== =========== ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ........................... 24,417,462 24,394,299 24,398,546 22,907,463
========== ========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-171
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
STOCK PAID-IN EARNINGS TOTAL
---------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 ............... $21,831 $ 129,507 $ 2,077,894 $ 2,229,232
Issuance of common stock, net of cost of
$1,255,668............................... 2,563 3,927,519 -- 3,930,082
Stock options granted to non-employees..... -- 94,000 -- 94,000
Distributions ............................. -- -- (4,211,972) (4,211,972)
Net income ................................ -- -- 2,565,763 2,565,763
------- ---------- ------------ ------------
BALANCE AT DECEMBER 31, 1996 ............... 24,394 4,151,026 431,685 4,607,105
Stock registration costs .................. -- (91,148) -- (91,148)
Stock issued to an employee ............... 10 18,740 -- 18,750
Distributions ............................. -- -- (175,115) (175,115)
Net income ................................ -- -- 1,116,999 1,116,999
------- ---------- ------------ ------------
BALANCE AT DECEMBER 31, 1997 ............... $24,404 $4,078,618 $ 1,373,569 $ 5,476,591
======= ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-172
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------------- -------------------------------
1998 1997 1997 1996
--------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................. $ 912,822 $ 939,424 $ 1,116,999 $ 2,565,763
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING
ACTIVITIES
Depreciation and amortization .............................. 188,285 145,361 578,553 388,607
Bad debt expense ........................................... -- -- 1,143,499 --
Write-down of investments in partnerships .................. -- -- 58,226 269,519
Deferred income tax (benefit) provision .................... -- (205,697) (631,362) 411,394
Income from investments in partnerships .................... (262,875) (806,225) (540,977) (40,759)
Stock issued to an employee ................................ -- -- 18,750 --
Stock options granted to non employees ..................... -- -- -- 94,000
Gain (loss) on sale of property and equipment .............. -- (24,685) (62,327) 27,734
CHANGES IN OPERATING ASSETS AND
LIABILITIES
Accounts and notes receivable ............................. (879,295) 265,346 (1,657,564) (520,522)
Inventories ............................................... (228,489) 42,749 (217,995) (108,029)
Advances and temporary deposits ........................... 349,651 91,479 (461.613) 75,478
Prepaid show expenses ..................................... (7,603,029) (1,173,833) (812,203) (117,363)
Other current assets ...................................... 14,728 76,007 207,635 (158,312)
Other assets .............................................. (50,000) -- (67,500) --
Deferred costs ............................................ (719,371) 47,614 (44,604) 182,929
Accounts payable .......................................... (174,805) 226,942 268,826 72,290
Accrued liabilities ....................................... (809) 384,943 303,840 134,428
Advance ticket sales ...................................... -- -- 2,635,096 (2,767,831)
Deferred Income ........................................... 6,290,802 1,212,027 -- --
------------ ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES ............................................. (2,162,385) 1,221,452 1,835,279 509,326
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment .......................... (169,450) (15,151) (480,639) (925,875)
Proceeds from sale of assets ................................ -- 143,500 206,500 --
Investments in partnerships ................................. 681,629 (4,033,595) (1,883,544) (873,720)
Payments from (advances to) affiliates ...................... (327,253) 39,170 396,621 (189,198)
Intangible assets ........................................... -- 34,592 (200,000) 4,952
------------ ------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES .................... 184,926 (3,831,484) (1,961,062) (1,983,841)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt .......................................... 3,100,000 375,000 8,243,700 1,914,057
Repayment of debt ........................................... (149,663) (290,755) (8,377,428) (3,070,417)
Net proceeds from (cash used for) private placement ......... -- -- -- 9,115,832
Distributions ............................................... -- (175,115) (175,115) (4,211,972)
Deferred debt issuance costs ................................ -- -- -- (792,577)
Stock registration costs .................................... -- (91,148) (91,148) --
------------ ------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES ................................... 2,950,337 (182,018) (399,991) 2,954,923
------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ....................................... 972,878 (2,792,050) (525,774) 1,480,408
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR ....................................................... 5,410,837 5,936,611 5,936,611 4,456,203
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR ...................... $ 6,383,715 $ 3,144,561 $ 5,410,837 $ 5,936,611
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest .................................................. $ 343,506 $ 311,145 $ 681,996 $ 490,628
============ ============ ============ ============
Income taxes .............................................. $ 457,388 $ 997,105 $ 1,264,475 $ 250,000
============ ============ ============ ============
SUPPLEMENTAL INFORMATION ON NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of notes to common stock ....................... $ 81,736 -- -- --
------------ ------------ ------------ ------------
Distribution of notes receivable to affiliates ............ $ -- $ -- $ -- $ --
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-173
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Magicworks Entertainment Incorporated (the "Company"), through its
subsidiaries and partnerships, acquires domestic and international stage and
ancillary rights to theatrical productions, produces and promotes live
entertainment, manages and books performances and shows, and provides ancillary
services including transportation and merchandising of a broad range of
products associated with its productions and performers.
MERGERS, ACQUISITIONS AND BUSINESS COMBINATIONS
On July 29, 1996, the Company consummated a simultaneous merger (the
"Merger") with certain other affiliated businesses. On the same date and on
September 27, 1996, the Company issued and sold 400.06 and 14.8 Units,
respectively, in a private placement (see Note 4). Upon completion of the
private placement, the Company merged with and into Shadow Wood Corporation
("Shadow Wood"), a publicly-traded Delaware corporation. In accordance with the
terms of the Merger, each share of the Company's common stock issued and
outstanding was converted into one share of Shadow Wood's common stock. Shadow
Wood was the surviving corporation and investors in the private placement
became security holders of Shadow Wood. Shadow Wood changed its name to
Magicworks Entertainment Incorporated.
On August 28, 1996, the Company acquired all of the outstanding capital
stock of MovieTime Entertainment, Inc. ("MovieTime") in exchange for 1,199,999
shares of the Company's common stock. MovieTime was formed in May 1995. The
principals of MovieTime are the same as the principals and management of the
Company. Accordingly, the acquisition was accounted for on a historical cost
basis in a manner similar to a pooling of interests. The consolidated financial
statements presented for periods prior to the acquisition date have been
restated to reflect the accounts of MovieTime since inception. Revenues and
loss generated by MovieTime since inception and included in the accompanying
consolidated statements of income are as follows:
<TABLE>
<CAPTION>
1996
--------------
<S> <C>
Revenues .................................... $ 81,077
----------
Loss before pro forma income taxes .......... $ (674,703)
==========
</TABLE>
Revenues and loss generated by MovieTime prior to the date of acquisition
and included in the accompanying consolidated statements of income for the year
ended December 31, 1996 were $59,546 and ($449,161), respectively. Effective
April 30, 1997, the Company dissolved MovieTime and ceased its operations.
F-174
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On December 31, 1996, the Company acquired all of the outstanding capital
stock of Space Agency, Inc. ("Space"), now known as Magicworks West, Inc. (see
Name changes section of Note 1), in exchange for 1,320,001 shares of the
Company's common stock. The acquisition has been accounted for using the
pooling of interests method of accounting. Accordingly, the consolidated
financial statements presented for periods prior to the acquisition date have
been restated to reflect the accounts of Space since inception. Revenues,
income and distributions to stockholders generated by Space since inception and
included in the accompanying consolidated statements of income are as follows:
<TABLE>
<CAPTION>
1996
--------------
<S> <C>
Revenues ...................................... $24,740,750
===========
Income before pro forma income taxes .......... $ 1,149,712
===========
Distributions to stockholders ................. $ 1,606,331
===========
</TABLE>
A final S-Corporation distribution of $175,115 was made to the Space
stockholders during 1997.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Magicworks Entertainment Incorporated, all its subsidiaries and certain
partnerships involved in theatrical productions. All significant intercompany
balances and transactions have been eliminated.
For periods prior to July 29, 1996, the accompanying financial statements
present the combined results of Magic Promotion, Inc., Magic Promotions, Inc.,
Touring Artists Group, Inc., Performing Arts Management of North Miami, Inc.,
Diamond Bullet Merchandising, Inc., MovieTime Entertainment, Inc. and Space
Agency, Inc.
NAME CHANGES
The Company has effectuated corporate name changes for the following
subsidiaries:
<TABLE>
<CAPTION>
FORMER NAME NEW NAME
- ------------------------------------ ---------------------------------------------
<S> <C>
Magic Promotion, Inc. Magicworks Entertainment International, Inc.
Magic Promotions, Inc. Magicworks Theatricals, Inc. ("MTI")
Diamond Bullet Merchandising, Inc. Magicworks Merchandising, Inc. ("MMI")
MagicSpace, Inc. (1) Magicworks West, Inc. ("MWI")
Magic Concert Promotions, Inc. Magicworks Concerts, Inc. ("MCI")
</TABLE>
- ----------
(1) Space, which was acquired by the Company on December 31, 1996, was
subsequently merged into MagicSpace, Inc.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and investments in short-term
highly liquid financial instruments, primarily time deposits and money market
accounts, with original maturities of three months or less. Due to the short
maturity period of the cash equivalents, the carrying amount of these
instruments approximates their fair values. Included in cash and cash
equivalents are interest-bearing deposits of $3,752,423 and $3,886,969 at
December 31, 1997 and 1996, respectively.
F-175
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost, determined on a first-in
first-out basis, or net realizable value.
PREPAID SHOW EXPENSES
Prepaid show costs consist of all costs relating to promoting a show
including artist advances and advertising. These costs are expensed over the
term of the related show for a period not to exceed six months.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Assets are depreciated using the straight-line method over
the estimated useful lives of the assets, or the lease terms if shorter, as
follows:
<TABLE>
<S> <C>
Leasehold improvements .......... Lease term
Furniture and equipment ......... 3 to 7 years
Vehicles ........................ 10 to 15 years
</TABLE>
Repairs of property and equipment and minor replacements and renewals are
charged to maintenance expense, which is included in general and administrative
expenses, as incurred.
INVESTMENTS IN PARTNERSHIPS
The Company has partnership interests, ranging from 1% to 20%, in various
theatrical productions. Because the Company does not exercise significant
influence over the operating and financial policies of these productions, these
investments are carried at cost, $1,069,716 and $397,331 at December 31, 1997
and 1996, respectively, and income is only recognized when received in the form
of distributions. The Company recognized no income from these partnerships in
1997 and 1996.
The Company has eleven joint venture interests ranging from 21% to 50%, in
various seasonal productions. Because the Company exercises influence over the
operating and financial policies of these productions, these investments are
accounted for under the equity method. The carrying value of such investments
was $3,204,257 and $1,510,347 at December 31, 1997 and 1996, respectively. The
Company recognized income from investments in partnerships of $540,977 and
$40,759 in 1997 and 1996, respectively.
DEFERRED COSTS
Deferred costs include pre-opening legal and professional fees incurred in
connection with the North Miami Performing Arts Center (The "Arts Center")
amounting to $373,532 which will be amortized over a maximum period of three
years once operations commence (see Note 9).
Additionally, deferred debt costs of approximately $836,000 were incurred
in connection with the private placement of debt (see Note 4), and are being
amortized over the 5-year term of the debt. Amortization of deferred debt costs
amounted to $166,039 and $68,566 in 1997 and 1996, respectively.
F-176
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Booking agreement (1) ........................ $ -- $ 341,595
Management operating agreements (2) .......... 300,000 466,962
Trademark (3) ................................ 200,000 --
---------- ----------
500,000 808,557
Less accumulated amortization ................ (100,833) (482,812)
---------- ----------
Intangible assets, net ....................... $ 399,167 $ 325,745
========== ==========
</TABLE>
- ----------
(1) The booking agreement resulted from the acquisition of the National
Artists Management Company, Inc. in 1992. The agreement was amortized
over a period of five years and was fully amortized at December 31, 1997.
(2) Management operating agreements consist of various agreements being
amortized over periods from five to thirty years. As of December 31, 1997
agreements amounting to $166,962 have been fully amortized and only one
agreement remains in effect, the management operating agreement relating
to the proposed Arts Center (see Note 9). That agreement is being
amortized over a thirty-year period, the term of the agreement which
began in 1993.
(3) The trademark was acquired when the Company entered into a limited
liability company agreement to form The Booking Group, LLC, and will be
amortized over a five-year period beginning in 1997.
Amortization expense incurred associated with intangible assets amounted
to $126,579 and $123,745 for 1997 and 1996, respectively.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company reviews long-lived assets and intangible
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be fully recoverable. If this review
indicates the asset will not be recoverable, as generally determined based on
estimated undiscounted cash flows over the remaining amortization period, the
carrying amount of the asset would be adjusted to fair value.
REVENUES
Revenues are recognized when earned, which is generally at the time of the
theatrical performance or entertainment event. Production revenues represent
the Company's share of performance revenues earned for events where the Company
functions as the event's producer. Producer activities include acquisition of
theatrical stage rights and all activities necessary to mount the production.
Such activities include, but are not limited to, engaging a director, set
construction, costume preparation, arrangements of lighting and sound
equipment, staging rehearsals and theater bookings. Cash received in advance of
a performance is reflected as advance ticket sales in the accompanying
consolidated balance sheets. Promotion revenues represent the Company's share
of performance operating results where the Company serves as promoter. The
promotion of an event involves the presentation of such event at particular
venues. The promoter is responsible for ticket sales, advertising and marketing
of the event. In certain cases, the Company may function as both the producer
and promoter of an event. With respect to the Company's share of production and
promotion receipts, when the Company holds an interest in a show of less than
51%, the Company records its share of the net profits, but does not record the
corresponding revenues or expenses.
F-177
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECEIVABLES
Receivables include amounts due from shows which the Company acts as the
promoter, advances to shows for start-up costs which will be repaid from profit
distributions, and amounts due from theaters for ticket sales. The Company
provides an allowance for losses on accounts receivable based on a monthly
review of the outstanding receivables and evaluation of their collectibility.
In 1997, the Company generated significant production and promotion revenues by
its new concert and international divisions. As a result of these new ventures,
the timing in which these receivables are expected to be collected requires the
Company to set up a provision for potential uncollectible accounts. Changes in
the allowance for losses on accounts receivable for the year ended December 31,
1997 are as follows:
<TABLE>
<S> <C>
Balance, beginning of the year ......... $ --
Provision for uncollectibles ........... 1,143,499
Write-offs ............................. (471,428)
---------
Balance, end of the year ............... $672,071
=========
</TABLE>
A substantial portion of the Company's revenues are derived from the
production and promotion of live entertainment acts and events throughout the
United States, Canada and South America. Changes in the entertainment
preferences of the general populations could affect the Company's future
revenues.
CONCENTRATIONS OF CREDIT RISK
The Company has no significant off balance sheet concentration of credit
risk. The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents.
INCOME TAXES
As a result of the Merger, the Company and its subsidiaries, previously
S-Corporations, became subject to U.S. corporate income tax. Prior to July 30,
1996, the stockholders included their proportionate share of the Company's
income in their respective tax returns.
The accompanying consolidated statements of income include pro forma
income taxes due for periods prior to the Merger as if the Company had been
subject to federal and state corporate income taxes, based on the tax laws in
effect during those periods and statutory rates applied to pre-tax accounting
income.
The Company follows the SFAS No. 109, "Accounting for Income Taxes," which
requires, among other things, recognition of future tax benefits measured at
enacted rates attributable to deductible temporary differences between
financial statement and income tax bases of assets and liabilities and to tax
net operating loss carryforwards to the extent that realization of said
benefits is more likely than not.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1997 and 1996, the carrying amount of cash and cash
equivalents, accounts and notes receivable and accounts payable approximates
fair value due to the short-term nature of these accounts.
F-178
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET INCOME AND PRO FORMA NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 simplifies the current
standards for computing earnings per share ("EPS") under Accounting Principles
Board Opinion ("APB") 15, "Earnings per Share," by replacing the existing
calculation of primary EPS with a basic EPS calculation. It requires a dual
presentation, for complex capital structures, of basic and diluted EPS on the
face of the income statement and requires a reconciliation of basic EPS factors
to diluted EPS factors. The impact of adopting SFAS 128 in 1997 was immaterial.
Basic net income and pro forma net income per common share is computed by
dividing net income or pro forma net income by the weighted average number of
common shares outstanding. Diluted net income and pro forma net income per
common share assumes the maximum dilutive effect from stock options and
warrants, and conversion of the Company's convertible notes (see Note 4). For
all periods presented, basic and diluted net income per share are the same.
The following is the reconciliation of the numerators and denominators of
the basic and dilutive earnings per share calculation:
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Weighted average number of common shares ......................... 24,398,546 22,907,463
Impact of dilutive warrants and options (1) ...................... 35,894 81,649
---------- ----------
Weighted average number of shares of common stock and common
stock equivalents for fully diluted earnings per share .......... 24,434,440 22,989,112
========== ==========
</TABLE>
- ----------
(1) Unsecured senior convertible notes are anti-dilutive.
STOCK-BASED COMPENSATION
In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation", which applies to transactions with non-employees, the Company
has recognized expense for stock options issued to consultants in fiscal 1996,
as more fully described in Note 10. The Company intends to continue applying
the provisions of APB 25, "Accounting for Stock Issued to Employees" for
transactions with employees, as permitted by SFAS 123.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 129, "Disclosures of
Information about Capital Structure" which is effective for fiscal years ending
after December 15, 1997. SFAS No. 129 requires disclosing information about an
entity's capital structure. The impact of adopting SFAS No. 129 in fiscal 1997
was immaterial.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which is required to be adopted in fiscal 1998. This statement
establishes standards to reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This
statement requires that an enterprise (a) classify items of other comprehensive
income by their nature in financial statements and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of statements of financial
position. Comprehensive income is defined as the change in equity during the
financial reporting period of a business enterprise resulting from non-owner
sources. The Company currently does not have other comprehensive income and
therefore does not believe the adoption of SFAS No. 130 will have a significant
impact on its financial statement presentation.
F-179
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is required to be adopted in
fiscal 1998. This statement requires that a public business enterprise report
financial and descriptive information about its reportable operating segments
including, among other things, a measure of segment profit or loss, certain
specific revenue and expense items, and segment assets. The Company currently
has one reporting segment and therefore does not believe the adoption of SFAS
No. 131 will have a significant impact on its financial statement presentation.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the current fiscal year's presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Leasehold improvements ............... $ 134,100 $ 121,001
Furniture and equipment .............. 665,534 587,781
Vehicles ............................. 1,834,200 2,085,022
---------- ----------
2,633,834 2,793,804
---------- ----------
Less accumulated depreciation and
amortization ........................ (535,049) (745,549)
---------- ----------
Property and equipment, net .......... $2,098,785 $2,048,255
========== ==========
</TABLE>
3. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Payroll-related accruals .......... $130,249 $ 90,996
Accrued show expenses ............. 240,582 --
Other ............................. 161,817 137,812
-------- --------
$532,648 $228,808
======== ========
</TABLE>
4. PRIVATE PLACEMENT
On July 29, 1996, the Company issued and sold 400.06 Units for which it
received net proceeds of $8,782,832. On September 27, 1996, the Company sold an
additional 14.8 Units pursuant to the private placement for which it received
additional net proceeds of $333,000. Each unit consists of an unsecured senior
convertible note (the "Notes") in the principal amount of $12,500 bearing
interest at a rate of 10% per annum, and 5,000 shares of common stock. The
value attributable to the common shares was $2.50 per share. As a placement
fee, the placement agent received 488,820 shares of the Company's common stock.
The Notes require interest payments semi-annually on June 30 and December
31. The Notes contain mandatory sinking fund requirements which are calculated
to retire 75% of the face amount of the Notes after payment of seven
consecutive equal quarterly contributions, the first such contribution to occur
on October 1, 1999 and every ninety days thereafter.
The principal amount and accrued and unpaid interest on each Note is
convertible (in whole but not in part), at any time prior to July 30, 2001, at
a conversion price of $3.50 per share (subject to adjustment in certain
circumstances). The Notes may be prepaid by the Company at its option, at the
principal amount plus accrued but unpaid interest.
F-180
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition to the placement fee described above, the Company issued the
placement agent 500,000 warrants at an exercise price of $3.00 per share,
(subject to adjustment in certain circumstances), and has authorized up to
1,481,643 redeemable warrants that may be issued in connection with the
prepayment of the Notes in certain circumstances at $3.50 per share.
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Various notes payable with interest ranging from 9.75% to
10.9%, principal due monthly through February 2004,
collateralized by vehicles. ................................... $1,160,970 $1,276,348
Convertible notes (see Note 4) ................................. 5,185,750 5,185,750
Capital lease obligation payable in monthly installments through
September 1997 including interest imputed at a rate of 10%,
collateralized by a vehicle. .................................. -- 18,350
---------- ----------
6,346,720 6,480,448
Less current portion ........................................... (299,557) (302,956)
---------- ----------
$6,047,163 $6,177,492
========== ==========
</TABLE>
Scheduled maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998 ................... $ 299,557
1999 ................... 869,330
2000 ................... 2,480,791
2001 ................... 2,511,529
2002 ................... 185,513
----------
$6,346,720
==========
</TABLE>
The Company has a committed line of credit agreement expiring in May 1998
with a bank that provides for short-term borrowings of up to $5.0 million by
the Company. Borrowings under this agreement bear interest at the London
Interbank Offered Rate (LIBOR) plus 250 basis points. This agreement is
collateralized by substantially all the Company's assets. At December 31, 1997,
the full amount of the line of credit was available for borrowing.
6. EMPLOYEE BENEFIT PLANS
Effective January 1, 1988, the Company initiated a Money Purchase Plan and
Trust (the "Plan") for all full-time employees of MTI who have completed one
year of service and are at least 21 years of age. The Company contributes an
amount not to exceed 10% of the participating employee's compensation or
$16,000. In addition, the Plan permits the Company to make additional
discretionary contributions to the Plan. Total contributions to the Plan were
$85,000 and $55,792 in 1997 and 1996, respectively. Employees vest in the
Company's discretionary contributions at the rate of 20% per year upon
completion of two years of service.
MWI has a qualified profit sharing plan for the employees. Contributions
to the plan are determined by the Board of Directors each year, and are limited
to an amount not to exceed 15% of eligible compensation paid to participants
for the year. Employees are eligible to participate in the plan after one year
if they are over 21 and work at least 1,000 hours each year. MWI made
contributions to the plan of $23,500 and $59,222 in 1997 and 1996,
respectively.
F-181
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Effective fiscal 1998, the Company plans to adopt a resolution to submit a
proposal to the Internal Revenue Service ("IRS") to freeze, distribute and
terminate both of the aforementioned plans, with the assets not to be
distributed until a final determination letter is received by the IRS. Through
a professional employer organization, effective January 1998, the Company has
implemented a 401(k) Profit Sharing Plan and Trust, (the "401(k) Plan"). With
the exception of individuals employed by the Company as of the initial plan
year effective date, who will be immediately eligible to participate in the
plan, employees will become eligible to participate after completing one year
of service provided the employee is over the age 21. Participants may elect to
contribute from 1% to 15% of their annual compensation into the 401(k) Plan.
The Company will make matching contributions in an amount equal to 25% of the
participant's contribution. Participants shall become vested in the employer
contribution portion of their account as follows:
<TABLE>
<CAPTION>
YEARS OF VESTING SERVICE VESTING %
- -------------------------------- ----------
<S> <C>
1 ............................ 0%
2 ............................ 20%
3 ............................ 40%
4 ............................ 60%
5 ............................ 80%
6 or more .................... 100%
</TABLE>
The 401(k) Plan will be administered by, and offer the funds and
investment options of, a national asset management company.
7. RELATED PARTY TRANSACTIONS
In the normal course of its business, the Company conducts business with
certain stockholders and their respective affiliates. In the opinion of
management, the transactions with related parties are equivalent to terms from
unrelated parties.
Fees paid by the Company for accounting, general management, office and
other administrative services to entities controlled by certain principal
stockholders were $0 and $25,750 in 1997 and 1996, respectively, and are
reflected in general and administrative expenses in the accompanying
consolidated statements of income for the applicable periods.
The Company entered into three non-cancelable operating leases for office
space with related entities. As of December 31, 1997, one of the above
mentioned non-cancelable operating leases has expired and the Company continues
to occupy the premises on a month to month rental basis. The Company is
required to pay taxes, maintenance, insurance and utility costs. Payments under
these leases and rental arrangements totaled $106,832 and $80,504 in 1997 and
1996, respectively. See Note 9 for a summary of future minimum commitments
under the non-cancelable operating leases.
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------- -----------
<S> <C> <C>
Current .................. $1,378,686 $185,822
Deferred ................. (631,362) 411,394
---------- --------
$ 747,324 $597,216
========== ========
Federal .................. $ 653,436 $514,028
State .................... 93,888 83,188
---------- --------
$ 747,324 $597,216
========== ========
</TABLE>
F-182
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Prior to July 29, 1996, the stockholders included their proportionate
share of the Company's income in their respective tax returns. Pro forma income
taxes represent the estimated tax provision, at 39%, which would have been
recorded had the Company been a taxable entity in 1996.
A reconciliation of the difference between the expected provision for
income taxes using the statutory federal tax rate and the Company's actual
provision is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ---------------
<S> <C> <C>
Provision using statutory rate of 34% ................... $633,870 $ 1,071,424
State income taxes ...................................... 61,522 50,745
Income earned in period prior to July 29, 1996 .......... -- (1,161,758)
Deferred income taxes recorded at July 29,
1996 ................................................... -- 548,525
Other ................................................... 51,932 88,280
-------- ------------
$747,324 $ 597,216
======== ============
</TABLE>
Deferred taxes are due to timing differences in reporting of certain
income and expense items for book purposes and income tax purposes. Deferred
taxes at December 31, 1996 consist primarily of the impact, prior to July 29,
1996, of the Company reporting its income on a cash basis.
9. COMMITMENTS AND CONTINGENCIES
LITIGATION
An arbitration proceeding had been instituted by MMI, a subsidiary of the
Company, against Robert L. Ferman ("Ferman"), a former financial advisor to
certain of the Company's predecessors. MMI's claim had been for rescission,
fraud and breach of fiduciary duty in connection with a consulting agreement
under which MMI agreed to pay Ferman a monthly retainer fee of $2,500 and an
equity position in MMI in the event that Ferman was successful in locating an
acceptable underwriter for a proposed initial public offering of the securities
of the Company or its affiliates. In March 1997, the Company and Ferman settled
the proceeding. Pursuant to a settlement agreement, the Company agreed to sell
to Ferman 500,000 shares of Common Stock (the "Settlement Shares") valued at
the market price as of the date of the Settlement Agreement in exchange for a
non-recourse promissory note (the "Note") in payment for the Settlement Shares.
The Settlement Shares will be held in escrow as security for the Note by the
Company pending payment of the Note. The parties have not yet signed a
settlement agreement and are in the process of revising the definitive
agreement for execution and expect the matter to be resolved in the near
future.
In October 1994, a former independent contractor filed a complaint against
the partnership that produced "Jesus Christ Superstar" in the Common Pleas
Court of Philadelphia County seeking consequential damages of $5,000,000
arising from the termination of an employment contract by such partnership. A
trial date has been set for June 1, 1998. Management believes, based on the
advice of counsel, that the lawsuit is without merit, and that the outcome of
this suit will not have a material adverse effect on its financial condition or
results of operations.
Performing Arts Management of North Miami, Inc., a wholly-owned subsidiary
of the Company ("PAM"), commenced an action against the City of North Miami
(the "City") for failure to perform under the operating management agreement
between PAM and the City relating to PAM's management of the Arts Center (see
Note 1). The City filed a counterclaim alleging that the Company had breached
the management contract. The dispute stems from the City's inability to deliver
a permit to the Company to build the Arts Center as required under the
operating agreement and the City's assertion that PAM breached the agreement by
failing to make certain payments alleged to be
F-183
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
required thereunder. The Company has incurred expenditures related to its PAM
contract totaling $626,032 at December 31, 1997, which were capitalized and are
included in deferred costs and intangible assets in the accompanying
consolidated balance sheets. In August 1998, the Company determined that the
assets capitalized were no longer realizable and wrote off all related assets.
In July 1997, Spinnaker III filed suit against MCI, U.S. Tobacco and Club
LaVela, alleging (among other things not related to Magic) that Magic breached
its contract with Spinnaker to host the ROAR Tour performance. The case is in
the discovery phase with no trial date yet set. Management believes, based on
the advice of counsel, that Spinnaker's claims are without merit, and that the
outcome of this suit will not have a material adverse effect on its financial
condition or results of operations.
MANAGEMENT AGREEMENTS
The Company entered into management agreements with Niko Associates
("Niko") to manage the daily general operations during the entire periods of
production of Dolliko, Judas and Impossible. Management fees are calculated
based on fixed weekly fees ranging from $2,000 to $5,000 per performance week
plus reimbursement of certain overhead related costs. Management fees paid by
the Company to Niko amounted to $405,000 and $635,000 in 1997 and 1996,
respectively, and are reflected in production expenses in the accompanying
consolidated statements of income.
OPERATING LEASES
The Company leases office space from affiliated (see Note 7) and
unaffiliated entities under operating lease agreements that extend through June
2001. The following is a schedule of approximate future minimum lease payments
required under such non-cancelable operating leases at December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AFFILIATED UNAFFILIATED TOTAL
- ------------------------- ------------ -------------- -----------
<S> <C> <C> <C>
1998 .................... $ 77,800 $ 58,300 $136,100
1999 .................... 80,200 67,450 147,650
2000 .................... 82,600 5,650 88,250
2001 .................... 28,000 -- 28,000
-------- -------- --------
$268,600 $131,400 $400,000
======== ======== ========
</TABLE>
The Company also has month-to-month leases with affiliated (see Note 7)
and unaffiliated entities. Rent expense amounted to $200,023 and $161,140, for
the years ended December 31, 1997 and 1996, respectively, and is included in
general and administrative expenses in the accompanying consolidated statements
of income.
F-184
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with key personnel that
require future minimum payments as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -------------------------
<S> <C>
1998 .................. $1,631,000
1999 .................. 1,484,583
2000 .................. 1,191,250
2001 .................. 700,000
----------
$5,006,833
==========
</TABLE>
10. STOCK OPTIONS
At the discretion of management, the Company may grant options to purchase
the Company's stock to employees, directors, consultants, and other unrelated
parties. The Company granted options to purchase an aggregate of 637,750 and
216,500 shares in 1997 and 1996, respectively as follows:
<TABLE>
<CAPTION>
EXERCISE
OPTIONS PRICE
--------- --------------
<S> <C> <C>
Balance at December 31, 1995 ......... --
Grants .............................. 216,500 $2.50 - $3.50
Exercises ........................... --
Canceled ............................ --
-------
Balance at December 31, 1996 ......... 216,500 $2.50 - $3.50
Grants .............................. 637,750 $1.75 - $3.56
Exercises ........................... --
Canceled ............................ --
-------
Balance at December 31, 1997 ......... 854,250 $1.75 - $3.56
=======
</TABLE>
Options exercisable December 31, 1997 and 1996 were 259,250 and 166,500,
respectively.
The Company applies APB 25 and its related interpretations in accounting
for options granted to employees. Accordingly, no compensation cost has been
recognized related to such grants. Had compensation cost for the Company's
stock options been based on fair value at the grant dates for awards granted,
consistent with the provisions of SFAS 123, the Company's 1997 net income and
net income per share, and the 1996 pro forma net income and pro forma income
per share would have been reduced to the amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net income and pro forma net income ..........
As reported .................................. $1,116,999 $1,404,005
Pro forma for the impact of SFAS 123 ......... $1,011,728 $1,384,146
Net income per share and pro forma income per
share, basic and diluted
As reported .................................. $ .05 $ .06
Pro forma for the impact of SFAS 123 ......... $ .04 $ .06
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
expected volatility of 25.0%, risk-free interest rate of 6.5%, expected
dividends of $0 and expected terms of 3 years.
F-185
<PAGE>
MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 1996, the Company recorded expense of $94,000 related to 200,000 stock
options granted to non-employees of the Company. In determining the expense to
be recorded, the Company applied the Black-Scholes model using the same
assumptions described above.
11. SUBSEQUENT EVENTS
On September 11, 1998 the Company was acquired by SFX Entertainment Inc.
F-186
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- -------------
(UNAUDITED) (NOTE 1)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ................................................... $ 4,500 $ 8,944
Cash escrow ................................................................. 746 704
Accounts receivable, net .................................................... 14,791 6,930
Prepaid production costs .................................................... 1,193 553
Prepaid expenses and other current assets ................................... 595 436
-------- --------
Total current assets ...................................................... 21,825 17,567
Property and equipment, net .................................................. 2,895 2,040
Receivables--non current ..................................................... 1,365 668
Notes receivable ............................................................. 2,135 1,887
Deposits and deferred expenses ............................................... 2,314 677
Intangible assets--net ....................................................... 59,648 23,951
-------- --------
$ 90,182 $ 46,790
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses ....................................... $ 8,728 $ 4,592
Acquisition indebtedness--current portion ................................... 1,515 775
Escrow payable .............................................................. 685 527
Deferred revenues ........................................................... 523 626
-------- --------
Total current liabilities ................................................. 11,451 6,520
Notes payable--bank .......................................................... 33,140
Acquisition indebtedness--non-current ........................................ 3,777 2,144
Deferred rent ................................................................ 651 696
Deferred income taxes ........................................................ 964 960
Common stock (545 shares) subject to put options ............................. 3,420 3,184
Stockholders' equity
Preferred stock, $.01 par value; 5,000 shares authorized, no shares issued
Common stock, $.01 par value; 25,000 shares authorized, 18,086
(September 30, 1998) and 17,913 (December 31, 1997) shares issued
and outstanding ............................................................. 175 174
Additional paid-in capital .................................................. 39,593 36,885
Accumulated deficit ......................................................... (3,003) (3,781)
Cumulative translation adjustment ........................................... 14 8
-------- --------
Total stockholders' equity ................................................ 36,779 33,286
-------- --------
$ 90,182 $ 46,790
======== ========
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1997 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
F-187
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues ............................................ $14,199 $5,817 $35,470 $ 11,991
Operating expenses .................................. 8,739 3,716 23,726 7,664
General and administrative expenses ................. 2,865 1,500 8,239 4,502
Non cash compensation ............................... (157) 81 367 165
Depreciation and amortization ....................... 660 72 1,463 91
------- ------ ------- --------
Income/(loss) from operations ....................... 2,092 448 1,675 (431)
Interest expense, net ............................... 227 222 120 224
Financing expense ................................... -- 756 -- 756
------- ------ ------- --------
Income/(loss) before income taxes ................... 1,865 (530) 1,555 (1,411)
Income taxes ........................................ 423 77 541 77
------- ------ ------- --------
Net income/(loss) ................................... 1,442 (607) 1,014 (1,448)
Accretion of obligation related to the put option
issued in connection with the ProServ
acquisition ........................................ 79 -- 236 --
------- ------ ------- --------
Net income/(loss) applicable to common
stockholders ....................................... $ 1,363 $ (607) $ 778 $ (1,488)
======= ====== ======= ========
Net income/(loss) per share--basic and dilutive ..... $ .08 $ (.08) $ .05 $ (.20)
======= ====== ======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-188
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES ................................ $ (3,547) $ (2,184)
INVESTING ACTIVITIES
Recent Acquisitions, net of cash acquired ........................... (30,736) --
Purchase of equipment and leasehold improvements, net of landlord
contribution ...................................................... (702) (1,240)
Employee loan ....................................................... -- (424)
Deposits and deferred expenses ...................................... (970) (2,200)
Increase in other assets ............................................ (568)
--------- --------
Net cash used in investing activities ............................. (32,408) (4,432)
--------- --------
FINANCING ACTIVITIES
Proceeds under Credit Agreement ..................................... 33,140 --
Proceeds from Bridge Financing ...................................... -- 10,500
Costs related to stock offerings .................................... (187) (131)
Costs related to Credit Agreement ................................... (667) --
Costs related to Tender Offer ....................................... -- (9,580)
Payment of acquisition indebtedness ................................. (775) (500)
--------- --------
Net cash provided by financing activities ......................... 31,511 289
--------- --------
NET DECREASE/INCREASE IN CASH ........................................ (4,444) (6,327)
CASH AT BEGINNING OF PERIOD .......................................... 8,944 7,231
--------- --------
CASH AT END OF PERIOD ................................................ $ 4,500 $ 904
========= ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
Issuance of common stock to an employee ............................. $ 100 --
========= ========
In connection with Recent Acquisitions
Issuance of common stock .......................................... $ 2,616 --
========= ========
Notes payable ..................................................... $ 2,594 --
========= ========
Obligation to issue common stock in future ........................ $ 416 --
========= ========
Note received in connection with sale of an interest in an associated
company ........................................................... $ 300 --
========= ========
Issuance of options to purchase 105 shares of Common stock in
connection with Bridge Financing for the Tender Offer ............. $ 394
========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-189
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE TOTAL
NUMBER OF COMMON PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES STOCK CAPITAL DEFICIT ADJUSTMENT EQUITY
----------- ---------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance--December 31, 1997 ..... 17,913 $174 $36,885 $ (3,781) 8 $33,286
Issuance of common stock:
In connection with
acquisitions ................ 549 5 2,611 2,616
To an employee ................ 16 100 100
Cancellation of IPO Escrow
Shares ........................ (392) (4) 4 --
QBQ Escrow Shares .............. 180 180
Secondary Offering costs ....... (187) (187)
Foreign currency translation
adjustment .................... 6 6
Net income for period .......... 778 778
------ ----- ------- -------- --- -------
Balance--September 30, 1998
(unaudited) ................... 18,086 $175 $39,593 $ (3,003) $14 $36,779
====== ===== ======= ======== === =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-190
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- MERGER WITH SFX ENTERTAINMENT
On July 23, 1998, The Marquee Group, Inc. (the "Company") entered into an
Agreement and Plan of Merger, as amended (the "Merger Agreement"), with SFX
Entertainment, Inc. ("Parent") and SFX Acquisition Corp., a wholly-owned
subsidiary of Parent ("Sub"), pursuant to which Sub will merge with and into
the Company (the "Merger") and the Company will continue as the surviving
corporation of the Merger. Pursuant to the Merger Agreement, upon the
consummation of the Merger, each outstanding share of common stock, $.01 par
value, of the Company will be converted into the right to receive from Parent
0.1111 shares of Class A Common Stock, $.01 par value, of Parent (the "SFX
Class A Common Stock")(the "Exchange Ratio"). If the SFX Class A Common Stock
Price (as defined below) is greater than $42.75, then the Exchange Ratio shall
be the quotient obtained by dividing $4.75 by the SFX Class A Common Stock
Price. The term "SFX Class A Common Stock Price" means the average of the last
reported sale price for the fifteen consecutive trading days ending on the
fifth trading day prior to the effective time of the Merger on the primary
exchange on which the SFX Class A Common Stock is traded (the NASDAQ National
Market).
Additionally, the Merger Agreement places certain restrictions on the
conduct of business by the Company, including a restriction on the incurrence
of indebtedness and the making of capital expenditures.
The consummation of the Merger is subject to the satisfaction of a number
of conditions set forth in the Merger Agreement, including approval by the
Company's stockholders. Certain of these conditions have been satisfied as of
November 12, 1998, including the expiration of the applicable waiting period
for the merger under the Hart-Scott-Rodino Antitrust Improvement Act of 1976,
as amended. The Merger is expected to be consummated in the first quarter of
1999.
NOTE 2 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Item 310(b) of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for an interim period
are not necessarily indicative of the results that may be expected for a full
year. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1997.
The Company was formed in July 1995 for the purpose of providing
integrated event management, television programming and production, marketing,
talent representation and consulting services in the sports, news and
entertainment industries. In furtherance of its business strategy, the Company
acquired by merger on December 12, 1996, concurrently with the closing of its
initial public offering ("IPO"), Sports Marketing & Television International,
Inc. ("SMTI"), which provides production and marketing services to sporting
events, sports television shows, and professional and collegiate leagues and
organizations, and Athletes and Artists, Inc. ("A&A"), a sports and media
representation firm. The acquisitions of SMTI and A&A are referred to as the
"1996 Acquisitions". In October 1997, the Company acquired ProServ, Inc. and
ProServ Television, Inc. (collectively, "ProServ") (the "ProServ Acquisition")
and QBQ Entertainment, Inc. ("QBQ") (the "QBQ Acquisition") (collectively, the
"1997 Acquisitions"). The Company also completed the secondary offering (the
"Second Offering") of 8,500,000 shares of its common stock at $5.00 per share
in the
F-191
<PAGE>
fourth quarter of 1997. In August and September 1998, the Company acquired
Alphabet City Industries, Inc. and Alphabet City Sports Records, Inc.,
Cambridge Holding Corporation, Park Associates Limited, Tony Stephens
Associates Limited, and Tollin/Robbins Productions (collectively, the "Recent
Acquisitions"). Accordingly, the accompanying condensed consolidated financial
statements include the accounts of the Company, the 1997 Acquisitions and the
Recent Acquisitions from their respective dates of acquisition. All significant
intercompany transactions and accounts have been eliminated.
NOTE 3 -- EARNINGS PER COMMON SHARE
Basic earnings per share applicable to common stockholders is based upon
the net loss after reduction of amounts, if any, for accretion of the
obligation related to the put option issued in connection with the ProServ
Acquisition divided by the weighted average number of shares of common stock
outstanding during the year. Shares of common stock placed in escrow upon
completion of the Company's initial public offering have been excluded from the
calculation of basic earnings per share. The Company's outstanding options,
warrants and contingently issuable shares are not included for diluted earnings
per share because the effect would be anti-dilutive for 1997. The following
table sets forth the computation of the adjusted weighted average number of
common stock outstanding:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- ------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Denominator for basic earnings per share--weighted
average shares .............................................. 16,859 16,660
Effect of dilutive securities--Employee stock options ......... 177 141
------ ------
Denominator for dilutive earnings per share--adjusted
weighted average shares ..................................... 17,036 16,801
====== ======
</TABLE>
NOTE 4 -- NON-CASH COMPENSATION CHARGE
In connection with the acquisition of QBQ in October 1997, the Company
placed in escrow 78,702 shares of its common stock issued to the seller as a
portion of the purchase price. As of March 31, 1998, the Company has determined
that it is probable that the financial thresholds required to be met for the
release of these escrowed shares will be achieved in 1998, and, accordingly has
recorded a charge of $180,000 for the nine months ended September 30, 1998 as
non-cash compensation in the accompanying condensed consolidated statements of
operations. This compensation charge will be adjusted based upon the changes in
the fair market value of the shares subject to the escrow arrangement through
the actual release date.
NOTE 5 -- BANK CREDIT AGREEMENT
On July 31, 1998, the Company and its subsidiaries entered into a Credit
Agreement, as amended, (the "Credit Agreement") with BankBoston, NA, which
provides for a revolving line of credit for loans and letters of credit
(subject to a $2 million sublimit) of up to $35 million in the aggregate. The
revolving credit facility under the Credit Agreement may be used to finance
acquisitions and to fund working capital needs. Loans under the Credit
Agreement bear interest at a floating rate equal to a base rate which
approximates prime plus an applicable margin, or a Eurocurrency rate plus an
applicable margin. The applicable margin is dependent on the Company achieving
certain leverage ratios. In August and September 1998, the Company borrowed a
total of approximately $33.1 million under the revolving credit facility in
connection with the Recent Acquisitions, with the interest rate associated with
such borrowings of approximately 8.3% for domestic borrowings and 10.5% for
British (Pounds Sterling) borrowings (at September 30, 1998). The obligations of
F-192
<PAGE>
the Company under the Credit Agreement are secured by a first priority security
interest in all existing and future acquired property of the Company, including
the capital stock of its subsidiaries. The Company's obligations under the
Credit Agreement are also guaranteed by the Company's present and future
subsidiaries and secured by a first priority security interest in all existing
and future property of these subsidiaries. The Credit Agreement also contains
financial leverage and coverage ratios, which may inhibit the Company's ability
to incur other indebtedness, and restrictions on capital expenditures,
distributions and other payments. However, the Company will be permitted to
incur additional indebtedness outside of the Credit Agreement to acquire
businesses secured solely by the assets of such acquired businesses, as long as
the Company is in compliance with the financial covenants of the Credit
Agreement exclusive of such indebtedness and the related borrowing base
applicable to the businesses acquired. The term of the Credit Agreement is
three years with borrowing availability reduced periodically commencing January
1, 2000. See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" for
additional information.
NOTE 6 -- RECENT ACQUISITIONS
On August 3, 1998, the Company consummated its acquisition of
substantially all of the assets of Alphabet City Industries, Inc. and all of
the outstanding stock of Alphabet City Sports Records, Inc., both of which are
sports and music marketing companies which develop strategic alliances among
sports leagues, music companies and corporate sponsors (collectively, the
"Alphabet City Acquisition"). The aggregate purchase price for the Alphabet
City Acquisition was approximately $4.0 million consisting of $3.4 million in
cash (excluding assumed liabilities) and 200,000 shares of the Company's common
stock. In addition, the Company may be obligated to make significant additional
payments (up to $9 million) based upon the financial performance of the
acquired businesses.
On August 6, 1998, the Company consummated its acquisition of all of the
outstanding stock of Cambridge Holding Corporation ("Cambridge"), a golf
representation company, whose client roster includes a mix of established PGA
Tour winners and many prospects on the Nike Tour (the "Cambridge Acquisition").
The aggregate purchase price for Cambridge was approximately $3.9 million
consisting of $3.5 million in cash and 89,536 shares of the Company's common
stock. In addition, the Company may be obligated to make additional payments
aggregating approximately $2.0 million based upon the future financial
performance of Cambridge.
On August 13, 1998, the Company acquired Park Associates Limited ("PAL"),
a sports and media talent representation firm in the United Kingdom. (the "PAL
Acquisition"). The initial consideration for the PAL Acquisition was
approximately (pounds sterling) 2.6 million (approximately $3.2 million)
consisting of (pounds sterling) 1.6 million (approximately $2.6 million) in cash
and 117,440 shares of the Company's common stock. In addition, the Company will
pay an additional (pounds sterling)800,000 (approximately $1.3 million) in cash
and (pounds sterling)200,000 (approximately $330,000) in common stock (based on
the closing price of such stock as reported in The Wall Street Journal during
the twenty days prior to the date of each payment) in five equal annual
installments.
On September 2, 1998, the Company consummated its acquisition of Tony
Stephens Associates Limited ("TSA"), a major soccer talent representation firm
in the United Kingdom (the "TSA Acquisition"). The initial consideration for the
TSA Acquisition was approximately consisting of (pounds sterling)1.8 million
(approximately $3.0 million), of which (pounds sterling)1.4 million
(approximately $2.3 million) was paid in cash and 142,291 shares of the
Company's common stock were issued. In addition, the Company will pay an
additional (pounds sterling)200,000 (approximately $330,000) in cash and (pounds
sterling)50,000 (approximately $83,000) in the form of shares of the Company's
common stock.
On September 18, 1998, the Company consummated its acquisition of all the
issued and outstanding equity interests in Halcyon Days, Productions, Inc.,
Robbins Entertainment Group, Inc. and Tollin/Robbins Management, LLC
(collectively, "Tollin/Robbins") (the "Tollin/Robbins Acquisition").
Tollin/Robbins is an award-winning independent film and television production
F-193
<PAGE>
company. The initial consideration for the Tollin/Robbins Acquisition was $20.5
million in cash. In addition, the two sellers will each receive $800,000 in
cash, payable in four equal annual installments beginning September 1, 1999 and
will receive additional consideration based on the EBITDA (as defined in the
acquisition agreement) of the acquired entities through 2003, payable in shares
of the Company's common stock and cash.
The funds used to consummate each of the Recent Acquisitions were
principally obtained from borrowings under the Credit Agreement.
F-194
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of
The Marquee Group, Inc.
We have audited the accompanying consolidated balance sheet of The Marquee
Group, Inc. and Subsidiaries (the "Company") as of December 31, 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the two years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly in
all material respects, the consolidated financial position of the Company at
December 31, 1997, and the consolidated results of its operations and its cash
flows for the two years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
New York, New York
March 5, 1998
F-195
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 8,944
Cash escrow .............................................................. 704
Accounts receivable -- net ............................................... 6,930
Television and event costs ............................................... 553
Prepaid expenses and other current assets ................................ 436
--------
Total current assets .................................................. 17,567
Property and equipment, net ............................................... 2,040
Noncurrent receivables .................................................... 668
Notes receivable .......................................................... 1,887
Deposits .................................................................. 677
Intangible assets -- net .................................................. 23,951
--------
$ 46,790
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ................................. $ 4,592
Acquisition indebtedness -- current portion .............................. 775
Escrow payable ........................................................... 527
Deferred revenues ........................................................ 626
--------
Total current liabilities ............................................. 6,520
Acquisition indebtedness -- non-current ................................... 2,144
Deferred rent ............................................................. 696
Deferred income taxes ..................................................... 960
Common stock (545 shares) subject to put options .......................... 3,184
Stockholders' equity
Preferred stock, $.01 par value, 5,000 shares authorized, no shares issued
Common stock, $.01 par value; 25,000 shares authorized, 8,769 and
17,913 shares issued and outstanding ................................... 174
Additional paid-in capital ............................................... 36,885
Accumulated deficit ...................................................... (3,781)
Cumulative translation adjustment ........................................ 8
--------
Total stockholders' equity ............................................ 33,286
--------
$ 46,790
========
</TABLE>
See accompanying notes.
F-196
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
Revenues .................................................................. $ 21,268 $ 2,869
Operating expenses ........................................................ 14,459 2,563
General and administrative expenses ....................................... 6,316 2,199
Loss on abandonment of lease .............................................. 466 --
Deferred compensation ..................................................... 145 56
Depreciation and amortization ............................................. 371 5
-------- --------
Loss from operations ...................................................... (489) (1,954)
Interest expense, net ..................................................... 22 283
Financing expense ......................................................... 756 193
-------- --------
Loss before income taxes .................................................. (1,267) (2,430)
Income tax benefit (provision) ............................................ (45) 20
-------- --------
Net loss .................................................................. (1,312) (2,410)
Accretion of obligation related to the put option issued in connection with
the ProServ acquisition .................................................. 59 --
-------- --------
Net loss applicable to common stockholders ................................ $ (1,371) $ (2,410)
======== ========
Net loss per share applicable to common stockholders-basic and dilutive ... $ (0.15) $ (1.03)
======== ========
Weighted number of shares outstanding ..................................... 9,377 2,347
======== ========
</TABLE>
See accompanying notes.
F-197
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF COMMON ADDITIONAL
SHARES STOCK PAID-IN CAPITAL
----------- -------- -----------------
<S> <C> <C> <C>
Balance -- December 31, 1995 .......... 1,938 $ 19 $ --
Issuance of common stock:
Issuance to employee ................. 50 -- 119
Conversion of Debentures ............. 667 7 1,993
Initial public offering, net of
offering costs ..................... 3,852 39 15,547
Acquisitions ......................... 2,262 23 1,488
Distribution to acquired companies'
former stockholders .................. -- -- (10,970)
"S" Corporation dividend .............. -- -- (382)
Amortization of deferred
compensation ......................... -- -- --
Net loss for the year ended
December 31, 1996 .................... -- -- --
----- ---- ----------
Balance -- December 31, 1996 .......... 8,769 88 7,795
Initial public offering costs ......... -- -- (131)
Issuance of common stock:
Second offering, net of offering
costs .............................. 8,500 85 38,470
Acquisitions ......................... 644 1 624
Tender Offer .......................... -- -- (10,280)
Issuance of options:
In connection with financing of
Tender Offer ....................... -- -- 394
In connection with acquisitions ...... -- -- 13
Amortization of deferred
compensation ......................... -- -- --
Foreign currency translation
adjustment ........................... -- -- --
Net loss for the year ended
December 31, 1997 .................... -- -- --
----- ---- ----------
17,913 $174 $ 36,885
====== ==== ==========
<CAPTION>
CUMULATIVE
DEFERRED ACCUMULATED TRANSLATION
COMPENSATION DEFICIT ADJUSTMENT TOTAL
-------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance -- December 31, 1995 .......... $ -- $ -- -- $ 19
Issuance of common stock:
Issuance to employee ................. (119) -- -- --
Conversion of Debentures ............. -- -- -- 2,000
Initial public offering, net of
offering costs ..................... -- -- -- 15,586
Acquisitions ......................... -- -- -- 1,511
Distribution to acquired companies'
former stockholders .................. -- -- -- (10,970)
"S" Corporation dividend .............. -- -- -- (382)
Amortization of deferred
compensation ......................... 56 -- -- 56
Net loss for the year ended
December 31, 1996 .................... -- (2,410) -- (2,410)
------- -------- -- ----------
Balance -- December 31, 1996 .......... (63) (2,410) -- 5,410
Initial public offering costs ......... -- -- -- (131)
Issuance of common stock:
Second offering, net of offering
costs .............................. -- -- -- 38,555
Acquisitions ......................... -- -- -- 625
Tender Offer .......................... -- -- -- (10,280)
Issuance of options:
In connection with financing of
Tender Offer ....................... -- -- -- 394
In connection with acquisitions ...... -- -- -- 13
Amortization of deferred
compensation ......................... 63 -- -- 63
Foreign currency translation
adjustment ........................... -- -- 8 8
Net loss for the year ended
December 31, 1997 .................... -- (1,371) -- (1,371)
------- -------- -- ----------
$ -- $ (3,781) $ 8 $ 33,286
======= ======== === ==========
</TABLE>
See accompanying notes.
F-198
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Operating activities
Net loss ......................................................................... $ (1,371) $ (2,410)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................... 385 5
Deferred compensation ........................................................... 145 56
Deferred income taxes ........................................................... -- (40)
Noncash financing expense ....................................................... 394 --
Accretion of put option and imputed interest .................................... 189 --
Loss on abandonment of lease .................................................... 335 --
Changes in operating assets and liabilities:
Cash escrow ................................................................... (461) --
Accounts receivable ........................................................... (2,297) 906
Television and event costs .................................................... (553) --
Prepaid expenses .............................................................. 100 (178)
Accounts payable and accrued liabilities ...................................... (1,551) (173)
Escrow payable ................................................................ 323 --
Deferred revenues ............................................................. 573 --
--------- --------
Net cash used in operating activities ............................................ (3,789) (1,834)
--------- --------
Investing activities
Acquisitions, net of cash acquired ........................................... (15,223) --
Loan to seller of business acquired .......................................... (1,500) --
Payment of acquired indebtedness ............................................. (2,469) --
Distribution to subsidiaries' former stockholders ............................ -- (9,000)
Cash acquired through acquisition of subsidiaries ............................ -- 504
Purchase of equipment and leasehold improvements, net of landlord contribution (1,473) (122)
Employee loan ................................................................ (446) --
Security deposits ............................................................ (527) (45)
--------- --------
Net cash used in investing activities ............................................ (21,638) (8,663)
--------- --------
Financing activities
Proceeds from loans payable -- related parties ............................... -- 767
Repayments of loans payable to related parties ............................... (122) (200)
Proceeds of private placement ................................................ -- 1,555
Proceeds from IPO, net of offering costs ..................................... (131) 15,586
Proceeds from bridge financing ............................................... 10,500 --
Costs related to Tender Offer ................................................ (10,280) --
Proceeds from second offering, net of offering costs ......................... 38,555 --
Payment of acquisition indebtedness .......................................... (882) --
Repayment of bridge financing ................................................ (10,500) --
--------- --------
Net cash provided by financing activities ........................................ 27,140 17,708
--------- --------
Increase in cash and cash equivalents ............................................ 1,713 7,211
Cash at beginning of period ...................................................... 7,231 20
--------- --------
Cash at end of period ............................................................ $ 8,944 $ 7,231
--------- --------
Supplemental disclosure of non-cash financing activities:
Exchange of loans payable to related parties for Debentures ...................... -- $ 445
========= ========
Conversion of debentures to common stock ......................................... -- $ 2,000
========= ========
Issuance of acquisition indebtedness ............................................. $ 1,319 $ 1,970
========= ========
S Corporation dividend payable ................................................... -- $ 382
========
Issuance of common stock in connection with acquisitions ......................... $ 3,750 --
=========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes .................................................................... $ 313 $ --
========= ========
Interest ........................................................................ $ 285 $ 254
========= ========
</TABLE>
See accompanying notes.
F-199
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND ORGANIZATION
The Marquee Group, Inc. (the "Company"), which began operations in 1996,
provides integrated event management, television programming and production,
marketing, talent representation and consulting services in the sports, news
and other entertainment industries.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries after elimination of all intercompany accounts
and transactions.
REVENUE RECOGNITION
The primary sources of the Company's revenues are fees from providing
event management, television programming and production, sports marketing and
consulting services and commissions from representation of sports, news and
entertainment personalities. Revenues from events are recognized when the
events are held. Revenues from television programming and production services
are recognized when the programs are available for broadcast. Marketing
revenues are recognized for guaranteed amounts when contractual obligations are
met (subsequent royalties are recorded when received). Revenues from
advertising services are recognized in the month the advertisement is broadcast
or printed. Commissions based on profit or gross receipt participations are
recorded upon the determination of such amounts. Consulting revenue is
recognized as services are provided. Commissions from the Company's talent
representation services are recognized as revenue when they become payable to
the Company under the terms of the Company's agreements with its clients.
Generally, such commissions are payable by clients upon their receipt of
payments for performance of services.
CASH EQUIVALENTS
The Company considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents.
TELEVISION AND EVENT COSTS
Television and event costs are recorded as incurred and are expensed when
the programs are available for use or when the event is held.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives ranging from five to
seven years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the remaining lease term.
INTANGIBLES
Intangibles represent the excess of the purchase price of acquisitions
over the tangible net assets acquired and are amortized over twenty years using
the straight-line method. The Company periodically reviews the recoverability
of the carrying value of these assets and the period of amortization based on
the current and expected future non-discounted income from operations of the
entities giving rise to these intangibles to determine whether events and
circumstances warrant revised estimates of carrying value or useful lives.
F-200
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DEFERRED RENT
The Company leases premises under leases which provide for periodic
increases over the lease term. Pursuant to Statement of Financial Accounting
Standards No. 13, "Accounting for Leases," the Company records rent expense on
a straight-line basis. The effect of these differences is recorded as deferred
rent.
INCOME TAXES
The Company accounts for income taxes under the liability method as
required by Statement of Financial Accounting Standards Board Statement No. 109
("FAS 109"), "Accounting for Income Taxes." FAS 109 requires an asset and
liability approach to financial accounting and reporting for income taxes.
Under this approach, differences between financial statement and tax bases of
assets and liabilities are determined, and deferred income tax assets and
liabilities are recorded for those differences that have future tax
consequences. Valuation allowances are established, if necessary, to reduce any
deferred tax asset recorded to an amount that will more likely than not be
realized in future periods. Income tax expense is composed of the current tax
payable or refundable for the period plus or minus the net change in deferred
tax assets and liabilities.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings, basic earnings per share excludes any dilutive effects
of options, warrants and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented in conformity
with the Statement No. 128 requirements.
Basic earnings per share applicable to common stockholders is based upon
net loss after reduction of amounts, if any, for accretion of the obligation
related to the put option issued in connection with the ProServ Acquisition
(see Note 3) divided by the weighted average number of shares of common stock
outstanding during the year. Shares of common stock placed in escrow upon
completion of the Initial Public Offering ("IPO") described in Note 2 and in
connection with the QBQ Acquisition described in Note 3 have been excluded from
the calculation of basic earnings per share. The shares of common stock issued
upon the automatic conversion of the debentures (see Note 5) are considered
outstanding for all periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
At December 31, 1997 and 1996, approximately 90% of the Company's cash and
cash equivalents was invested with one financial institution.
F-201
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the year ended December 31, 1997, one client represented approximately
28% of reported revenues.
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of entities comprising the Company's client
base.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the carrying amounts of its financial
instruments, principally noncurrent receivables and liabilities, approximates
the fair value.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1996 financial statements
to conform to the 1997 presentation.
2. PUBLIC OFFERINGS AND TENDER OFFER
In December 1996, the Company closed its initial public offering ("IPO")
of 3,852,500 units (the "Units"), each unit consisting of one share of common
stock and one redeemable warrant, at a price of $5.00 per Unit. Each warrant
entitles the holder to purchase one share of common stock at an exercise price
of $7.50, subject to adjustment, at any time until December 4, 2001. The
warrants are redeemable by the Company under certain circumstances at a
redemption price of $.05 per warrant. (See below.)
The Company also granted to the underwriters, or their designees, options
(the "IPO Options") to purchase up to 335,000 Units. The Units purchasable upon
exercise of the IPO Options are identical to the Units described above, except
that the underlying warrants are redeemable only by the Company under limited
circumstances. The IPO Options are exercisable during a three-year period
commencing December 12, 1998 at an exercise price of $8.25, subject to
adjustment in certain events.
Certain of the Company's officer/stockholders have placed an aggregate of
1,275,000 of their shares of common stock in escrow. These shares will not be
assignable or transferable (but may be voted) until such time as they are
released from escrow based upon the Company meeting certain annual earnings
levels or the common stock attaining certain price levels. All reserved shares
remaining in escrow on March 31, 2000 will be forfeited and contributed to the
Company's capital. In the event the Company attains any of the earnings
thresholds or stock prices providing for the release of the escrow shares to
the stockholders, the Company will recognize compensation expense at such time
based on the then fair market value of the shares.
In September 1997, the Company purchased in a tender offer approximately 4
million of the 4.5 million outstanding warrants at a cash purchase price of
$2.40 per warrant. In order to consummate its purchase of the Warrants, the
Company borrowed $10.5 million pursuant to a loan agreement (the "Bridge
Facility"). The Company repaid such borrowing with a portion of the net
proceeds of its second public offering described below. In connection with the
Bridge Facility, the Company paid the lender fees and expenses of $362,000 and
issued to the lender immediately exercisable options to acquire an aggregate of
105,000 shares of common stock, at an exercise price of $2.25, subject to
adjustment in certain circumstances. The options will expire in 2007. As a
result of the issuance of the options, the Company recorded financing expense
of $394,000 in 1997.
On October 14, 1997 and November 12, 1997, the Company consummated a
second public offering (the "Second Offering") of 8.5 million shares (including
the Underwriters' overallotment) of the Company's common stock at $5.00 per
share. The proceeds to the Company after deducting the underwriting discount
and commissions and other expenses was approximately $39 million.
F-202
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACQUISITIONS
1996 ACQUISITIONS
On December 12, 1996, the Company acquired by merger, concurrently with
the closing of its IPO, Sports Marketing & Television International, Inc.
("SMTI") which provides production and marketing services to sporting events,
sports television shows and professional and collegiate leagues and
organizations and, Athletes and Artists, Inc. ("A&A"), a sports and media
talent representation firm, collectively the "1996 Acquisitions". The SMTI
stockholders received cash of $6,500,000 from the proceeds of the IPO, an
additional $1,500,000 payable in five equal installments over five years and
1,292,307 shares of the Company's common stock. The A&A stockholders received
cash of $2,500,000 from the proceeds of the IPO, miscellaneous reimbursements
of $80,000, an additional $1,000,000 payable in five equal installments over
five years and 969,231 shares of the Company's common stock.
The 1996 Acquisitions were accounted for as a consolidation at historical
cost due to the significance of the equity interests in the Company held by the
former stockholders of SMTI and A&A following completion of the acquisitions.
Accordingly, the acquired assets and liabilities were recorded at their
historical amounts. The capital stock of SMTI and A&A was included in
additional paid-in capital. In addition, the cash paid to the former
stockholders of SMTI and A&A was recorded as a dividend charged to additional
paid-in capital.
SMTI was an S Corporation prior to the merger. The SMTI stockholders
received a distribution of approximately $350,000 during 1997, which represents
40% of the taxable earnings of SMTI prior to the merger.
The accompanying consolidated financial statements include the accounts of
SMTI and A&A from December 12, 1996.
ACQUISITION OF PROSERV
On October 14, 1997, the Company acquired all of the outstanding stock of
ProServ, Inc. and ProServ Television, Inc. (collectively, "ProServ"), an
established provider of international sports event management, television
production, marketing, talent representation and consulting. The aggregate
purchase price for ProServ was approximately $10.8 million in cash and 250,000
shares of the Company's common stock. The Company may be obligated to make
additional earn-out payments over the next four years of up to $2.5 million
based upon ProServ achieving, during this period, certain levels of revenues
and earnings before interest, taxes, depreciation and amortization. The Company
also repaid approximately $2.5 million of ProServ's outstanding indebtedness at
the acquisition date. The Company used a portion of the proceeds of the Second
Offering to finance the acquisition and the repayment of the outstanding
indebtedness. Under certain circumstances, the Company may be required to
repurchase up to all of the 250,000 shares of the common stock issued in
connection with the acquisition for an aggregate purchase price of up to $1.9
million.
The acquisition was accounted for using the purchase method, with the
aggregate puchase price allocated to the tangible net assets based upon
estimated fair market values. The total purchase price of $13.4 million, which
includes costs incurred in connection with the acquisition, exceeded the
tangible net asset deficiency acquired by approximately $17 million, which has
been recorded as an intangible. ProServ's results of operations for the period
from the October 14, 1997 have been included in the accompanying consolidated
financial statements. The potential earn-out will be recorded as additional
purchase price when earned.
ACQUISITION OF QBQ
On October 14, 1997, the Company acquired substantially all of the assets
of QBQ Entertainment, Inc. ("QBQ"), a company that books tours and appearances
for a variety of
F-203
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
entertainers. The aggregate purchase price for QBQ was approximately $3.1
million in cash, $1.6 million payable in annual installments payable over eight
years and 393,514 shares of common stock, including 78,702 shares held in
escrow and subject to forfeiture if certain financial performance tests are not
met. In connection with an employment agreement with the chief executive
officer and sole stockholder of QBQ, the Company granted a five-year,
non-recourse loan of $1.5 million, secured by the common stock issued in
connection with the QBQ acquisition. The Company used a portion of the proceeds
of the Second Offering to finance the acquisition and the loan. Under certain
circumstances, the Company may be required to repurchase up to 295,135 shares
of common stock issued in connection with the acquisition for an aggregate
purchase price of up to $1.9 million.
The QBQ acquisition was accounted for using the purchase method of
accounting and the results of its operations have been included in the
accompanying financial statements from October 14, 1997. The total purchase
price of approximately $7.2 million, which includes costs incurred in
connection with the acquisition, exceeded the tangible net assets acquired by
approximately the same amount and has been recorded as intangibles.
The following unaudited pro forma information is presented as if the
Company had completed the acquisition of ProServ, QBQ, SMTI and A&A and the
Secondary Offering at the beginning of the respective periods and gives effect
to the related contractually required reductions in personnel, officers'
salaries and employee benefits:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---------- ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Pro forma revenues ................................... $34,953 $ 29,932
Pro forma net loss applicable to common stockholders . $ (521) $ (2,814)
Pro forma net loss per share applicable to common
stockholders--basic and dilutive ................... $ (.03) $ (.17)
Pro forma weighted average shares .................... 16,559 16,559
</TABLE>
Aggregate maturities for the indebtedness related to the Company's
acquisitions, exclusive of the put options, as of December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
1998 ............................................. $ 775
1999 ............................................. 775
2000 ............................................. 730
2001 ............................................. 730
2002 ............................................. 230
Thereafter ....................................... 375
------
3,615
Less: amounts representing interest .............. 696
------
Total, including current portion of $775.......... $2,919
------
</TABLE>
F-204
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
At December 31, 1997, property and equipment consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
Furniture and fixtures ............................. $ 952
Leasehold improvements ............................. 1,190
Vehicles ........................................... 27
------
2,169
Accumulated depreciation and amortization .......... 129
------
$2,040
======
</TABLE>
5. PRIVATE PLACEMENT
In August 1996, the Company issued debentures (the "Debentures"), in the
aggregate principal amount of $2 million, each Debenture consisted of $50,000
principal amount of 10% Convertible Debentures. Interest on the Debentures of
$254,000 was calculated for the period from the final closing of the Private
Placement to a date one year from the effective date of the Company's IPO. The
Debentures were automatically converted into units (see Note 2) identical in
all respects to those offered in the IPO at a rate of one unit for each $3.00
principal amount of Debentures.
Stockholders of the Company and stockholders of SMTI and A&A purchased an
aggregate of $750,000 principal amount of Debentures, of which $445,103 was in
exchange for existing indebtedness of the Company to the stockholders. In
addition, the Company repaid $125,000 to one of the officer/stockholders from
the proceeds of the private placement.
6. INCOME TAXES
The income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER
31,
-----------------
1997 1996
------ --------
(IN THOUSANDS)
<S> <C> <C>
Current:
Federal ................. $-- $ --
State and local ......... 45 (20)
--- -----
45 (20)
--- -----
Deferred:
Federal ................. -- 30
State and local ......... -- 10
--- -----
-- 40
--- -----
$45 $ 20
=== =====
</TABLE>
F-205
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the federal statutory tax rate to the actual effective
rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- ------------
<S> <C> <C>
Statutory rate ............................................... (34.0)% (34.0)%
State and local income taxes, net of federal benefit ......... 2.3 .4
Valuation allowance .......................................... 26.3 31.8
Permanent differences ........................................ 8.9 1.0
----- -----
Effective rate ............................................... 3.5% (.8)%
===== =====
</TABLE>
The deferred tax assets and liabilities is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER, 31,
-----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cumulative effect of change in tax accounting basis ......... $ (228) $ (343)
Deferred compensation expense ............................... (67) (29)
Deferred rent ............................................... (48) --
Net operating losses ........................................ 1,494 1,051
ProServ tax audits .......................................... (617) --
Valuation allowance ......................................... (1,494) (1,022)
-------- --------
Net deferred tax liabilities ................................ $ (960) $ (343)
======== ========
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $3.3 million which will begin to expire in 2011. ProServ had net
operating losses of approximately $2.6 million at the time of the acquisition.
These losses are subject to limitations under the Internal Revenue Code and
will begin to expire in 2010.
In connection with examinations of the consolidated federal tax returns of
ProServ for years 1993 through 1995, the Internal Revenue Service has
challenged the tax treatment of certain significant transactions. The French
taxing authorities are conducting an audit of ProServ's former subsidiary,
located in France, for the same period. Although ProServ's management believes
that there are valid defenses to defeat any tax assessment, the Company has
provided for these contingencies. Such amounts have been included in deferred
tax liabilities at December 31, 1997.
The Company recorded an increase in the valuation allowance of $472,000
for the year ended December 31, 1997.
7. STOCKHOLDERS' EQUITY
On July 17, 1996, the Board of Directors and stockholders of the Company
approved an increase in the authorized capitalization of the Company to 25
million shares of common stock, par value $.01 per share, and 5 million shares
of preferred stock, par value $.01 per share. In addition, in August 1996 the
Board of Directors and the stockholders of the Company approved a stock split
whereby 999 shares of the 1,000 shares of common stock outstanding at that time
were split on the basis of approximately 1,940-for-1 and the remaining one
share of common stock outstanding at that time was split on the basis of
50,000-for-1. All share information in the financial statements reflect the
stock split.
COMMON STOCK RESERVED FOR ISSUANCE
As of December 31, 1997, the Company has 1,197,503 shares of common stock
reserved for issuance upon the exercise of the warrants and the IPO Options
(see Note 2), 800,000 shares of
F-206
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common stock reserved for issuance upon exercise of options pursuant to the
1996 and 1997 Stock Option Plans and 315,000 shares reserved for issuance under
other options and warrants of the Company.
8. STOCK OPTION PLAN
The Company's Board of Directors has adopted and the stockholders have
approved the Company's 1996 and 1997 Stock Option Plans (the "Plan"). The Plan
provides for the grant, at the discretion of the Board of Directors, of (i)
options that are intended to qualify as incentive stock options within the
meaning of Section 422A of the Internal Revenue Code to certain employees and
consultants and (ii) options not intended to so qualify. The aggregate number
of shares of common stock for which options may be granted under the Plan is
800,000 shares.
The Plan is administered by a Stock Option Committee (the "Committee")
which is appointed by the Board of Directors. The Committee determines who
among those eligible will be granted options, the time or times at which
options will be granted, the terms of the options, including the exercise
price, the number of shares subject to the options and the terms and conditions
of exercise.
A summary of the activity in the Plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Granted--1996 ............................ 230,000 $ 5.71
Granted--1997 ............................ 7,500 $5.875
Forfeited--1997 .......................... (4,000) $ 5.00
------- -------
Outstanding at December 31, 1997 ......... 233,500 $ 5.72
======= =======
Exercisable at December 31, 1996 ......... -- --
======= =======
Exercisable at December 31, 1997 ......... 23,575 $ 5.69
======= =======
</TABLE>
Options outstanding as of December 31, 1997 have exercise prices ranging
from $5 to $6.25 per share. The options vest in annual installments over the
three to five year period commencing one year from the date of grant.
The Company has elected to follow Accounting Principles Board opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
options valuation models that were not developed for use in valuing employee
stock options. The exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant and,
therefore, no compensation expense is recognized.
F-207
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996:
<TABLE>
<CAPTION>
ASSUMPTION 1997 1996
- -------------------------------------------------------- --------- ---------------
<S> <C> <C>
Risk-free rate ...................................... 5.47% 5.45% to 6.18%
Dividend yield ...................................... 0% 0%
Volatility factor of the expected market price of the
Company's common stock ............................ .54 .72
Average life ........................................ 3 years 4 years
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Pro forma net loss applicable to common stockholders ......... $ (2,454) $ (1,547)
Pro forma net loss per share applicable to common
stockholders--basic and dilutive ........................... $ (1.05) $ (0.16)
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1997 and 1996 was $2.43 and $2.57, respectively. The weighted
average remaining contractual life of options outstanding at December 31, 1997
is 4.8 years.
9. RELATED PARTY TRANSACTIONS
In December 1997, the Company repaid an officer/stockholder the $121,615
outstanding at December 31, 1996. Interest on the loan accrued at 12%.
The Company provided services as a subcontractor for SMTI aggregating
$724,000, for the period from January 1, 1996 to December 12, 1996 (see Note
3), which are included in 1996 revenues in the accompanying consolidated
statement of operations.
During August 1996, the Company entered into a six-year consulting
agreement with Sillerman Communications Management Corporation ("SCMC"), which
is controlled by Robert F.X. Sillerman, the Chairman of the Company and the
controlling stockholder of The Sillerman Companies, Inc. ("TSC"), a principal
stockholder of the Company, that provides for a monthly fee of $30,000
commencing in September 1997. In March 1997, SCMC assigned its rights,
obligations, and duties under the consulting agreement to The Sillerman
Companies, Inc. In October 1997, TSC waived its right to future monthly
payments under the consulting agreement.
F-208
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 1997, the Company paid $400,000 to SCMC as an advance against
special advisory services to be provided. In connection with the ProServ
Acquisition and the QBQ Acquisition, TSC received Special Advisory Fees of
$450,000 (of which $400,000 was offset against the amounts previously
advanced), and, in connection with the Tender Offer, an immediately exercisable
option to purchase 200,000 shares of common stock at $7.00 per share. In
addition, the Company paid $75,000 to TSC for expenses.
In consideration for Mr. Sillerman's guarantee of a portion of the $1.5
million letter of credit issued to replace the escrow in connection with the
ProServ Acquisition, the Company, in November 1997, granted Mr. Sillerman an
immediately exercisable, five-year option to purchase 10,000 shares of common
stock at an exercise price per share of $5.00 and paid Mr. Sillerman $75,000,
including $25,000 for his related legal fees and expenses.
In April 1997, in connection with the employment of an officer of the
Company, the Company loaned the officer $446,000 which loan by its terms may be
forgiven. In addition, the officer will over a three year period beginning with
his date of employment receive $100,000 payable in shares of Common Stock.
10. INVESTMENT IN JOINT VENTURE
SMTI and NBC formed a limited liability corporation, Celebrity Golf
Championship, LLC ("CGC") to conduct the annual golfing tournament known as The
Celebrity Golf Championship. Earnings are allocated 75% to NBC and 25% to SMTI
in accordance with the LLC agreement. All profits from CGC are distributed
annually.
Condensed financial information for CGC is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
---------------
(IN THOUSANDS)
<S> <C> <C>
Cash ....................... $ 232
======
Due to SMTI ................ $ 232
======
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996
----------- ------
(IN THOUSANDS)
Revenues ................... $3,529 $2,743
Operating expenses ......... 2,699 2,067
----------- -------
Net income ................. $ 830 $ 676
=========== =======
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating leases that expire through
2008. These operating leases provide for basic annual rents plus escalation
charges. The aggregate future minimum lease payments (including the deferred
rent liability of $696,000) required under these leases, net of noncancelable
sublease income of $2,370,000 as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
1998 ................ $1,223
1999 ................ 1,124
2000 ................ 1,173
2001 ................ 1,078
2002 ................ 999
Thereafter .......... 3,862
------
$9,459
======
</TABLE>
F-209
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company also rents office space on a month-to-month basis. Rent
expense amounted to $45,000 and $303,000, respectively, for the years ended
December 31, 1996 and 1997.
The Company has notified the landlord for space previously occupied by one
of the Company's subsidiaries that the space has been abandoned. The Company
has recorded a loss of $466,000 for the year ended December 31, 1997 related to
the settlement with the landlord and to write-off the related abandoned fixed
assets.
The Company has entered into employment agreements with key executives for
periods ranging from three to five years.
The Company is subject to certain legal proceedings and claims, which have
arisen, in the ordinary course of its business. In the opinion of management,
settlement of these actions, when ultimately concluded, will not have a
material adverse effect on the Company's financial condition, results of
operations and liquidation.
12. SUBSEQUENT EVENT
In March 1998, the Company entered into a non-binding letter of intent to
acquire Alphabet City Industries and Alphabet City Sports Records, Inc.
(collectively, the "Pending Acquisition"), both of which are sports and music
marketing companies which develop strategic alliances among sports leagues,
music companies and corporate sponsors. The aggregate purchase price for the
Pending Acquisition will be approximately $4.0 million consisting of $3.0
million in cash and 1.0 million in shares of Common Stock. In addition, the
Company may be obligated to make additional payments based upon the financial
performance of the acquired businesses. In connection with entering into the
letter of intent, the Company advanced Alphabet City Industries $350,000.
F-210
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders
Alphabet City Sports Records, Inc. and
Alphabet City Industries, Inc.
We have audited the accompanying combined balance sheet of Alphabet City
Sports Records, Inc. and Alphabet City Industries, Inc. as of December 31,
1997, and the related combined statements of income and cash flows for the year
ended December 31, 1997 and for the period from April 11, 1996 (inception) to
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 Alphabet City
Sports Records, Inc. and Alphabet City Industries, Inc. at December 31, 1997
and the combined results of their operations and their cash flows for the year
ended December 31, 1997 and for the period from April 11, 1996 (inception) to
December 31, 1996 in conformity with generally accepted accounting principles.
Ernst & Young LLP
New York, New York
May 21, 1998
F-211
<PAGE>
ALPHABET CITY SPORTS RECORDS, INC.
ALPHABET CITY INDUSTRIES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
-------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash .............................................. $ 651 $ 56,643
Accounts receivable ............................... 527,207 902,561
Prepaid expenses and other current assets ......... 444,684 627,992
---------- ----------
Total current assets ............................... 972,542 1,587,196
Property and equipment, net ........................ 31,340 31,920
Other assets ....................................... 10,669 17,191
---------- ----------
Total assets ....................................... $1,014,551 $1,636,307
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable ...................................... $ -- $ 350,000
Accounts payable .................................. 836,247 990,898
Accrued liabilities ............................... 56,627 254,217
---------- ----------
Total current liabilities .......................... 892,874 1,595,115
Stockholders' equity ............................... 121,677 41,192
---------- ----------
Total liabilities and stockholders' equity ......... $1,014,551 $1,636,307
========== ==========
</TABLE>
See accompanying notes.
F-212
<PAGE>
ALPHABET CITY SPORTS RECORDS, INC.
ALPHABET CITY INDUSTRIES, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 11, 1996 SIX MONTHS ENDED
YEAR ENDED (INCEPTION) TO JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------------------
1997 1996 1998 1997
-------------- --------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues ..................................... $2,976,331 $1,316,763 $1,476,069 $1,930,736
Cost of revenues ............................. 1,796,194 1,003,949 968,846 1,192,385
---------- ---------- ---------- ----------
Gross profit ................................. 1,180,137 312,814 507,223 738,351
Operating expenses:
Selling expenses ............................ 424,109 196,984 217,700 199,258
General and administrative expenses ......... 663,836 59,919 350,008 294,701
---------- ---------- ---------- ----------
Total operating expenses .................. 1,087,945 256,903 567,708 493,959
---------- ---------- ---------- ----------
Income from operations ....................... 92,192 55,911 (60,485) 244,392
Other income/(expenses) ...................... 10,944 -- -- (12,676)
---------- ---------- ---------- ----------
Income before income taxes ................... 103,136 55,911 (60,485) 231,716
Provision for income taxes ................... 23,000 14,370 20,000 14,789
---------- ---------- ---------- ----------
Net income ................................... $ 80,136 $ 41,541 $ (80,485) $ 216,927
========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-213
<PAGE>
ALPHABET CITY SPORTS RECORDS, INC.
ALPHABET CITY INDUSTRIES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 11, 1996 SIX MONTHS ENDED
YEAR ENDED (INCEPTION) TO JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------------------
1997 1996 1998 1997
-------------- --------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income ........................................ $ 80,136 $ 41,541 $ (80,485) $ 216,927
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization .................. 3,527 983 4,123 2,068
Changes in operating assets and liabilities:
Accounts receivable ........................... (256,870) (270,337) (375,354) (112,324)
Other current assets .......................... (414,684) (30,000) (183,308) (29,949)
Other assets .................................. (5,081) -- (6,522) (1,775)
Accounts payable .............................. 595,330 240,917 154,651 136,649
Accrued liabilities ........................... 2,472 54,155 197,590 57,256
---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities ....................................... 4,830 37,259 (289,305) 268,852
---------- ---------- ---------- ----------
INVESTING ACTIVITIES
Purchases of fixed assets ......................... (30,617) (5,233) (4,703) (27,352)
Payment of security deposit ....................... (5,588) -- -- (5,588)
---------- ---------- ---------- ----------
Net cash used in investing activities ............. (36,205) (5,233) (4,703) (32,940)
---------- ---------- ---------- ----------
FINANCING ACTIVITIES
Proceeds from loan ................................ -- -- 350,000 --
---------- ---------- ---------- ----------
Net cash provided by financing activities ......... -- -- 350,000 --
---------- ---------- ---------- ----------
Net (decrease) increase in cash ................... (31,375) 32,026 55,992 235,912
Cash at beginning of year ......................... 32,026 -- 651 32,026
---------- ---------- ---------- ----------
Cash at end of year ............................... $ 651 $ 32,026 $ 56,643 $ 267,938
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Income taxes paid ................................. $ 53,740 $ -- $ 15,133 $ --
========== ========== ========== ==========
Interest paid ..................................... $ -- $ -- $ -- $ --
========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-214
<PAGE>
ALPHABET CITY SPORTS RECORDS, INC.
ALPHABET CITY INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND ORGANIZATION
Alphabet City Sports Records, Inc. and Alphabet City Industries, Inc.
(collectively, the "Company") were organized in New York on April, 11, 1996 and
May 14, 1997, respectively. The Company's main purpose is creating, licensing,
marketing and distributing recorded music through non-music retail outlets in
association with a broad spectrum of professional and college sports teams and
leagues. The Company also provides non-traditional marketing and media services
to various corporations.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of
Alphabet City Sports Records, Inc. and Alphabet City Industries, Inc. The
companies are under common ownership. All significant intercompany transactions
have been eliminated in combination.
REVENUE RECOGNITION
Revenues from the sale of music CDs and cassettes are recognized upon
shipment to the customers. Marketing and media revenues are recognized as
services are provided or upon the delivery to the client of the materials
created for them by the Company.
ADVANCES AND RECOUPABLE COSTS
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 50, Financial Reporting in the Record and Music Industry, advances to
artists and producers are capitalized as an asset when the current popularity
and past performance of the artist or producer provides a sound basis for
estimating the probable future recoupment of such advances from sales. Any
portion of such advances not deemed to be recoupable from future sales is
reserved at the balance sheet date. All other advances which do not meet the
above criteria are expensed when incurred.
LICENSE AGREEMENTS
Certain of the Company's compilation products are master recordings under
license from various sports teams and organizations for the right to use the
names, logos and other material directly related to the team or organization.
Typically, minimum guarantees or non-returnable advances are required to obtain
the licenses and are realized through future sales of the product. The amounts
paid for minimum guarantees or non-returnable advances are charged to expense
over the license term. When anticipated sales appear to be insufficient to
fully recover the minimum guarantees or non-returnable advances, a provision
against current operations is made for anticipated losses.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives ranging from three to
seven years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-215
<PAGE>
ALPHABET CITY SPORTS RECORDS, INC.
ALPHABET CITY INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
INTERIM FINANCIAL STATEMENTS
The unaudited interim information as of June 30, 1998 and for the six
months ended June 30, 1997 and 1998 has been prepared on the same basis as the
annual financial statements and, in the opinion of the Company's management,
reflects normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. Interim results are not necessarily
indicative of results for a full year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
INCOME TAXES
Income taxes are provided on the liability method as required by Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes.
Deferred income taxes (which are not material) reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
The shareholders of Alphabet City Industries, Inc. have elected under
Subchapter S of the Internal Revenue Code to include the Company's income in
their own income for Federal income tax purposes. Alphabet City Sports Records,
Inc. was incorporated as a "C Corporation."
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
-------------- -----------
<S> <C> <C>
Furniture and equipment ............... $ 35,850 $ 40,553
Less accumulated depreciation ......... (4,510) (8,633)
-------- --------
$ 31,340 $ 31,920
======== ========
</TABLE>
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
-------------- -----------
<S> <C> <C>
Project costs ................ $352,397 $441,322
Inventory .................... 33,161 50,161
Prepaid expenses ............. 34,076 40,881
Other current assets ......... 25,050 95,628
-------- --------
$444,684 $627,992
======== ========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company leases its office space. The lease provides for escalations of
rent based upon the increase in certain operating expenses.
F-216
<PAGE>
ALPHABET CITY SPORTS RECORDS, INC.
ALPHABET CITY INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
Future minimum payments under operating leases consist of the following:
<TABLE>
<S> <C>
Year ending December 31:
1998 ........................ $51,200
1999 ........................ 9,200
-------
$60,400
=======
</TABLE>
There was no rent expense in 1996; rent expense was $36,084, $15,055 and
$21,197 for the year ended December 31, 1997 and for the six months ended June
30, 1997 and 1998, respectively.
5. STOCKHOLDERS' EQUITY
Stockholders' equity consists of the following:
<TABLE>
<CAPTION>
COMMON RETAINED DUE FROM
TOTAL STOCK EARNINGS STOCKHOLDERS
------------ ---------- ------------ -------------
<S> <C> <C> <C> <C>
Alphabet City Sports Records, Inc.:
Issuance of common stock--1996 ......... $ -- $ 1,000 $ -- $ (1,000)
Net income ............................. 41,541 -- 41,541 --
--------- ------- --------- ---------
Balance at December 31, 1996 ............ 41,541 1,000 41,541 (1,000)
Net income ............................. 40,781 -- 40,781 --
--------- ------- --------- ---------
Balance at December 31, 1997 ............ 82,322 1,000 82,322 (1,000)
--------- ------- --------- ---------
Alphabet City Industries, Inc.:
Issuance of common stock--1997 ......... -- 1,000 -- (1,000)
Net income ............................. 39,355 -- 39,355 --
--------- ------- --------- ---------
Balance at December 31, 1997 ............ 39,355 1,000 39,355 (1,000)
--------- ------- --------- ---------
Combined stockholders' equity at
December 31, 1997 ...................... $ 121,677 $ 2,000 $ 121,677 $ (2,000)
========= ======= ========= =========
</TABLE>
Alphabet City Sports Records, Inc. has 200 shares of no par value common
stock authorized and 20 shares are issued and outstanding. Alphabet City
Industries, Inc. has 200 shares of no par value common stock authorized and 20
shares are issued and outstanding.
6. MAJOR CUSTOMERS/SUPPLIER
For the period from April 11, 1996 to December 31, 1996, approximately 92%
of combined revenues were derived from one customer. For the year ended
December 31, 1997, three customers accounted for approximately 22%, 17%, and
13% of combined revenues, respectively. For the six months ended June 30, 1998
two customers accounted for approximately 52% and 19% of combined revenues,
respectively. For the six months ended June 30, 1997, three customers accounted
for approximately 26%, 23% and 21% of combined revenues respectively.
For the period from April 11, 1996 to December 31, 1996, 100% of the CDs
produced were manufactured by one vendor. For the year ended December 31, 1997,
86% of the CDs produced were manufactured by one vendor. For the six months
ended June 30, 1998, two vendors manufactured 53% and 32%, respectively, of the
CD's produced.
F-217
<PAGE>
ALPHABET CITY SPORTS RECORDS, INC.
ALPHABET CITY INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
7. IMPACT OF YEAR 2000 (UNAUDITED)
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue and has developed an
implementation plan to resolve the issue. The Company presently believes that,
with modifications to existing software, the cost of which is not material to
the results of operations or financial condition of the Company, the Year 2000
problem will not pose significant operational problems for the Company's
computer systems.
8. SUBSEQUENT EVENT
On August 3, 1998, The Marquee Group, Inc. consummated its acquisition of
substantially all of the assets of Alphabet City Industries, Inc. and all of
the outstanding stock of Alphabet City Sports Records, Inc. (collectively, the
"Alphabet City Acquisition"). The aggregate purchase price for the Alphabet
City Acquisition was approximately $3.4 million in cash (excluding assumed
liabilities) and 200,000 shares of The Marquee Group, Inc. common stock.
F-218
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders
Cambridge Holding Corporation, Inc.
We have audited the accompanying consolidated balance sheet of Cambridge
Holding Corporation, Inc. and Subsidiary (the "Company") as of December 31,
1997 and the related consolidated statements of operations and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 1997 and the consolidated results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
New York, New York
June 3, 1998
F-219
<PAGE>
CAMBRIDGE HOLDING CORPORATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash ........................................................ $ 162,781 $ 241,425
Accounts receivable ......................................... 767,204 773,613
Other current assets ........................................ 24,345 13,330
---------- ----------
Total current assets ......................................... 954,330 1,028,368
Property and equipment, net .................................. 4,537 2,186
Other assets ................................................. 62,878 62,878
---------- ----------
Total assets ................................................. $1,021,745 $1,093,432
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 883,411 $ 723,279
Accrued liabilities ......................................... 25,938 112,153
---------- ----------
Total current liabilities .................................... 909,349 835,432
---------- ----------
Stockholders' equity:
Common stock, $1 par; authorized 25,000 shares; 10,000 shares
issued .................................................... 10,000 10,000
Retained earnings ........................................... 123,552 269,156
---------- ----------
133,552 279,156
Less 6,666 shares held in treasury, at cost ................. (21,156) (21,156)
---------- ----------
Total stockholders' equity ................................... 112,396 258,000
---------- ----------
Total liabilities and stockholders' equity ................... $1,021,745 $1,093,432
========== ==========
</TABLE>
See accompanying notes.
F-220
<PAGE>
CAMBRIDGE HOLDING CORPORATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------------
1997 1998 1997
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revenue ...................................... $1,318,763 $691,276 $874,692
Expenses:
Stockholders' salary expense ................ 487,974 182,576 173,880
Other salary expense ........................ 153,536 48,935 58,619
Travel and entertainment .................... 127,458 71,886 65,316
General and administrative expenses ......... 581,520 158,135 273,488
---------- -------- --------
Total expenses ............................... 1,350,488 461,532 571,303
(Loss) income from operations ................ (31,725) 229,744 303,389
Other income:
Interest income ............................. 12,746 860 1,656
Other income ................................ 2,000 -- --
---------- -------- --------
14,746 860 1,656
---------- -------- --------
(Loss) income before income taxes ............ (16,979) 230,604 305,045
Income tax provision ......................... -- 85,000 113,000
---------- -------- --------
Net loss ..................................... $ (16,979) $145,604 $192,045
========== ======== ========
</TABLE>
See accompanying notes.
F-221
<PAGE>
CAMBRIDGE HOLDING CORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
DECEMBER 31, -------------------------
1997 1998 1997
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................ $ (16,979) $ 145,604 $ 192,045
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation ....................................... 9,405 2,351 4,702
Changes in operating assets and liabilities:
Accounts receivable .............................. (476,866) (6,409) 210,630
Other current assets ............................. (4,800) 11,015 8,615
Other assets ..................................... (2,444) -- --
Accounts payable and accrued liabilities ......... 616,394 (73,917) (11,847)
---------- --------- ---------
Net cash provided by operating activities ........... 124,710 78,644 404,145
---------- --------- ---------
INVESTING ACTIVITIES
Purchase of fixed assets ............................ (2,773) -- (2,773)
---------- --------- ---------
Net cash used in investing activities ............... (2,773) -- (2,773)
---------- --------- ---------
Net increase in cash ................................ 121,937 78,644 401,372
Cash at beginning of year ........................... 40,844 162,781 40,844
---------- --------- ---------
Cash at end of year ................................. $ 162,781 $ 241,425 $ 442,216
========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid ................................... $ 9,222 $ 8,219 $ --
========== ========= =========
Interest paid ....................................... $ -- $ -- $ --
========== ========= =========
</TABLE>
See accompanying notes.
F-222
<PAGE>
CAMBRIDGE HOLDING CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION
The Company is a full service sports management and marketing firm,
specializing in both the representation of professional athletes and corporate
consulting. The accompanying consolidated financial statements include the
accounts of Cambridge Holding Corporation, Inc. and its wholly owned
subsidiary, Cambridge Sports International, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company's revenues arise primarily from percentage fees or commissions
received for the negotiation of professional sporting contracts and marketing
and endorsement contracts. The Company recognizes revenue ratably over the
performance period of the associated contract.
ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1997 and June 30, 1998 include
approximately $731,000 and $582,000, respectively, which represents amounts
billed on behalf of professional athletes relating to sporting contracts and
marketing and endorsement contracts. Such amounts are to be paid, net of the
Company's commission, to the professional athletes upon collection.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives ranging from five to
seven years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The unaudited interim information as of June 30, 1998 and for the six
months ended June 30, 1997 and 1998 has been prepared on the same basis as the
annual financial statements and, in the opinion of the Company's management,
reflects normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. Interim results are not necessarily
indicative of results for a full year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
INCOME TAXES
Income taxes are provided on the liability method as required by Statement
of Financial Accounting Standard Statement No. 109, "Accounting for Income
Taxes." Deferred income taxes (which are not material), reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes.
F-223
<PAGE>
CAMBRIDGE HOLDING CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
-------------- ------------
<S> <C> <C>
Furniture and equipment ............... $ 13,734 $ 13,734
Computer equipment .................... 27,333 27,333
--------- ---------
41,067 41,067
Less accumulated depreciation ......... (36,530) (38,881)
--------- ---------
$ 4,537 $ 2,186
========= =========
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
The Company leases its office space. The lease provides for escalations of
rent based upon the increase in certain operating expenses.
Future minimum payments under noncancelable operating leases is as
follows:
<TABLE>
<S> <C>
Years ending December 31:
1998 .................. $25,000
1999 .................. 4,200
-------
$29,200
=======
</TABLE>
Rent expense was $32,878, $16,309, and $14,242 for the year ended December
31, 1997 and for the six months ended June 30, 1997 and 1998, respectively.
4. SIGNIFICANT CLIENTS
For the year ended December 31, 1997, three professional athletes
accounted for approximately 32%, 18% and 11% of consolidated revenue,
respectively.
For the six months ended June 30, 1998 and 1997, two professional athletes
accounted for approximately 12% and 12% and 34% and 6% of consolidated revenue,
respectively.
5. IMPACT OF YEAR 2000 (UNAUDITED)
The Company has conducted a review of its computer systems to identify the
systems that could be effected by the "Year 2000" issue and has developed an
implementation plan to resolve the issue. The Company presently believes that,
with modifications to existing software, the cost of which is not material to
the results of operations or financial condition of the Company, the Year 2000
problem will not pose significant operational problems for the Company's
computer systems.
6. SUBSEQUENT EVENT
On August 6, 1998, The Marquee Group, Inc. consummated its acquisition of
all of the outstanding stock of Cambridge Sports International, Inc. The
aggregate purchase price was approximately $3.5 million in cash and 89,536
shares of The Marquee Group, Inc.'s common stock.
F-224
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and the Shareholders of Park Associates Limited.
We have audited the accompanying balance sheet of Park Associates Limited
("the Company") as of December 31, 1997 and the related statements of profit
and loss account and cash flows for the year ended December 31, 1997 all
expressed in pounds sterling, (together, "the financial statements") which, as
described in the financial statements (pages F-226 to F-236), have been
prepared on the basis of accounting principles generally accepted in the United
Kingdom. These financial statements are the responsibility of the Directors of
the Company. 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 in the United Kingdom, which are substantially the same as auditing
standards generally accepted in the United States. These 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 financial position of Park Associates Limited as
of December 31, 1997, and the results of its operations and its cash flows for
the year ended December 31, 1997, in conformity with accounting principles
generally accepted in the United Kingdom.
United Kingdom accounting principles vary in certain material respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of
shareholders' equity and financial position as of December 31, 1997, and the
determination of net profit for year ended December 31, 1997 to the extent
summarized in Note 22 to the financial statements.
Grant Thornton
Chartered Accountants
Nottingham
England
May 28, 1998 except for the information presented in the Cash Flow Statement,
notes 13, 14, 15 and 22 for which the date is September 22, 1998.
F-225
<PAGE>
PARK ASSOCIATES LIMITED
BALANCE SHEET
AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997
(POUNDS
NOTE STERLING)
------ -------------
<S> <C> <C>
Fixed assets:
Tangible assets ........................................ 7 331,588
Investments ............................................ 8 194
-------
331,782
Current assets:
Debtors ................................................ 9 216,862
Cash at bank and in hand ............................... 87,806
-------
304,668
Creditors: amounts falling due within one year ......... 10 (323,189)
--------
Net current liabilities ................................ (18,521)
--------
Net assets ............................................. 313,261
========
Capital and reserves:
Called up share capital ................................ 11 10,000
Profit and loss account ................................ 12 303,261
--------
Shareholders' fund ..................................... 13 313,261
========
</TABLE>
The accompanying accounting policies and notes form an integral part of this
financial statement.
F-226
<PAGE>
PARK ASSOCIATES LIMITED
PROFIT AND LOSS ACCOUNT
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997
(POUNDS
NOTE STERLING)
------ ---------------
<S> <C> <C>
Commission and fees receivable ........................ 2,971,136
Commission and fees payable ........................... (2,294,181)
----------
676,955
Administrative expenses ............................... (523,039)
Other operating income ................................ 15,400
----------
Operating profit ...................................... 169,316
Net interest .......................................... 3 4,702
----------
Profit on ordinary activities before taxation ......... 174,018
Tax on profit on ordinary activities .................. 5 (44,706)
----------
Profit for the financial year ......................... 13 129,312
Dividends ............................................. 6 (60,000)
----------
Profit transferred to reserves ........................ 12 69,312
==========
</TABLE>
There were no recognized gains or losses other than the profit for the year.
The accompanying accounting policies and notes form an integral part of this
financial statement.
F-227
<PAGE>
PARK ASSOCIATES LIMITED
CASH FLOW STATEMENT
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997
(POUNDS
NOTE STERLING)
------ ------------
<S> <C> <C>
Net cash inflow from operating activities .............................. 14 249,887
Returns on investments and servicing of finance:
Interest received ...................................................... 4,702
-------
Net cash inflow from returns on investments and servicing of finance ... 4,702
-------
Taxation ............................................................... (47,370)
-------
Capital expenditure and financial investment:
Purchase of tangible fixed assets ...................................... (54,995)
Sale of tangible fixed assets .......................................... 13,700
-------
Net cash outflow from capital expenditure and financial investment ..... (41,295)
-------
Acquisitions and disposals:
Purchase of investments ................................................ (194)
-------
Net cash outflow from acquisitions and disposals ....................... (194)
-------
Equity dividends paid .................................................. (104,000)
--------
Increase in cash ....................................................... 15 61,730
========
</TABLE>
The accompanying accounting policies and notes form an integral part of this
financial statement.
F-228
<PAGE>
PARK ASSOCIATES LIMITED
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
1. PRINCIPAL ACCOUNTING POLICIES
BASIS OF PREPARATION
The financial statements have been prepared under the historical cost
convention.
The principal accounting policies of the company have remained unchanged
from the previous year and are set out below.
TURNOVER
Turnover is the gross amount receivable by the company, invoiced on behalf
of the clients when the company acts as agents and for other services provided,
excluding VAT and trade discounts.
INCOME FROM INVESTMENTS
Investment income comprises interest receivable on bank deposits.
DEPRECIATION
Depreciation is calculated to write down the cost less estimated residual
value of all tangible fixed assets other than freehold land and buildings by
the reducing balance method. The rates generally applicable are:
<TABLE>
<S> <C>
Motor vehicles ................ 25%
Fixtures and fittings ......... 10%
Computer equipment ............ 33%
</TABLE>
No depreciation is provided on freehold land and buildings as it is the
company's policy to maintain these assets in a continual state of sound repair.
The useful lives of these assets are thus so long and residual values so high
that any depreciation would not be material. Residual values are based on
prices prevailing at the date of acquisition or subsequent valuation. Provision
is made in the profit and loss account for any permanent diminution in value.
INVESTMENTS
Investments are included at cost less amounts written off. Profits or
losses arising from disposals of fixed asset investments are treated as part of
the result from ordinary activities.
DEFERRED TAXATION
Deferred tax is provided using the tax rates estimated to arise when the
timing differences reverse and is accounted for to the extent that it is
probable that a liability or asset will crystallize. Unprovided deferred tax is
disclosed as a contingent liability.
Debit balances arising in respect of advance corporation tax on dividends
payable or proposed are carried forward to the extent that they are expected to
be recoverable.
FOREIGN CURRENCIES
Transactions in foreign currencies are translated at the exchange rate
ruling at the date of the transaction. Monetary assets and liabilities in
foreign currencies are translated at the rates of exchange
F-229
<PAGE>
PARK ASSOCIATES LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
ruling at the balance sheet date. Where exchange differences result from the
translation of foreign currency borrowings raised to acquire foreign assets
they are taken to reserves and offset against the differences arising from the
translation of those assets. All other exchange differences are dealt with
through the profit and loss account.
CONTRIBUTIONS TO PENSION FUNDS
DEFINED CONTRIBUTION SCHEME
The pension costs charged against profits represent the amount of the
contributions payable to the scheme in respect of the accounting period.
LEASED ASSETS
All other leases are regarded as operating leases and the payments made
under them are charged to the profit and loss account on a straight-line basis
over the lease term.
2. TURNOVER AND PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
<TABLE>
<CAPTION>
1997
(POUNDS
STERLING)
--------
<S> <C>
The profit on ordinary activities is stated after:
Auditors' remuneration ......................................... 2,000
Depreciation and amortization:
Tangible fixed assets, owned ................................... 13,990
Other operating lease rentals .................................. 3,000
Rent receivable in respect of:
Operating leases including rents of land and buildings ......... 15,400
</TABLE>
3. NET INTEREST
<TABLE>
<CAPTION>
1997
(POUNDS
STERLING)
------
<S> <C>
Other interest receivable and similar income ......... 4,702
=====
</TABLE>
4. DIRECTORS AND EMPLOYEES
<TABLE>
<CAPTION>
1997
(POUNDS
STERLING)
----------
<S> <C>
Staff costs during the year were as follows:
Wages and salaries ......................... 253,818
Social security costs ...................... 26,317
Other pension costs ........................ 76,791
-------
356,926
=======
</TABLE>
F-230
<PAGE>
PARK ASSOCIATES LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
The average number of employees of the company during the year was nine.
<TABLE>
<CAPTION>
1997
(POUNDS
STERLING)
----------
<S> <C>
Emoluments ...................................................... 112,760
Pension contributions to money purchase pension schemes ......... 57,765
-------
170,525
=======
</TABLE>
During the year two directors participated in money purchase pension schemes.
5. TAX ON PROFIT ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
1997
(POUNDS
STERLING)
-------
<S> <C>
UK Corporation tax at 21.75% ......... 44,706
======
</TABLE>
6. DIVIDENDS
<TABLE>
<CAPTION>
1997
(POUNDS
STERLING)
-------
<S> <C>
Ordinary shares -- first interim dividend of (pounds sterling)6
per share ........................................................ 60,000
======
</TABLE>
7. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
FREEHOLD FIXTURES
LAND AND MOTOR AND COMPUTER
BUILDINGS VEHICLES FITTINGS EQUIPMENT TOTAL
(POUNDS (POUNDS (POUNDS (POUNDS (POUNDS
STERLING) STERLING) STERLING) STERLING) STERLING)
----------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cost:
At January 1, 1997 ........................... 261,382 22,375 34,343 8,146 326,246
Additions .................................... -- 42,250 9,367 3,378 54,995
Disposals .................................... -- (22,375) -- -- (22,375)
------- ------- ------ ----- -------
At December 31, 1997 ......................... 261,382 42,250 43,710 11,524 358,866
Depreciation:
At January 1, 1997 ........................... -- 9,778 12,106 2,008 23,892
Provided in the year ......................... -- 8,787 2,565 2,638 13,990
Eliminated on disposals ...................... -- (10,604) -- -- (10,604)
------- ------- ------ ------ -------
At December 31, 1997 ......................... -- 7,961 14,671 4,646 27,278
------- ------- ------ ------ -------
Net book amount at December 31, 1998 ......... 261,382 34,289 29,039 6,878 331,588
======= ======= ====== ====== =======
</TABLE>
<PAGE>
8. FIXED ASSETS INVESTMENTS
<TABLE>
<CAPTION>
1997
(POUNDS
STERLING)
-----
<S> <C>
Cost:
Additions .................................... 194
---
Net book amount at December 31, 1997 ......... 194
===
</TABLE>
F-231
<PAGE>
PARK ASSOCIATES LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
9. DEBTORS
<TABLE>
<CAPTION>
1997
(POUNDS
STERLING)
----------
<S> <C>
Trade debtors .......................... 199,783
Other debtors .......................... 13,871
Prepayments and accrued income ......... 3,208
-------
216,862
=======
</TABLE>
10. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
1997
(POUNDS
STERLING)
----------
<S> <C>
Trade creditors ......................... 196,000
Advance corporation tax ................. 15,000
Corporation tax ......................... 17,036
Social security and other taxes ......... 34,106
Other creditors ......................... 22,606
Loans from directors .................... 25,435
Accruals and deferred income ............ 13,006
-------
323,189
=======
</TABLE>
11. SHARE CAPITAL
<TABLE>
<CAPTION>
1997
(POUNDS
STERLING)
-------
<S> <C>
Authorized:
10,000 ordinary shares of (pounds sterling)1 each ......... 10,000
======
Allotted, called up and fully paid:
10,000 ordinary shares of (pounds sterling)1 each ......... 10,000
======
</TABLE>
Allotments during the year:
On July 31, 1997, the company by passing Resolutions at an Extraordinary
General Meeting increased its authorized share capital to (pounds
sterling)10,000 ordinary shares of (pounds sterling)1 each. The company
capitalized (pounds sterling)9,900 standing to the credit of accumulated
reserves and applied these funds to take up the allotment of 9,900 (pounds
sterling)1 ordinary shares at par to its existing shareholders.
<PAGE>
12. RESERVES
<TABLE>
<CAPTION>
PROFIT AND
LOSS ACCOUNT
(POUNDS
STERLING)
-------------
<S> <C>
At January 1, 1997 ................... 243,849
Retained profit for the year ......... 69,312
Bonus issue of shares ................ (9,900)
-------
At December 31, 1997 ................. 303,261
=======
</TABLE>
F-232
<PAGE>
PARK ASSOCIATES LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
13. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
1997
(POUNDS
STERLING)
------------
<S> <C>
Profit for the financial year .................... 129,312
Dividends ........................................ (60,000)
-------
Net increase in shareholders' funds .............. 69,312
Shareholders' funds at January 1, 1997 ........... 243,949
-------
Shareholders' funds at December 31, 1997 ......... 313,261
=======
</TABLE>
14. NET CASH INFLOW FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
1997
(POUNDS
STERLING)
-----------
<S> <C>
Operating profit ............................................. 169,316
Depreciation ................................................. 13,990
Profit on sale of tangible fixed assets- ..................... (1,929)
Increase in debtors .......................................... (84,759)
Increase in creditors ........................................ 153,269
-------
Net cash inflow from continuing operating activities ......... 249,887
=======
</TABLE>
15. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
1997
(POUNDS
STERLING)
-------
<S> <C>
Increase in cash in the year ............. 61,730
------
Movement in net debt in the year ......... 61,730
Net funds at January 1, 1997 ............. 26,076
------
Net funds at December 31, 1997 ........... 87,806
======
</TABLE>
16. ANALYSIS OF CHANGES IN NET DEBT
<TABLE>
<CAPTION>
AT AT
JANUARY 1 DECEMBER 31
1997 CASH FLOW 1997
(POUNDS (POUNDS (POUNDS
STERLING) STERLING) STERLING)
----------- ----------- ------------
<S> <C> <C> <C>
Cash in hand, at bank ......... 26,076 61,730 87,806
====== ====== ======
</TABLE>
<PAGE>
17. CAPITAL COMMITMENTS
The company had no capital commitments at December 31, 1997.
18. CONTINGENT LIABILITIES
There were no contingent liabilities at December 31, 1997.
F-233
<PAGE>
PARK ASSOCIATES LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
19. PENSIONS
Defined Contribution Scheme
The company operates a defined contribution pension scheme for the benefit
of the directors and senior employees. The assets of the scheme are
administered by trustees in a fund independent from those of the company.
20. LEASING COMMITMENTS
Operating lease payments amounting to (pounds sterling)7,750 are due within
one year. The leases to which these amounts relate expire as follows:
<TABLE>
<CAPTION>
1997
LAND AND
BUILDINGS
(POUNDS
STERLING)
----------
<S> <C>
Between one and five years ......... 7,750
=====
</TABLE>
21. TRANSACTIONS WITH DIRECTORS AND RELATED PARTIES
(a) Transactions with directors
Amounts due in respect of loans, quasi-loans and credit transactions by
directors were as follows:
<TABLE>
<CAPTION>
AMOUNT MAXIMUM
OUTSTANDING LIABILITY
1997 DURING YEAR
(POUNDS (POUNDS
STERLING) STERLING
------------- ------------
<S> <C> <C>
J R Holmes ......... -- 496
P McGarvey ......... -- 69
</TABLE>
(b) Transactions with other related parties were as follows:
J R Holmes and P McGarvey are partners in Benson McGarvey Henderson and
the inter business transactions in the year were rent receivable and management
charges amounting to (pounds sterling)15,400 and (pounds sterling)8,709.
J R Holmes is a director of both Gary Lineker Promotions Limited and David
Gower Promotions Limited. Park Associates Limited was involved in normal trading
activities with both companies during the year. Commission and fees receivable
in respect of Gary Lineker Promotions Limited being (pounds sterling)128,175 and
David Gower Promotions Limited (pounds sterling)31,222 with debtors due at the
period end of (pounds sterling)8,842 and (pounds sterling)2,181.
22. RECONCILIATION TO US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US
GAAP)
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United Kingdom ("UK
GAAP"), which differ in certain material respects from generally accepted
accounting principles in the United States ("US GAAP"). Such differences
involve methods for measuring the amounts shown in the financial statements, as
well as additional disclosures required by US GAAP.
F-234
<PAGE>
PARK ASSOCIATES LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
The following is a summary of the material adjustment to profit on
ordinary activities and shareholders' equity which would have been required in
applying the significant differences between UK and US GAAP.
(a) Reconciliation of profit and loss accounts:
<TABLE>
<CAPTION>
1997
(POUNDS
STERLING)
-----------
<S> <C>
Profit for financial year reported under:
UK GAAP ........................................................... 69,312
Depreciation expense .............................................. (5,420)
------
Net income in accordance with US GAAP ............................. 63,892
======
Earnings per share -- basic and dilutive .......................... 15.12
======
Weighted average shares outstanding -- basic and dilutive ......... 4,225
======
(b) Reconciliation of shareholders' equity
Shareholders' equity per GAAP ..................................... 313,261
Depreciation expense .............................................. (42,005)
=======
Shareholders' equity in accordance with US GAAP ................... 271,256
=======
(c) Changes in shareholders' equity on a US GAAP basis
Shareholders' equity at beginning of year ......................... 207,364
Net income ........................................................ 63,892
=======
Shareholders' equity at end of year ............................... 271,256
=======
</TABLE>
In preparing the summary of differences between UK and US GAAP, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities,
and the estimates of revenue and expenses. Accounting estimates have been
employed in these financial statements to determine reported amounts, including
realizability, useful lives of tangible assets, income taxes and other areas.
Actual results could differ from those estimates.
The following is a description of the US GAAP reconciling item:
Under UK GAAP no depreciation has been provided on freehold buildings as
it is the company's policy to maintain these assets in a continual state of
sound repair. The useful lives of these assets are thus so long and residual
values so high that any depreciation would not be material. Residual value is
based on prices prevailing at the date of acquisition or subsequent valuation.
For US GAAP purposes the acquisition cost of the freehold buildings is
depreciated over 39 years from the original date of purchase.
CASH FLOW INFORMATION
Under UK GAAP, the Cash Flow Statement is presented in accordance with UK
Financial Reporting Standard No. 1, as revised ("FRS 1"). The Statement
prepared under FRS 1 presents substantially the same information as that
required under US GAAP as interpreted by Statement of Financial Accounting
Standard No. 95.
Under UK GAAP, cash flows are presented for operating activities; returns
on investments and servicing of finance; taxation; capital expenditure and
financial investment acquisitions and disposals and equity dividends paid. US
GAAP requires the classification of cash flows as resulting from operating,
investing and financing activities.
F-235
<PAGE>
PARK ASSOCIATES LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
Cash flows under UK GAAP in respect of interest received and taxation
would be included within the operating activities. Capital expenditure and
financial investment and cash flows from acquisitions and disposals would be
included within investing activities under US GAAP. Equity dividends paid would
be included within financing activities under US GAAP.
F-236
<PAGE>
PARK ASSOCIATES LIMITED
UNAUDITED INTERIM BALANCE SHEET
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------
1998 1997
NOTE (POUNDS (POUNDS
STERLING) STERLING)
------ ------------- -------------
<S> <C> <C> <C>
Fixed assets:
Tangible assets ........................................ 2 23,994 330,622
Investments ............................................ -- 194
------ -------
23,994 330,816
------ -------
Current assets:
Debtors ................................................ 274,167 202,572
Cash at bank and in hand ............................... 104,354 98,686
------- -------
378,521 301,258
------- -------
Creditors: amounts falling due within one year ......... (306,437) (305,303)
-------- --------
Net current assets/(liabilities) ....................... 72,084 (4,045)
-------- --------
Total assets less current liabilities .................. 96,078 326,771
Provisions for liabilities and charges ................. (2,437) --
-------- --------
93,641 326,771
======== ========
Capital and reserves:
Called up share capital ................................ 10,000 100
Profit and loss account ................................ 83,641 326,671
-------- --------
Shareholders' funds .................................... 3 93,641 326,771
======== ========
</TABLE>
The accompanying notes form an integral part of these financial statements.
F-237
<PAGE>
PARK ASSOCIATES LIMITED
UNAUDITED INTERIM PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1998 1997
NOTE (POUNDS (POUNDS
STERLING) STERLING)
------ --------------- ---------------
<S> <C> <C> <C>
Commission and fees receivable ............................... 1,558,380 1,348,246
Commission and fees payable .................................. (1,189,489) (1,069,103)
---------- ----------
368,891 279,143
---------- ----------
Administrative expenses ...................................... 2 (554,533) (179,863)
Other operating income ....................................... 7,260 8,140
---------- ----------
Operating (loss)/profit ...................................... (178,382) 107,420
Net interest ................................................. 4,691 1,856
---------- ----------
(Loss)/profit on ordinary activities before taxation ......... (173,691) 109,276
Tax on (loss)/profit on ordinary activities .................. 18,071 (26,454)
---------- ----------
(Loss)/profit for the financial period ....................... 3 (155,620) 82,822
Dividends .................................................... 3 (64,000) --
---------- ----------
(Loss)/profit transferred to reserves ........................ (219,620) 82,822
========== ==========
</TABLE>
There were no recognized gains or losses other than the (loss)/profit for the
financial periods.
The accompanying notes form an integral part of these financial statements.
F-238
<PAGE>
PARK ASSOCIATES LIMITED
UNAUDITED INTERIM CASH FLOW STATEMENT
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
NOTE (POUNDS (POUNDS
STERLING) STERLING)
------ ------------ ------------
<S> <C> <C> <C>
Net cash inflow from operating activities ......................... 4 78,625 158,118
Return on investments and servicing of finance:
Interest received ................................................. 4,691 1,856
------ -------
Net cash inflow from returns on investments and servicing of
finance .......................................................... 4,691 1,856
------ -------
Taxation .......................................................... (31,000) (11,000)
------- -------
Capital expenditure and financial investment:
Purchase of tangible fixed assets ................................. (487) (45,870)
Sale of tangible fixed assets ..................................... 28,525 13,700
------- -------
Net cash inflow/(outflow) from capital expenditure and
financial investment ............................................. 28,038 (32,170)
------- -------
Acquisition and disposals:
Purchase of investments ........................................... -- (194)
Sale of investments ............................................... 194 --
------- -------
Net cash inflow/(outflow) from acquisitions and disposals ......... 194 (194)
------- -------
Equity dividends paid ............................................. (64,000) (44,000)
------- -------
Increase in cash .................................................. 5 16,548 72,610
======= =======
</TABLE>
The accompanying notes form an integral part of these financial statements.
F-239
<PAGE>
PARK ASSOCIATES LIMITED
UNAUDITED INTERIM CASH FLOW STATEMENT
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998 AND JUNE 30 1997
1. BASIS OF ACCOUNTING
The interim financial statements for the six months to June 30, 1998 and
1997 are unaudited and have been prepared in accordance with the accounting
policies adopted in the financial statements for the year ended December 31,
1997.
2. STAFF COSTS AND DISPOSAL OF FREEHOLD PROPERTY
(a) On June 17, 1998 the company voted to directors, J R Holmes and P
McGarvey, bonuses in equal share by way of transfer of the freehold property at
open market value at that date.
The following amounts are included in Administrative expenses in respect
of the above transaction:
<TABLE>
<CAPTION>
(POUNDS
STERLING)
--------
<S> <C>
Directors' bonuses ............................. 200,000
Loss on disposal of freehold property .......... 61,382
</TABLE>
The net book value of tangible fixed assets at June 30, 1998 has been
reduced by (pounds sterling)261,382 as a result of the above disposal.
(b) Additional costs relating to other staff in respect of bonuses, pension
contributions and redundancy amounting to (pounds sterling)77,365 were paid in
the six months ended June 30, 1998 for which there were no equivalent costs in
the six-month period to June 30, 1997.
3. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
------------- ---------
<S> <C> <C>
(Loss)/profit for the financial period ................. (155,620) 82,822
Dividends .............................................. (64,000) --
-------- ------
Net (decrease)/increase in shareholders' funds ......... (219,620) 82,822
Shareholders' funds at January 1 ....................... 313,261 243,949
-------- -------
Shareholders' funds at June 30 ......................... 93,641 326,771
======== =======
</TABLE>
4. NET CASH INFLOW FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
------------- -----------
<S> <C> <C>
Operating (loss)/profit ...................................... (178,382) 107,420
Depreciation ................................................. 6,428 5,831
Directors' bonuses by transfer of property ................... 200,000 --
Loss/(profit) on sale of tangible fixed assets ............... 73,128 (1,929)
Increase in debtors .......................................... (22,395) (70,469)
(Decrease)/increase in creditors ............................. (154) 117,265
-------- -------
Net cash inflow from continuing operating activities ......... 78,625 158,118
======== =======
</TABLE>
F-240
<PAGE>
PARK ASSOCIATES LIMITED
UNAUDITED INTERIM CASH FLOW STATEMENT
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998 AND JUNE 30 1997
5. ANALYSIS OF CHANGES IN NET DEBT
<TABLE>
<CAPTION>
AT AT
JANUARY 1 JUNE 30
1998 CASH FLOW 1998
(POUNDS (POUNDS (POUNDS
STERLING) STERLING) STERLING)
----------- ----------- --------
<S> <C> <C> <C>
Cash in hand, at bank ......... 87,806 16,548 104,354
====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
AT AT
JANUARY 1 JUNE 30
1997 CASH FLOW 1998
(POUNDS (POUNDS (POUNDS
STERLING) STERLING) STERLING)
----------- ----------- --------
<S> <C> <C> <C>
Cash in hand, at bank ......... 26,076 72,610 98,686
====== ====== ======
</TABLE>
6. RECONCILIATION TO US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(US GAAP)
The US GAAP reconciliations of net profit/(loss) and shareholders' equity
included herein is unaudited. Certain information and disclosures, normally
included in financial statements prepared in accordance with US GAAP, have been
omitted as permitted by such requirements. However, the company believes that
the disclosures made are adequate to make the information presented not
misleading.
SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP")
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United Kingdom ("UK
GAAP"), which differ in certain material respects from generally accepted
accounting principle in the United States ("US GAAP"). Such differences involve
methods for measuring the amounts shown in the financial statements, as well as
additional disclosures required by US GAAP.
The following is a summary of the material adjustments to profit/(loss) on
ordinary activities and shareholders' equity which would have been required in
applying the significant differences between UK and US GAAP.
(a) Reconciliation of profit and loss accounts for the six months ended
June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
------------- -----------
<S> <C> <C>
Net (loss)/profit per UK GAAP ..................................... (219,620) 82,822
Depreciation expense .............................................. (2,258) (2,710)
Difference in loss on disposal .................................... 44,263 --
-------- ------
Net (loss)/income in accordance with US GAAP ...................... (177,615) 80,112
======== ======
(Loss)/earnings per share --basic and dilutive .................... (17.76) 801.12
======== ======
Weighted average shares outstanding -- basic and dilutive ......... 10,000 100
======== ======
</TABLE>
F-241
<PAGE>
PARK ASSOCIATES LIMITED
UNAUDITED INTERIM CASH FLOW STATEMENT
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998 AND JUNE 30 1997
6. RECONCILIATION TO US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(US GAAP) (CONTINUED)
(b) Reconciliation of shareholders' equity at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
------------ ------------
<S> <C> <C>
Shareholders' equity per UK GAAP ........................ 93,641 326,771
Depreciation expense .................................... (44,263) (39,295)
Difference in loss on disposal .......................... 44,263 --
------- -------
Shareholders' equity in accordance with US GAAP ......... 93,641 287,476
======= =======
</TABLE>
(c) Changes in Shareholders' equity on a US GAAP basis:
<TABLE>
<CAPTION>
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
------------- ----------
<S> <C> <C>
Shareholders' equity at beginning of period ......... 271,256 ) 207,364
Net (loss)/profit ................................... (177,615) 80,112
-------- -------
Shareholders' equity at end of period ............... 93,641 287,476
======== =======
</TABLE>
In preparing the summary of differences between UK and US GAAP, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities,
and the estimates of revenue and expenses. Accounting estimates have been
employed in these financial statements to determine reported amounts, including
realizability, useful lives of tangible assets, income taxes and other areas.
Actual results could differ from those estimates.
The following is a description of the US GAAP reconciling item:
Under UK GAAP no depreciation has been provided on freehold buildings as
it is the company's policy to maintain these assets in a continual state of
sound repair. The useful lives of these assets are thus so long and residual
values so high that any depreciation would not be material. Residual value is
based on prices prevailing at the date of acquisition or subsequent valuation.
For US GAAP purposes the acquisition cost of the freehold buildings is
depreciated over 39 years from the original date of purchase.
CASH FLOW INFORMATION
Under UK GAAP, the Cash Flow Statement is presented in accordance with UK
Financial Reporting Standard No. 1, as revised ("FRS 1"). The Statement
prepared under FRS 1 presents substantially the same information as that
required under US GAAP as interpreted by SFAS No. 95.
Under UK GAAP, cash flows are presented for operating activities; returns
on investments and servicing of finance; taxation; capital expenditure and
financial investment acquisitions and disposals and equity dividends paid. US
GAAP requires the classification of cash flows as resulting from operating,
investing and financing activities.
Cash flows under UK GAAP in respect of interest received and taxation
would b included within the operating activities. Capital expenditure and
financial investment and cash flows from acquisitions and disposals would be
included within investing activities under US GAAP. Equity dividends paid would
be included within financing activities under US GAAP.
F-242
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Marquee Group, Inc.
We have audited the accompanying combined balance sheets of Tollin-Robbins
Entertainment as of December 31, 1997 and 1996, and the related combined
statements of operations and comprehensive income, stockholders' equity
(deficit), and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of
Tollin-Robbins Entertainment at December 31, 1997 and 1996, and the results of
its operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
July 6, 1998
F-243
<PAGE>
TOLLIN-ROBBINS ENTERTAINMENT
COMBINED BALANCE SHEETS
(000'S OMITTED)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------- JUNE 30
1997 1996 1998
--------- ----------- ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 102 $ 712 $ 2,243
Marketable securities ....................................... -- -- 723
Producer fee receivable ..................................... -- -- 130
Management fee receivable ................................... 60 -- --
Advances to stockholders .................................... -- -- 132
Deferred income tax ......................................... -- 80 --
Other ....................................................... 8 -- 59
------ ------- -------
Total current assets ......................................... 170 792 3,287
Property and equipment, net .................................. 310 321 298
------ ------- -------
Total assets ................................................. $ 480 $ 1,113 $ 3,585
====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses ....................... $ 73 $ 68 $ 99
Payable to stockholders ..................................... 388 840 1,536
Deferred revenue ............................................ 152 762 77
------ ------- -------
Total current liabilities .................................... 613 1,670 1,712
Stockholders' equity (deficit):
Capital stock ............................................... 4 4 4
Accumulated equity (deficit) ................................ (137) (561) 1,880
Accumulated other comprehensive income (loss) ............... -- -- (11)
------ ------- -------
Total stockholders' equity (deficit) ......................... (133) (557) 1,873
------ ------- -------
Total liabilities and stockholders' equity (deficit) ......... $ 480 $ 1,113 $ 3,585
====== ======= =======
</TABLE>
See accompanying notes.
F-244
<PAGE>
TOLLIN-ROBBINS ENTERTAINMENT
COMBINED STATEMENTS OF OPERATIONS
(000'S OMITTED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31 JUNE 30
--------------------- ---------------------
1997 1996 1998 1997
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Producer fees .......................... $4,284 $3,133 $3,955 $2,270
Post-production revenue ................ 595 490 247 268
Management services .................... 60 -- 40 --
Other .................................. 134 52 50 15
------ ------ ------ ------
Total revenues .......................... 5,073 3,675 4,292 2,553
Operating expenses:
Compensation to stockholders and related
benefits ............................. 3,223 3,551 1,600 1,612
Post-production expenses ............... 374 274 111 166
General and administrative ............. 846 482 529 363
Depreciation expense ................... 75 50 35 35
Other expenses ......................... 51 60 -- --
------ ------ ------ ------
Total operating expenses ................ 4,569 4,417 2,275 2,176
Income (loss) before income tax provision
(benefit) .............................. 504 (742) 2,017 377
Income tax provision (benefit) .......... 80 (80) -- 52
------ ------ ------ ------
Net income (loss) ....................... $ 424 $ (662) $2,017 $ 325
====== ====== ====== ======
</TABLE>
See accompanying notes.
F-245
<PAGE>
TOLLIN-ROBBINS ENTERTAINMENT
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ACCUMULATED
RETAINED OTHER
COMMON EARNINGS COMPREHENSIVE
STOCK (DEFICIT) INCOME TOTAL
-------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 ................... $ 4 $ 101 $ -- $ 105
Net loss .................................... -- (662) (662)
--- ------- ------ -------
Balance at December 31, 1996 ................. 4 (561) -- (557)
Net income .................................. -- 424 -- 424
--- ------- ------ -------
Balance at December 31, 1997 ................. 4 (137) -- (133)
Net income (unaudited) ...................... -- 2,017 -- 2,006
Other comprehensive income (loss)
(unaudited) ............................... -- -- (11) (11)
--- ------- ------ -------
Balance at June 30, 1998 (unaudited) ......... $ 4 $ 1,880 $ (11) $ 1,873
=== ======= ====== =======
</TABLE>
See accompanying notes.
F-246
<PAGE>
TOLLIN-ROBBINS ENTERTAINMENT
COMBINED STATEMENTS OF CASH FLOWS
(000'S OMITTED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
----------------------- -------------------------
1997 1996 1998 1997
---------- ---------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .................................. $ 424 $ (662) $ 2,017 $ 325
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization ..................... 75 50 35 35
Loss on disposal of fixed assets .................. 51 60 -- --
Deferred income tax ............................... 80 (80) -- 52
Changes in operating assets and liabilities:
Producer fee receivable ......................... -- -- (130) --
Management fee receivable ....................... (60) -- 60 --
Advances to stockholders ........................ -- -- (132) (330)
Other assets .................................... (8) 4 (51) --
Accounts payable and accrued expenses ........... 5 (104) 26 23
Payable to stockholders ......................... (452) 681 1,148 772
Deferred revenue ................................ (610) 903 (75) (469)
------- ------ ------- -------
Net cash provided by (used in) operating
activities ........................................ (495) 852 2,898 (392)
INVESTING ACTIVITIES
Purchases of marketable securities ................. -- -- (734) --
Purchases of equipment ............................. (115) (336) (23) (101)
------- ------ ------- -------
Net cash used in investing activities .............. (115) (336) (757) (101)
------- ------ ------- -------
Increase (decrease) in cash ........................ (610) 516 2,141 307
Cash and cash equivalents at beginning of
period ............................................ 712 196 102 712
------- ------ ------- -------
Cash and cash equivalents at end of period ......... $ 102 $ 712 $ 2,243 $ 1,019
======= ====== ======= =======
</TABLE>
See accompanying notes.
F-247
<PAGE>
TOLLIN-ROBBINS ENTERTAINMENT
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION FOR THE PERIOD ENDED JUNE 30, 1997
AND SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION AND BUSINESS ACTIVITIES
The combined financial statements of Tollin-Robbins Entertainment are
comprised of the following entities: Tollin-Robbins Productions; Halcyon Days
Productions, Inc. (Halcyon); Robbins Entertainment Group, Inc. (Robbins); and
Tollin-Robbins Management (TRM) (collectively referred to herein as the
Company). All significant intercompany accounts and transactions have been
eliminated.
Tollin-Robbins Productions, a California General Partnership (the
Partnership), was formed in November 1993. Halcyon and Robbins are the equal
partners of the Partnership. Profit and losses are allocated equally to each
partner. The Partnership is engaged in the business of providing executive
producer, director, writer, post-production, and other creative services to
owners and distributors of entertainment programming.
Halcyon was incorporated in California in November 1990, and is an S
Corporation under the Internal Revenue Code; Mr. Tollin is the sole stockholder
of this entity. Robbins was initially incorporated in California in May 1991 as
a C Corporation and elected, effective January 1, 1998, an S Corporation status
under the Internal Revenue Code. Mr. Robbins is the sole stockholder of this
entity. These two entities each receive their 50% share of the results of
operations generated by the Partnership.
TRM, a California limited liability company which was formed in April
1997, is engaged in the business of providing management services to artists.
Messrs. Tollin and Robbins are the sole members of TRM. TRM typically receives
a percentage of the compensation paid to the artists it represents.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited combined financial statements at June 30, 1998
and for the six month periods ended June 30, 1998 and 1997 have been prepared
on the same basis as the audited combined financial statements and, in the
opinion of management, include all adjustments (consisting only of normal and
recurring accruals) necessary to present fairly the combined financial
information set forth therein, in accordance with generally accepted accounting
principles. The results of operations for the six month period ended June 30,
1998 are not necessarily indicative of the results to be expected for the
entire fiscal year.
SIGNIFICANT CUSTOMER
Approximately 79% in 1997 and 87% in 1996 of the Company's total producer
fees and post-production revenues shown in the accompanying combined statement
of operations was received from Nickelodeon/MTV Networks and affiliated
companies.
REVENUE RECOGNITION
Executive producer and other creative services revenue is recognized as
the related production services are rendered. Pursuant to a two-year production
services agreement with Nickelodeon/MTV Networks (Agreement) which commenced as
of February 1, 1996, the Partnership will receive $1,750,000 per year in
guaranteed payments (payable in equal bi-monthly installments over the term).
Such revenue is recognized ratably over the Agreement's term. In addition to
the guaranteed
F-248
<PAGE>
TOLLIN-ROBBINS ENTERTAINMENT
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD ENDED JUNE 30, 1997
AND SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
payments, the Partnership received a signing bonus of $500,000, which is being
recognized ratably over the original two year term. Both parties to the
Agreement have agreed to extend the term to a third year (February 1, 1998 --
January 31, 1999). The Partnership will receive a guaranteed minimum payment of
$2,500,000 for its services over the third year.
Management fee commissions are recognized as services are rendered by the
related artists who are represented by TRM.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less and investments in money market
accounts to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities are accounted for using Statement of Financial
Account Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." At June 30, 1998, the Company's marketable securities,
all of which are classified as available-for sale as defined by SFAS 115,
consist primarily of municipal securities. Pursuant to SFAS 115, such
investments are stated at market value, and unrealized gains and losses on such
securities are reflected, net of tax, in other comprehensive income or loss.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over their
estimated useful lives using the straight-line method, generally ranging from
seven to ten years.
INCOME TAXES
Income taxes are accounted for using Statement of Financial Account
Standards No. 109, "Accounting for Income Taxes." Under this method, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
COMPREHENSIVE INCOME
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS 130
established new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS 130 requires unrealized
gains and losses on the Company's available-for-sale securities to be included
in other comprehensive income.
For the six month period ended June 30, 1998, the Company's comprehensive
income was $2,006,000. The comprehensive income differs from the net income in
the first six months of 1998 due to the inclusion of the Company's unrealized
loss on marketable securities in its comprehensive income.
F-249
<PAGE>
TOLLIN-ROBBINS ENTERTAINMENT
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD ENDED JUNE 30, 1997
AND SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
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.
2. MARKETABLE SECURITIES (UNAUDITED)
At June 30, 1998, the Company has classified all investments as
available-for-sale.
The amortized cost, gross unrealized loss and fair value of the marketable
securities are as follows (in 000's):
<TABLE>
<CAPTION>
GROSS
AMORTIZED UNREALIZED FAIR
COST LOSS VALUE
----------- ------------ ------
<S> <C> <C> <C>
Municipal obligations ......... $734 $ (11) $723
</TABLE>
Contractual maturities of marketable debt securities at June 30, 1998 are
as follows (in 000's):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- ------
<S> <C> <C>
Due in one year or less ....................... $102 $100
Due after one year through five years ......... 160 156
Due after 10 years ............................ 472 467
---- ----
Total debt securities ......................... $734 $723
==== ====
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1996 1998
--------- --------- ------------
(Unaudited)
<S> <C> <C> <C>
Equipment ............................. $ 185 $ 167 $ 208
Furniture and fixtures ................ 306 279 306
------ ------ ------
491 446 514
Less accumulated depreciation ......... (181) (125) (216)
------ ------ ------
$ 310 $ 321 $ 298
====== ====== ======
</TABLE>
4. STOCKHOLDERS' EQUITY (DEFICIT)
The Company's capital stock consists of the common stock of Halcyon and
Robbins. The partners' equity of the Partnership has been eliminated.
At December 31, 1997 and 1996, there were 1,000 shares of common stock
authorized, issued and outstanding of Halcyon, and 3,000 shares of common stock
authorized, issued and outstanding of Robbins. All shares of common stock were
issued at $1 per share.
F-250
<PAGE>
TOLLIN-ROBBINS ENTERTAINMENT
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD ENDED JUNE 30, 1997
AND SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
5. INCOME TAXES
Partnerships and limited liability companies are not subject to federal or
state income taxes and, accordingly, no provision for income taxes has been
provided for the Partnership and TRM. The partners of the Partnership and
members of TRM are required to report their proportional share of gains,
losses, credits and deductions on their respective income tax returns.
Halcyon is an S Corporation under Section 1361 of the Internal Revenue
Code. Under the provisions of the Internal Revenue Code, federal and state
taxes based on income for S Corporations are generally the direct liability of
the stockholders. Therefore, no federal and state tax provision has been
provided on S Corporation earnings other than certain state minimum taxes based
on income.
Robbins was a C Corporation as of December 31, 1997 and 1996 and,
accordingly, was subject to federal and state taxes. Robbins elected S
Corporation status effective January 1, 1998; accordingly, no federal and state
tax provision has been provided for the three months ended June 30, 1998 other
than certain state minimum taxes based on income.
The Company's provision for income taxes (benefit) consists of the
applicable amounts based on Robbins' result of operations and was as follows
(in 000's):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
------------------ JUNE 30,
1997 1996 1997
------ --------- ------------
(Unaudited)
<S> <C> <C> <C>
Deferred ..........
Federal ............ $50 $ (50) $33
State .............. 30 (30) 19
--- ----- ---
$80 $ (80) $52
=== ===== ===
</TABLE>
A reconciliation from the provision for income taxes based on the federal
statutory rate of 15% to the actual rate follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS
---------------------- ENDED
1997 1996 JUNE 30, 1997
---------- --------- --------------
(Unaudited)
<S> <C> <C> <C>
Statutory rate applied to income before income taxes...... 15.0% 15.0% 15.0%
State income taxes, net of federal income tax benefit..... 7.5 7.5 7.5
Income from non-taxable entities ......................... (12.6) (8.4) (11.9)
Other non-deductible expenses ............................ 0.5 0.5 0.4
Other, net ............................................... 5.5 (3.8) 2.8
----- ---- -----
15.9% 10.8% 13.8%
===== ==== =====
</TABLE>
The Company's deferred tax assets as of December 31, 1996 was principally
comprised of deferred revenue.
6. DEFERRED REVENUE
Deferred revenue consists of advances from television networks and
production companies for services not yet rendered.
F-251
<PAGE>
TOLLIN-ROBBINS ENTERTAINMENT
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD ENDED JUNE 30, 1997
AND SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
7. COMMITMENT AND CONTINGENCIES
The Company rents its office facilities on a month-to-month basis from an
entity controlled by Messrs. Tollin and Robbins, the owners of the building.
The monthly rent is $3,750.
8. YEAR 2000 (UNAUDITED)
Until recently, computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
Such programs are unable to properly distinguish between the year 1900 and the
year 2000. This situation is frequently referred to as the "Year 2000 problem."
The Company believes that all of its own computer software is year 2000
compliant and that it will not need to make significant modifications or
replacements to its software so that its computer systems will function
properly with respect to dates in the year 2000 and beyond.
F-252
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and the shareholders of Tony Stephens Associates
Limited
We have audited the accompanying balance sheet of Tony Stephens Associates
Limited ("the Company") as of April 30, 1998 and the related statements of
profit and loss account and cash flows for the year ended April 30, 1998 all
expressed in pounds sterling, (together, "the financial statements") which, as
described in the financial statements (pages F-252 to F-257), have been
prepared on the basis of accounting principles generally accepted in the United
Kingdom. These financial statements are the responsibility of the Directors of
the Company. 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 in the
United Kingdom, which are substantially the same as auditing standards
generally accepted in the United States. These 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 financial position of Tony Stephens Associates
Limited as of April 30, 1998, and the results of its operations and its cash
flows for the year ended April 30, 1998, in conformity with accounting
principles generally accepted in the United Kingdom.
United Kingdom accounting principles vary in certain respects from
accounting principles generally accepted in the United States. The application
of the latter would have affected the determination of shareholders' equity and
financial position as of April 30, 1998 and the determination of net profit for
year ended April 30, 1998 to the extent summarised in Note 11 to the financial
statements.
Richard E Woodhall
Chartered Accountants and Registered Auditors
Birmingham
England
July 14, 1998 except for information presented in the Cash Flow Statement, and
notes 10 and 11 which the date is October 2, 1998.
F-253
<PAGE>
TONY STEPHENS ASSOCIATES LIMITED
ABBREVIATED BALANCE SHEET
AT 30 APRIL 1998
<TABLE>
<CAPTION>
1998
(POUNDS
NOTE STERLING)
------- ---------
<S> <C> <C>
FIXED ASSETS ...........................................
Tangible assets ........................................ 4 31
--
CURRENT ASSETS
Debtors ................................................ 235
Cash at bank ........................................... 97
---
332
CREDITORS: amounts falling due within one year ......... 5 (326)
----
NET CURRENT ASSETS ..................................... 6
----
TOTAL ASSETS LESS CURRENT LIABILITIES .................. 37
====
CAPITAL AND RESERVES
Called up share capital ................................ 6 1
Profit and loss account ................................ 7 36
----
8 37
====
</TABLE>
The accompanying notes form an integral part of the financial statements.
F-254
<PAGE>
TONY STEPHENS ASSOCIATES LIMITED
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30 APRIL 1998
<TABLE>
<CAPTION>
1998
(POUNDS
NOTE STERLING)
------- -----------
<S> <C> <C>
TURNOVER .............................................. 3,106
Cost of sales ......................................... (2,646)
------
GROSS PROFIT .......................................... 460
Administrative expenses ............................... (206)
------
OPERATING PROFIT ...................................... 2 254
Interest received ..................................... 9
------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION ......... 263
Taxation .............................................. 3 (70)
------
PROFIT FOR THE FINANCIAL YEAR AFTER TAXATION .......... 193
Retained profit brought forward ....................... 7 33
------
226
Dividends paid ........................................ (190)
------
RETAINED PROFIT CARRIED FORWARD ....................... 7 36
======
</TABLE>
There were no recognised gains or losses other than the profit for the
financial period.
The accompanying notes form an integral part of the financial statements.
F-255
<PAGE>
TONY STEPHENS ASSOCIATES LIMITED
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30 APRIL 1998
<TABLE>
<CAPTION>
1998
(POUNDS
STERLING)
NOTES 000
----------- --------
<S> <C> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES 10(a) 261
----
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received ................................. 9
----
TAXATION
Corporation tax paid .............................. (76)
----
CAPITAL EXPENDITURE
Payments to acquire tangible fixed assets ......... (17)
----
EQUITY DIVIDENDS PAID
(190)
-----
DECREASE IN CASH .................................. 10(b) (13)
=====
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS
1998
(POUNDS
STERLING)
000
-------
Decrease in cash in the year ...................... 10(b) (13)
-------
MOVEMENT IN NET FUNDS IN THE YEAR ................. (13)
NET FUNDS AT 1 MAY 1997 ........................... 110
-------
NET FUNDS AT 30 APRIL 1998 ........................ 97
=======
</TABLE>
The accompanying notes form an integral part of the financial statements.
F-256
<PAGE>
TONY STEPHENS ASSOCIATES LIMITED
NOTES TO THE ACCOUNTS
AT 30 APRIL 1998
1. ACCOUNTING POLICIES
ACCOUNTING CONVENTION
The accounts have been prepared under the historical cost convention and
in accordance with the Financial Reporting Standard for Small Entities.
TURNOVER
Turnover represents net invoiced services, excluding VAT.
DEPRECIATION
Depreciation is provided on all tangible fixed assets, at rates calculated
to write off the cost evenly over a period which does not exceed anticipated
useful life.
Equipment and vehicles -- over 4 years.
PENSION COSTS
The Company operates a money purchase pension scheme and contributions are
charged to the profit and loss account in the year in which they are paid.
OPERATING LEASES
Rentals applicable to operating leases where substantially all of the
benefits and risks of ownership remain with the lessor are charged to profit
and loss account as incurred.
2. OPERATING PROFIT
This is stated after charging:
<TABLE>
<CAPTION>
1998
(POUNDS
STERLING)
000
------
<S> <C>
Depreciation of tangible fixed assets ......... 13
Auditors' remuneration ........................ 2
Directors' remuneration ....................... 109
Operating lease rentals ....................... 8
Pension costs ................................. 40
===
</TABLE>
During the year retirement benefits were accruing to 2 directors (1997 --
2) in respect of money purchase pension schemes.
3. TAX ON PROFIT ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
1998
(POUNDS
STERLING)
000
------
<S> <C>
UK corporation tax ......... 70
==
</TABLE>
F-257
<PAGE>
TONY STEPHENS ASSOCIATES LIMITED
NOTES TO THE ACCOUNTS
AT 30 APRIL 1998
4. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
VEHICLES AND
EQUIPMENT
(POUNDS
STERLING)
000
-------------
<S> <C>
Cost:
At 1 May 1997 ........................... 43
Additions ............................... 17
--
At 30 April 1998 ........................ 60
--
Depreciation:
At 1 May 1997 ........................... 16
Provided in the year .................... 13
--
At 30 April 1998 ........................ 29
--
Net book value at 30 April 1998 ......... 31
==
</TABLE>
5. CREDITORS: amounts falling due within one year
<TABLE>
<CAPTION>
1998
(POUNDS
STERLING)
000
------
<S> <C>
Trade creditors .................... 272
Corporation tax .................... 24
Tax and National Insurance ......... 30
---
326
===
</TABLE>
6. SHARE CAPITAL
<TABLE>
<CAPTION>
1998
(POUNDS
1998 STERLING)
NO. 000
------- ------
<S> <C> <C>
Authorised ordinary shares of
(pounds sterling)1 each ...................... 1,000 1,000
===== =====
</TABLE>
<TABLE>
<CAPTION>
1998
1998 (POUNDS
NO. STERLING)
------ -----
<S> <C> <C>
Allotted, called up and fully paid ordinary shares of
(pounds sterling)1 each .............................................. 500 500
=== ===
</TABLE>
<PAGE>
7. RESERVES
<TABLE>
<CAPTION>
PROFIT AND
LOSS ACCOUNT
(POUNDS
STERLING)
000
-------------
<S> <C>
At 1 May 1997 ........................ 33
Retained profit for the year ......... 3
--
At 30 April 1998 ..................... 36
==
</TABLE>
F-258
<PAGE>
TONY STEPHENS ASSOCIATES LIMITED
NOTES TO THE ACCOUNTS
AT 30 APRIL 1998
8. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
1998
(POUNDS
STERLING)
000
---------
<S> <C>
Profit for the year .......................... 193
Dividends .................................... (190)
----
Net increase in shareholders' funds .......... 3
Shareholders' funds at 1 May 1997 ............ 34
----
Shareholders' funds at 30 April 1998 ......... 37
====
</TABLE>
9. LEASING COMMITMENTS
As at 30 April 1998 the company had annual commitments of (pounds
sterling)8,319 and on a non con-cancellable operating lease which expires in
January 2000.
10. NOTES TO THE STATEMENT OF CASH FLOWS
a) Reconciliation of operating profit to net cash inflow from operating
activities
<TABLE>
<CAPTION>
1998
(POUNDS
STERLING)
000
---------
<S> <C>
Operating profit .................................. 254
Depreciation of tangible fixed assets ............. 13
Increase in debtors ............................... (210)
Increase in creditors ............................. 204
----
Net cash inflow from operating activities ......... 261
====
</TABLE>
b) Analysis of changes in net funds
<TABLE>
<CAPTION>
AT 1 MAY AT 30 APRIL
1997 CASH FLOW 1998
(POUNDS (POUNDS (POUNDS
STERLING) STERLING) STERLING)
000 000 000
---------- ----------- ------------
<S> <C> <C> <C>
Cash at bank and in hand ......... 110 (13) 97
=== === ==
</TABLE>
11. RECONCILIATION TO US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US GAAP)
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United Kingdom ("UK
GAAP"), which differ in certain respects from generally accepted accounting
principles in the United States ("US GAAP"). Such differences involve methods
for measuring the amounts shown in the financial statements as well as
additional disclosures required by US GAAP.
There are no material adjustments to profit for the year, cash flows and
shareholders' equity in applying the significant differences between UK and US
GAAP.
F-259
<PAGE>
TONY STEPHENS ASSOCIATES LIMITED
UNAUDITED INTERIM BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
NOTES 000 000
------- --------- ---------
<S> <C> <C> <C>
FIXED ASSETS
Tangible assets ........................................ 6 32 25
-- --
CURRENT ASSETS
Debtors ................................................ 7 334 84
Cash at bank and in hand ............................... 28 263
--- ---
362 347
CREDITORS: amounts falling due within one year ......... 8 (308) (331)
---- ----
NET CURRENT ASSETS ..................................... 54 16
---- ----
TOTAL ASSETS LESS CURRENT LIABILITIES .................. 86 41
==== ====
CAPITAL AND RESERVES
Called up share capital ................................ 9 1 1
Profit and loss account ................................ 10 85 40
---- ----
SHAREHOLDERS' FUNDS .................................... 11 86 41
==== ====
</TABLE>
The accompanying notes form an integral part of these financial statements.
F-260
<PAGE>
TONY STEPHENS ASSOCIATES LIMITED
UNAUDITED INTERIM PROFIT AND LOSS ACCOUNTS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
NOTES 000 000
------- ----------- ---------
<S> <C> <C> <C>
COMMISSIONS AND FEES RECEIVABLE .............. 1,891 1,118
Commissions and fees payable ................. (1,612) (881)
------ -----
279 237
Administrative expenses ...................... (102) (89)
------ -----
OPERATING PROFIT ............................. 2 177 148
Bank interest receivable ..................... 5 3
------ -----
PROFIT ON ORDINARY ACTIVITIES BEFORE
TAXATION .................................... 182 151
Tax on profit on ordinary activities ......... 5 (52) (38)
------ -----
PROFIT FOR THE PERIOD ........................ 130 113
Dividends .................................... (64) (83)
------ -----
PROFIT RETAINED FOR THE PERIOD ............... 66 30
====== =====
</TABLE>
There were no recognised gains or losses other than the profit for the
financial period.
The accompanying notes form an integral part of these financial statements.
F-261
<PAGE>
TONY STEPHENS ASSOCIATES LIMITED
UNAUDITED INTERIM STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
NOTES 000 000
----------- --------- ----------
<S> <C> <C> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES ............ 14(a) 86 110
-- ----
RETURNS ON INVESTMENTS AND SERVICING OF
FINANCE
Interest received .................................... 5 3
-- ----
TAXATION
Corporation tax paid ................................. (54) (46)
--- ----
CAPITAL EXPENDITURE
Payments to acquire tangible fixed assets ............ (18) (6)
Receipts from sales of tangible fixed assets ......... -- 19
--- -----
(18) 13
--- -----
EQUITY DIVIDENDS PAID ................................ (120) (120)
---- ------
DECREASE IN CASH ..................................... 14(b) (101) (40)
==== ======
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS
1998 1997
(POUNDS (POUNDS
STERLING STERLING
000 000
------ --------
Decrease in cash in period ........................... 14(b) (101) (40)
------- --------
MOVEMENTS IN NET FUNDS IN THE YEAR ................... (101) (40)
NET FUNDS AT 1 JANUARY ............................... 129 303
------- --------
NET FUNDS AT 30 JUNE ................................. 28 263
======= ========
</TABLE>
The accompanying notes form an integral part of these financial statements.
F-262
<PAGE>
TONY STEPHENS ASSOCIATES LIMITED
NOTES TO THE UNAUDITED INTERIM ACCOUNTS
AT 30 JUNE 1998
1. ACCOUNTING POLICIES
BASIS FOR PREPARATION
The financial statements have been prepared under the historical cost
convention.
The principal accounting policies of the company are set out below.
TURNOVER
Turnover is gross amount receivable by the company, invoiced on behalf of
clients when the company acts as agents and for other services provided,
excluding VAT and trade discounts.
DEPRECIATION
Depreciation is provided on all tangible fixed assets, at rates calculated
to write off the cost, less estimated residual value based on prices prevailing
at the date of acquisition, of each asset evenly over its expected useful life,
as follows:
Equipment and vehicles - over 4 years
DEFERRED TAXATION
Deferred taxation is provided using the liability method on all timing
differences which are expected to reverse in the future without being replaced,
calculated at the rate at which it is anticipated the timing differences will
reverse. Advance corporation tax which is expected to be recoverable in the
future is deducted from the deferred taxation balance.
Deferred tax assets are only recognised if recovery without replacement by
equivalent debit balances is reasonably certain.
CONTRIBUTIONS TO PENSION FUNDS
The pension costs for the money purchase scheme charged against profits
represent the amount of the contributions payable to the scheme in respect of
the accounting period.
LEASED ASSETS
All other leases are regarded as operating leases and the payments made
under them are charged to the profit and loss account on a straight-line basis
over the lease term.
2. OPERATING PROFIT
This is stated after charging:
<TABLE>
<CAPTION>
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
000 000
------- ------
<S> <C> <C>
Auditors' remuneration ..................... 1 1
Depreciation of owned fixed assets ......... 7 5
Other operating lease rentals .............. 4 4
======= ======
</TABLE>
F-263
<PAGE>
TONY STEPHENS ASSOCIATES LIMITED
NOTES TO THE UNAUDITED INTERIM ACCOUNTS (CONTINUED)
AT 30 JUNE 1998
3. STAFF COSTS
<TABLE>
<CAPTION>
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
000 000
------- ------
<S> <C> <C>
Wages and salaries ............ 49 31
Social security costs ......... 6 3
Other pension costs ........... 15 25
-- --
70 59
== ==
</TABLE>
The average number of employees of the company during the period was 5
(1997 - 4).
4. DIRECTORS' REMUNERATION
<TABLE>
<CAPTION>
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
000 000
------- ------
<S> <C> <C>
Emoluments ...................................................... 35 27
Pension contributions to money purchase pension schemes ......... 14 24
-- --
49 51
== ==
</TABLE>
During the period 2 directors (1997 -2 directors) participated in money
purchase pension schemes.
5. TAX ON PROFIT ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
000 000
------- ------
<S> <C> <C>
UK corporation tax ......... 52 38
== ==
</TABLE>
<PAGE>
6. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
FIXTURES
MOTOR AND COMPUTER
VEHICLES FITTINGS EQUIPMENT TOTAL
(POUNDS (POUNDS (POUNDS (POUNDS
STERLING) STERLING) STERLING) STERLING)
000 000 000 000
---------- ---------- ----------- ------
<S> <C> <C> <C> <C>
Cost
At 1 January 1998 ....................... 16 10 17 43
Additions ............................... 18 -- -- 18
-- -- -- --
At 30 June 1998 ......................... 34 10 17 61
-- -- -- --
Depreciation
At 1 January 1998 ....................... 10 4 8 22
Provided in the period .................. 4 1 2 7
-- -- -- --
At 30 June 1998 ......................... 14 5 10 29
-- -- -- --
Net book amount at 30 June 1998 ......... 20 5 7 32
== == == ==
Net book amount at 30 June 1997 ......... 7 7 11 25
== == == ==
</TABLE>
F-264
<PAGE>
TONY STEPHENS ASSOCIATES LIMITED
NOTES TO THE UNAUDITED INTERIM ACCOUNTS (CONTINUED)
AT 30 JUNE 1998
7. DEBTORS
<TABLE>
<CAPTION>
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
000 000
------- ------
<S> <C> <C>
Trade debtors .......................... 234 74
Loans to directors ..................... 100 --
Prepayments and accrued income ......... -- 10
--- --
334 84
=== ==
</TABLE>
8. CREDITORS: amounts falling due within one year
<TABLE>
<CAPTION>
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
000 000
------- ------
<S> <C> <C>
Trade creditors ......................... 221 254
Corporation tax ......................... 39 29
Social security and other taxes ......... 45 32
Other creditors ......................... 3 --
Dividend payable ........................ -- 16
--- ---
308 331
=== ===
</TABLE>
9. SHARE CAPITAL
<TABLE>
<CAPTION>
1998 1997
NO. NO.
------- ------
<S> <C> <C>
Authorised ordinary shares of
(pounds sterling)1 each ....................... 1,000 1,000
===== =====
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1998 1997
NO. NO. (POUNDS (POUNDS
STERLING) STERLING)
------ ------ ------ -----
<S> <C> <C> <C> <C>
Allotted, called up and full paid ordinary shares of
(pounds sterling)1 each .............................. 500 500 500 500
=== === === ===
</TABLE>
10. RESERVES
<TABLE>
<CAPTION>
PROFIT AND
LOSS ACCOUNT
(POUNDS
STERLING)
000
-------------
<S> <C>
At 1 January 1998 ...................... 19
Retained profit for the period ......... 66
--
At 30 June 1998 ........................ 85
==
</TABLE>
11. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
000 000
------- --------
<S> <C> <C>
Profit for the period ....................... 130 113
Dividends ................................... (64) (83)
--- ---
Net increase in shareholders' funds ......... 66 30
Shareholders' funds at 1 January ............ 20 11
--- ---
Shareholders' funds at 30 June .............. 86 41
=== ===
</TABLE>
F-265
<PAGE>
TONY STEPHENS ASSOCIATES LIMITED
NOTES TO THE UNAUDITED INTERIM ACCOUNTS (CONTINUED)
AT 30 JUNE 1998
12. LEASING COMMITMENTS
Operating lease payments amounting to (pounds sterling)8,319 (1997 -
(pounds sterling)8,719) are due within one year. The leases to which these
amounts relate expire as follows:
<TABLE>
<CAPTION>
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
000 000
------- ------
<S> <C> <C>
Between one and five years ......... 8 8
======= ======
</TABLE>
13. PENSIONS
Money Purchase Scheme
The company operates a money purchase pension scheme for the benefit of
the directors and senior employees. The assets of the scheme are administered
by trustees in a fund independent from those of the company.
14. NOTES TO THE STATEMENT OF CASH FLOWS
a) Reconciliation of operating profit to net cash inflow from operating
activities
<TABLE>
<CAPTION>
1998 1997
(POUNDS (POUNDS
STERLING) STERLING)
000 000
----------- --------
<S> <C> <C>
Operating profit ................................................. 177 148
Depreciation of tangible fixed assets ............................ 7 5
Profit on sale of tangible fixed assets .......................... (2) --
(Increase)/decrease in operating debtors and prepayments ......... (93) (23)
Increase/(decrease) in operating creditors and accruals .......... (3) (20)
------ ---
Net cash inflow from operating activities ........................ 86 110
===== ===
</TABLE>
b) Reconciliation of operating profit to net cash inflow from operating
activities
<TABLE>
<CAPTION>
AT AT
1 JANUARY 30 JUNE
1998 CASH FLOW 1998
(POUNDS (POUNDS (POUNDS
STERLING) STERLING) STERLING)
000 000 000
----------- ----------- --------
<S> <C> <C> <C>
Cash at bank and in hand ......... 129 (101) 28
=== ==== ==
</TABLE>
<PAGE>
15. RECONCILIATION TO US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(US GAAP)
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United Kingdom ("UK
GAAP"), which differ in certain respects from generally accepted accounting
principles in the United States ("US GAAP"). Such differences involve methods
for measuring the amounts shown in the financial statements as well as
additional disclosures required by US GAAP.
There are no material adjustments to profit for the year, cash flows and
shareholders' equity in applying the significant differences between UK and US
GAAP.
F-266
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
ProServ, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of ProServ,
Inc. and Subsidiaries as of December 31, 1996 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended December 31, 1996 and 1995. 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 ProServ, Inc.
and Subsidiaries as of December 31, 1996, and the consolidated results of their
operations and their cash flows for the years ended December 31, 1996 and 1995,
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Washington, D.C.
June 25, 1997
F-267
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1997
-------------- --------------
1996 (UNAUDITED)
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 168,295 $ 1,181,889
Restricted cash .............................................. -- 254,401
Accounts receivable, net ..................................... 3,241,184 4,099,189
Prepaid expenses and other current assets .................... 158,364 259,944
------------ ------------
Total current assets .......................................... 3,567,843 5,795,423
Property and equipment, net ................................... 468,444 450,949
Noncurrent accounts receivable ................................ 1,228,206 1,158,819
Other assets .................................................. 76,426 49,019
------------ ------------
Total assets .................................................. $ 5,340,919 $ 7,454,210
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of notes payable ............................. $ 900,000 $ 2,175,000
Accounts payable ............................................. 1,104,623 2,330,864
Accrued expenses ............................................. 1,003,968 554,250
Income tax payable ........................................... 48,290 156,207
Production rights payable .................................... 42,741 370,588
Accounts payable--clients .................................... -- 254,401
Deferred revenue ............................................. 659,386 1,098,213
Deferred income taxes ........................................ 259,000 259,000
------------ ------------
Total current liabilities ..................................... 4,018,008 7,198,523
Notes payable ................................................. 650,000 --
Deferred rent ................................................. 875,778 776,726
Minority interest ............................................. -- 24,683
------------ ------------
Total liabilities ............................................. 5,543,786 7,999,932
------------ ------------
Commitments and contingencies
Stockholders' deficit:
Class A preferred stock, $1,000 par value--2,000 shares
authorized; 600 shares issued and outstanding .............. 600,000 600,000
Common stock, $1.00 par value--20,000 shares authorized; 1,250
shares issued and outstanding .............................. 1,250 1,250
Additional paid-in capital ................................... 3,571,692 3,571,692
Unearned compensation ........................................ (341,369) (258,475)
Accumulated deficit .......................................... (4,232,051) (4,659,107)
Cumulative translation adjustment ............................ 197,611 198,918
------------ ------------
Total stockholders' deficit ................................... (202,867) (545,722)
------------ ------------
Total liabilities and stockholders' deficit ................... $ 5,340,919 $ 7,454,210
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-268
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------- -------------------------------
1996 1995 1997 1996
---------------- ---------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenue .............................. $ 13,387,810 $ 17,792,247 $6,438,343 $ 5,253,016
Operating expenses ............................. 10,130,353 11,926,379 4,739,531 4,872,175
General and administrative expenses ............ 5,000,927 6,581,388 1,921,300 2,481,005
Restructuring costs ............................ 565,000 -- -- --
Legal settlement ............................... -- 300,000 -- --
Loss on sublease ............................... -- 293,832 -- --
------------ ------------ ---------- ------------
Loss from operations ........................... (2,308,470) (1,309,352) (222,488) (2,100,164)
Interest expense, net .......................... 208,691 190,967 71,368 124,438
Equity in loss of joint venture ................ -- (6,927) -- --
Gain on sale of joint venture interest ......... -- 67,763 -- --
Minority interest .............................. -- -- 24,683 --
------------ ------------ ---------- ------------
Loss before income taxes ....................... (2,517,161) (1,439,483) (318,539) (2,224,602)
Provision (benefit) for income taxes ........... 239,824 (1,126) 108,517 2,003
------------ ------------ ---------- ------------
Net loss ....................................... $ (2,756,985) $ (1,438,357) $ (427,056) $ (2,226,605)
============ ============ ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-269
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN TREASURY
STOCK STOCK CAPITAL STOCK
----------- -------- ------------ --------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 ........ $600,000 $1,000 $ 248,041 $ (218,020)
Net loss ........................ -- -- -- --
Treasury stock reissued
under restricted
purchase ....................... -- -- -- 218,020
Amortization of unearned
compensation ................... -- -- -- --
Foreign currency
translation adjustment ......... -- -- -- --
-------- ------ ---------- ----------
Balance, December 31,
1995 ........................... 600,000 1,000 248,041 --
Net loss ........................ -- -- -- --
Issuance of stock options ....... -- -- 323,901 --
Issuance of common stock -- 250 2,999,750 --
Amortization of unearned
compensation ................... -- -- -- --
Foreign currency
translation adjustment ......... -- -- -- --
-------- ------ ---------- ----------
Balance, December 31,
1996 ........................... 600,000 1,250 3,571,692 --
Net loss (unaudited) ............ -- -- -- --
Amortization of unearned
compensation
(unaudited) .................... -- -- -- --
Foreign currency
translation adjustment
(unaudited) .................... -- -- -- --
-------- ------ ---------- ----------
Balance, June 30, 1997
(unaudited) .................... $600,000 $1,250 $3,571,692 $ --
======== ====== ========== ==========
<CAPTION>
CUMULATIVE
UNEARNED ACCUMULATED TRANSLATION
COMPENSATION DEFICIT ADJUSTMENT TOTAL
-------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 ........ $ (59,778) $ (36,709) $ 141,468 $ 676,002
Net loss ........................ -- (1,438,357) -- (1,438,357)
Treasury stock reissued
under restricted
purchase ....................... (218,020) -- -- --
Amortization of unearned
compensation ................... 164,937 -- -- 164,937
Foreign currency
translation adjustment ......... -- -- 107,332 107,332
---------- ------------ --------- -------------
Balance, December 31,
1995 ........................... (112,861) (1,475,066) 248,800 (490,086)
Net loss ........................ -- (2,756,985) -- (2,756,985)
Issuance of stock options ....... (323,901) -- -- --
Issuance of common stock -- -- -- 3,000,000
Amortization of unearned
compensation ................... 95,393 -- -- 95,393
Foreign currency
translation adjustment ......... -- -- (51,189) (51,189)
---------- ------------ --------- -------------
Balance, December 31,
1996 ........................... (341,369) (4,232,051) 197,611 (202,867)
Net loss (unaudited) ............ -- (427,056) -- (427,056)
Amortization of unearned
compensation
(unaudited) .................... 82,894 -- -- 82,894
Foreign currency
translation adjustment
(unaudited) .................... -- -- 1,307 1,307
---------- ------------ --------- -------------
Balance, June 30, 1997
(unaudited) .................... $ (258,475) $ (4,659,107) $ 198,918 $ (545,722)
========== ============ ========= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-270
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................ $ (2,756,985) $ (1,438,357)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation ...................................................... 181,048 152,349
Deferred income taxes ............................................. 77,000 (288,119)
Provision for bad debts ........................................... 537,820 385,616
Amortization of unearned compensation ............................. 95,393 164,937
Equity in loss of investee ........................................ -- 6,927
Gain on distribution from joint venture ........................... -- (67,763)
Realized gain on sale of marketable securities .................... -- (4,511)
Minority interest ................................................. -- --
Changes in assets and liabilities:
Restricted cash .................................................. (332,999) (31,886)
Accounts receivable .............................................. (256,278) 466,686
Income tax receivable ............................................ 83,175 143,959
Prepaid expenses and other current assets ........................ 233,664 (74,220)
Noncurrent accounts receivable ................................... 410,016 445,949
Other assets ..................................................... (6,202) 37,275
Accounts payable ................................................. (702,583) 212,128
Accrued expenses ................................................. 21,551 35,000
Income tax payable ............................................... (47,869) 96,159
Production rights payable ........................................ (12,573) (522,327)
Deferred revenue ................................................. (211,276) (1,109,279)
Deferred rent .................................................... (172,879) 263,036
Accounts payable-clients ......................................... 332,999 31,886
------------ ------------
Net cash (used in) provided by operating activities ............. (2,526,978) (1,094,555)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of marketable securities ......................... -- 216,590
Purchases of property and equipment ................................. (74,297) (142,609)
Investment in joint venture ......................................... (10,836) (89,164)
------------ ------------
Net cash used in investing activities ........................... (85,133) (15,183)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of capital stock ............................. 3,000,000 --
Proceeds from notes payable ......................................... 1,250,000 2,460,000
Payments on notes payable ........................................... (1,800,000) (1,822,500)
------------ ------------
Net cash provided by financing activities ....................... 2,450,000 637,500
------------ ------------
Effect of exchange rate changes on cash and cash equivalents ......... 47,626 30,090
------------ ------------
Increase (decrease) in cash and cash equivalents ..................... (114,485) (442,148)
Cash and cash equivalents, beginning of period ....................... 282,780 724,928
------------ ------------
Cash and cash equivalents, end of period ............................. $ 168,295 $ 282,780
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes, net of refunds .......... $ 127,518 $ 61,930
============ ============
Cash paid during the year for interest .............................. $ 224,461 $ 181,106
============ ============
Noncash investing and financing activities:
Issuance of treasury stock for restricted stock award ............... $ -- $ 218,020
============ ============
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1997 1996
-------------- ----------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................ $ (427,056) $ (2,226,605)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation ...................................................... 51,408 60,111
Deferred income taxes ............................................. -- --
Provision for bad debts ........................................... -- --
Amortization of unearned compensation ............................. 82,894 35,000
Equity in loss of investee ........................................ -- 10,836
Gain on distribution from joint venture ........................... -- --
Realized gain on sale of marketable securities .................... -- --
Minority interest ................................................. 24,683 --
Changes in assets and liabilities:
Restricted cash .................................................. (260,238) (303,193)
Accounts receivable .............................................. (964,658) (862,833)
Income tax receivable ............................................ -- 83,175
Prepaid expenses and other current assets ........................ (112,525) (63,933)
Noncurrent accounts receivable ................................... 69,387 --
Other assets ..................................................... (37,195) 13,791
Accounts payable ................................................. 1,466,375 1,798,750
Accrued expenses ................................................. (315,592) (278,124)
Income tax payable ............................................... 107,917 (16,754)
Production rights payable ........................................ 327,847 540,732
Deferred revenue ................................................. 442,410 840,737
Deferred rent .................................................... (99,052) (339,969)
Accounts payable-clients ......................................... 260,238 303,193
---------- ------------
Net cash (used in) provided by operating activities ............. 616,843 (405,086)
---------- ------------
Cash flows from investing activities:
Proceeds from sale of marketable securities ......................... -- --
Purchases of property and equipment ................................. (5,001) (14,770)
Investment in joint venture ......................................... -- (10,836)
---------- ------------
Net cash used in investing activities ........................... (5,001) (25,606)
---------- ------------
Cash flows from financing activities:
Proceeds from issuance of capital stock ............................. -- --
Proceeds from notes payable ......................................... 425,000 957,500
Payments on notes payable ........................................... -- --
---------- ------------
Net cash provided by financing activities ....................... 425,000 957,500
---------- ------------
Effect of exchange rate changes on cash and cash equivalents ......... (23,248) 1,194
---------- ------------
Increase (decrease) in cash and cash equivalents ..................... 1,013,594 528,002
Cash and cash equivalents, beginning of period ....................... 168,295 282,780
---------- ------------
Cash and cash equivalents, end of period ............................. $1,181,889 $ 810,782
========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes, net of refunds .......... $ -- $ --
========== ============
Cash paid during the year for interest .............................. $ 71,368 $ 124,438
========== ============
Noncash investing and financing activities:
Issuance of treasury stock for restricted stock award ............... $ -- $ --
========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-271
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
ProServ, Inc. and Subsidiaries (the Company) is an international
corporation operating as one segment in the business of sports marketing. The
Company provides career management and advisory services to professional
athletes and also engages in sports event management and promotion, production
and distribution of television sports broadcasting, and corporate sports
consulting. The Company conducts its business principally in North America and
Europe.
The Company experienced negative cash flow from operations during the
years ended December 31, 1996 and 1995, and the Company has been reliant on
financing activities to fund its operations. As further described in Note 4,
the Company has certain lines of credit available to fund working capital
through May 31, 1998. In management's opinion, the Company has sufficient
financing available to meet its current obligations as they come due.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company's wholly-owned subsidiaries and a partially owned subsidiary in which
the Company has a controlling financial interest through its direct and
indirect ownership. The following entities are included in the consolidated
financial statements:
o ProServ, Inc.
o ProServ Europe
o ProServ, U.K.
o ProServ Financial Services, Inc.
o ProServ Television, Inc.
The above subsidiaries are wholly-owned except for ProServ Television,
Inc. (ProServ TV), which is 49% owned by the Company and 51% owned by an
officer/majority shareholder of the Company. The 51% ownership is accounted for
as a minority interest in the accompanying consolidated financial statements.
As of December 31, 1996, there was no minority interest liability. All
significant intercompany balances and transactions have been eliminated in
consolidation.
INVESTMENT IN JOINT VENTURE
The Company accounts for its investment in joint venture (see Note 10)
under the equity method. Under this method, the original investment is recorded
at cost and adjusted by the Company's share of undistributed earnings of the
joint venture. The investment balance is further adjusted for additional
investments in and cash distributions from the joint venture.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
F-272
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company's revenues arise primarily from a percentage fee or
commissions received for performing services. The Company recognizes revenue
when services have been performed. Fees or commissions collected in advance for
services to be performed in subsequent years are recorded on the accompanying
consolidated balance sheets as deferred revenue. Deferred revenue is recognized
when the event is held or the Company's client performs under the related
contract. Revenue associated with television event production is recorded net
of fees payable to the related events. All recognized but unpaid fees are
included in the accompanying consolidated balance sheets as production rights
payable. The Company manages or represents various sporting events and has an
ownership interest in certain of these events. Revenues and expenses from these
events are recognized on the accrual basis.
CASH EQUIVALENTS
Short-term investments with an original maturity of three months or less
are considered to be cash equivalents.
RESTRICTED CASH
The Company collects endorsement fees, special appearance fees, and
tournament earnings on behalf of its clients. These funds are held in separate
bank accounts pending disbursement to the individual clients. These cash
balances are reflected separately on the accompanying consolidated balance
sheets as restricted cash with a corresponding accounts payable to clients.
ACCOUNTS RECEIVABLE
Accounts receivable are recorded net of an allowance for doubtful accounts
of $577,650 and $569,559 at December 31, 1996 and June 30, 1997, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents
and accounts receivable. The Company deposits its cash and cash equivalents in
two financial institutions which are insured by the Federal Depository
Insurance Corporation (FDIC). The Company has not experienced any losses on
these balances to date. In addition, the Company maintains a repurchase
agreement with one of the financial institutions, in which excess funds are
deposited by the financial institution in an overnight investment account. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific clients, historical trends and other
information.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, restricted cash, accounts receivable, notes payable and accounts
payable approximate fair value as of December 31, 1996 because of the
relatively short maturity of these instruments. The carrying value of
noncurrent receivables approximates fair value as of December 31, 1996 based on
discounted future cash flows using a discount rate that approximates the
current interest rate available from the Company's financial institutions.
F-273
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from five to fifteen years. Leasehold improvements are amortized over
the remaining lease term using the straight-line method. Upon retirement or
disposition of property and equipment, the cost and accumulated depreciation
are removed from the accounts and any resulting gain or loss is reflected in
operations.
INCOME TAXES
ProServ, Inc. and ProServ Financial Services, Inc. file a consolidated
Federal income tax return. ProServ TV files separate Federal and state returns
and ProServ Europe and ProServ U.K. file separate tax returns in their
respective tax jurisdictions. The Company accounts for income taxes utilizing
the liability method. Deferred income taxes are recognized for the tax
consequences in future years for differences between the tax bases of assets
and liabilities and their financial reporting amounts at each year end, based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes is the current tax
expense for the period plus the change during the period in deferred tax assets
and liabilities.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 123 is effective for the year
ended December 31, 1996. SFAS 123 permits companies to account for stock based
compensation based on the provisions prescribed in SFAS 123 or based on the
authoritative guidance in Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees." The Company has elected to
continue to account for its stock based compensation in accordance with APB 25,
however, as required by SFAS 123, the Company has disclosed the pro forma
impact on the financial statements assuming the recognition provisions of SFAS
No. 123 had been adopted.
CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiaries are
translated at the exchange rates in effect on the reporting date and revenues
and expenses are translated at the weighted average exchange rate in effect
during the period. Adjustments resulting from these translations are included
as a separate component of stockholders' equity.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information as of June 30, 1997 and for the six
months ended June 30, 1997 and 1996 is unaudited. The unaudited interim
financial statements reflect, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to fairly present
the results of operations, changes in cash flows and financial position as of
and for the periods presented. The unaudited interim financial information
should be read in conjunction with the audited financial statements and related
notes thereto. The results for the interim periods presented are not
necessarily indicative of results to be expected for the full year.
F-274
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 IS UNAUDITED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
Office equipment ........................................ $ 1,651,915 $ 1,570,645
Leasehold improvements .................................. 264,639 225,351
Tape library ............................................ 229,813 229,813
------------ ------------
2,146,367 2,025,809
Less: accumulated depreciation and amortization ......... (1,677,923) (1,574,860)
------------ ------------
$ 468,444 $ 450,949
============ ============
</TABLE>
Depreciation and amortization expense was $181,048 and $152,349 for the
years ended December 31, 1996 and 1995, respectively and $51,408 and $60,111 for
the six months ended June 30, 1997 and 1996, respectively.
3. NONCURRENT ACCOUNTS RECEIVABLE
Noncurrent accounts receivable include certain contractually earned amounts
for which there is no future performance required by the Company and outstanding
loans that will not be collected within one year from the balance sheet date.
Amounts to be collected during the twelve months subsequent to December 31, 1996
are included in accounts receivable. The noncurrent accounts receivable are
reflected at the present value of future receipts based on the discount rate
prevailing on the date upon which the earnings process is complete and are
recorded net of an unamortized discount of approximately $872,000 and $837,000
as of December 31, 1996 and June 30, 1997, respectively. Interest resulting from
the amortization of the discount, which is included in operating revenues, was
approximately $80,000 and $129,000 for the years ended December 31, 1996 and
1995, respectively and approximately $35,000 and $50,000 for the six months
ended June 30, 1997 and 1996, respectively. Based on the present value at
December 31, 1996 of future cash receipts, the noncurrent accounts receivable
will be realized over the next five years and thereafter as follows as of
December 31, 1996 and June 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
1997 .......................... $ 482,559 $ 482,559
1998 .......................... 534,836 465,449
1999 .......................... 52,695 52,695
2000 .......................... 11,724 11,724
2001 .......................... 12,566 12,566
Thereafter .................... 616,385 616,385
---------- ----------
1,710,765 1,641,378
Less: current portion ......... (482,559) (482,559)
---------- ----------
Total ........................ $1,228,206 $1,158,819
========== ==========
</TABLE>
F-275
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 IS UNAUDITED)
4. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
Lines of credit ............... $1,450,000 $ 2,150,000
Term notes payable ............ 100,000 25,000
---------- ------------
Total notes payable .......... 1,550,000 2,175,000
Less: current portion ......... (900,000) (2,175,000)
---------- ------------
Noncurrent portion ........... $ 650,000 $ --
========== ============
</TABLE>
LINES OF CREDIT
The Company maintains three lines of credit providing an aggregate working
capital facility of $1,850,000 and $2,100,000 at December 31, 1996 and June 30,
1997, respectively, of which $1,450,000 and $1,950,000 was outstanding as of
December 31, 1996 and June 30, 1997, respectively. Specific descriptions of
these lines of credit are set forth below.
The Company maintains two of its lines of credit with one financial
institution for an aggregate working capital facility of up to $1,100,000.
Total amounts outstanding under these lines of credit were $700,000 and
$1,100,000 at December 31, 1996 and June 30, 1997, respectively. Interest
payments are due monthly on these facilities at the bank's prime rate (8.25% at
December 31, 1996 and 8.5% at June 30, 1997). These lines of credit are
collateralized by substantially all of the Company's assets and certain future
contract rights and are guaranteed by a shareholder of the Company. One of the
lines maintained by ProServ TV is also guaranteed by ProServ, Inc. The line of
credit agreements contain certain restrictive covenants, including a minimum
cash flow coverage requirement, a minimum net worth requirement and
restrictions on incurring additional indebtedness and issuing shares of common
stock. As of December 31, 1996, the Company was not in compliance with these
covenants but received a waiver from the bank related to each covenant
violation. These facilities expired on May 31, 1997. On June 17, 1997, the
Company renegotiated these lines of credit. The lines were combined into one
$1,100,000 line of credit with a maturity date of May 31, 1998. The revised
line of credit agreement requires a principal payment of $550,000 on the
earlier of October 15, 1997 or the closing of a definitive purchase and sale
agreement (the Agreement) between the majority shareholder of the Company and
The Marquee Group (see Note 10) and a principal payment on the earlier of
October 30, 1997 or 15 days after the closing of the Agreement. All other terms
of the previous lines of credit remain the same.
The Company has an additional line of credit at another bank that provides
for a working capital facility of up to $750,000 and $1,000,000 at December 31,
1996 and June 30, 1997, respectively, of which $750,000 and $850,000 was
outstanding as of December 31, 1996 and June 30, 1997, respectively. Interest
payments were due monthly on this facility at the prime rate as published in
the Wall Street Journal (8.25% at December 31, 1996 and 9.5% at June 30, 1997).
This line of credit expired on December 31, 1996. The Company subsequently
renegotiated this line of credit, and the resulting new terms include a
scheduled principal payment of $150,000 on or before September 30, 1997 with
the remaining outstanding balance due May 31, 1998. The terms of the
renegotiated line of credit terms included an increase in the maximum principal
available on the line of credit to $1,000,000 and an increased interest rate of
prime (as published in the Wall Street Journal) plus 1%. This line is
collateralized by the rights to the Company's earnings generated by an
agreement related to a specific Company sponsored event, earnings generated
from certain ongoing management contracts, the rights to certain cash flow
generated from the Company's team sports operations and certain royalties
F-276
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 IS UNAUDITED)
4. NOTES PAYABLE (CONTINUED)
received by the Company pursuant to a specific contract. The line is also
guaranteed by a shareholder of the Company. The line contains certain
restrictive covenants, including a requirement that the Company maintain thirty
consecutive days with a zero balance on this line. The Company was not in
compliance with this covenant as of December 31, 1996, but received a waiver
from the bank related to this covenant violation.
During 1996, the Company borrowed an additional $482,500 from this
financial institution. Interest payments were due monthly on this facility at
the prime rate (as published in the Wall Street Journal) plus 2%. This loan was
repaid in full during July 1996.
The majority shareholder of the Company also entered into a line of credit
agreement with a third financial institution during 1996. This line provides
the Company with up to $600,000 in borrowings, none of which was outstanding at
December 31, 1996 and $200,000 of which was outstanding at June 30, 1997.
Interest payments are due monthly at the bank's prime rate (8.50% at December
31, 1996 and 9% at June 30, 1997) plus .50%, and this line expired July 31,
1997. This line is collateralized by the majority shareholder's primary
residence. The line was subsequently renewed through December 31, 1997 with all
of the terms remaining the same.
The weighted average interest rate on short term borrowings was
approximately 8.75% and
9.25% for the years ended December 31, 1996 and 1995, respectively and
approximately 9% and 8.5% for the six months ended June 30, 1997 and 1996,
respectively.
TERM NOTES PAYABLE
The Company maintains a term note payable with a financial institution
with quarterly principal payments and monthly interest payments at the bank's
prime rate (8.25% at December 31, 1996). The note is collateralized by
substantially all of the Company's assets as well as certain future contract
rights and is guaranteed by a shareholder of the Company. This note expired on
July 31, 1997 and was repaid in full at that time. The term notes payable
agreement contained certain restrictive covenants including a minimum cash flow
coverage requirement, a minimum net worth requirement, and restrictions on
incurring additional indebtedness and issuing common stock. As of December 31,
1996, the Company was not in compliance with these covenants but received a
waiver from the bank related to each covenant violation.
5. INCOME TAXES
The components of the provision (benefit) for income taxes were as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- ----------------------
1996 1995 1997 1996
----------- ------------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal ......... $123,116 $ 220,340 $ 74,117 $1,903
State ........... 39,708 41,313 13,100 100
Foreign ......... -- 25,340 21,300 --
-------- ---------- -------- ------
162,824 286,993 108,517 2,003
-------- ---------- -------- ------
Deferred
Federal ......... -- (276,119) -- --
State ........... -- (12,000) -- --
Foreign ......... 77,000 -- -- --
-------- ---------- -------- ------
77,000 (288,119) -- --
-------- ---------- -------- ------
Total .......... $239,824 $ (1,126) $108,517 $2,003
======== ========== ======== ======
</TABLE>
F-277
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 IS UNAUDITED)
5. INCOME TAXES (CONTINUED)
Although the Company has a loss before income taxes on a consolidated
basis for the years ended December 31, 1996 and 1995, ProServ TV has generated
taxable income for both of those years, giving rise to the current provision.
The Company's consolidated provision (benefit) for income taxes differs from
the provision (benefit) that would have resulted from applying the federal
statutory rates to net income before taxes. The reasons for these differences
are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- ------------------------------
1996 1995 1997 1996
-------------- -------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
(Benefit) provision based upon Federal
statutory rate of 34% ................. $ (855,835) $ (489,424) $ (99,911) $ (756,365)
State tax provision--ProServ TV ......... 20,000 28,432 13,000 --
IRS contingency (see Note 7) ............ -- 57,000 -- --
Increase in deferred tax asset valuation
allowance ............................. 1,054,000 312,000 220,000 746,868
French tax audit (see Note 7) ........... 77,000 -- -- --
Other ................................... (55,341) 90,866 24,572 11,500
---------- ---------- --------- ----------
$ 239,824 $ (1,126) $ 108,517 $ 2,003
========== ========== ========= ==========
</TABLE>
The sources and tax effects of temporary differences which give rise to
deferred tax assets (liabilities) are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ......... $ 1,244,000 $ 1,464,000
AMT credit carryforwards ................. 109,000 109,000
Deferred rent ............................ 333,000 310,000
Accrued liabilities ...................... 302,000 300,000
Foreign tax credit carryforwards ......... 360,000 360,000
------------ ------------
2,348,000 2,543,000
Less: valuation allowance ................ (1,726,000) (1,946,000)
------------ ------------
Total deferred tax assets ................ 622,000 597,000
------------ ------------
Deferred tax liabilities:
Property and equipment ................... (80,000) (80,000)
Accounts receivable ...................... (535,000) (510,000)
IRS contingency .......................... (182,000) (182,000)
French Tax Audit ......................... (77,000) (77,000)
Other .................................... (7,000) (7,000)
------------ ------------
Total deferred tax liabilities ........... (881,000) (856,000)
------------ ------------
Net deferred tax liability ............... $ (259,000) $ (259,000)
============ ============
</TABLE>
As of December 31, 1996 and June 30, 1997, the Company had foreign tax
credit carryforwards (FTC's) of $360,000 expiring in 1997. Utilization of the
FTC's is subject to certain limitations, including the generation of future
foreign source taxable income, the effective tax rate on such income and the
amount of future U.S. taxable income. Based on the expiration of the FTC's in
1997, their recoverability is doubtful; therefore, a valuation allowance has
been established for the full amount of these FTC's at December 31, 1996 and
June 30, 1997. The $1,054,000 and $320,000 increases in the valuation allowance
at December 31, 1996 and June 30, 1997, respectively, relate primarily to the
Company's net operating loss carryforwards generated during 1996 and 1997.
F-278
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 IS UNAUDITED)
5. INCOME TAXES (CONTINUED)
The Company has approximately $3,054,000 in domestic net operating loss
carryforwards and approximately $220,000 in foreign net operating loss
carryforwards. The realizability of the deferred tax asset generated from these
operating loss carryforwards is dependent upon future taxable income generated
by the entity to which the operating loss carryforwards relate. The Company's
net operating loss carryforwards expire as follows:
<TABLE>
<S> <C>
2010 ................ $1,324,000
2011 ................ 1,950,000
----------
$3,274,000
==========
</TABLE>
6. RESTRUCTURING COSTS
During 1996, the Company incurred $565,000 in restructuring costs related
to closing down the Paris office of ProServ Europe. Included in these costs
were approximately $432,000 in severance, resulting from the termination of 16
employees and $133,000 in other miscellaneous costs. There were no significant
accrued expenses resulting from this restructuring included in the consolidated
balance sheet as of December 31, 1996.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company rents all of its space under operating leases, primarily a
twelve-year lease that expires in May 2001. The terms of this lease included a
waiver of rental payments for the first year of the lease term and scheduled
rent increases at specified intervals during the twelve year term of the lease.
The Company is recognizing rent expense on a straight-line basis over the life
of the lease, giving rise to deferred rent. The rental payments prescribed in
the lease are also subject to changes resulting from changes in the consumer
price index. During 1995, the Company entered into an agreement with the lessor
resulting in a reduction of the space under lease and a corresponding reduction
in annual rental payments. In connection with this agreement and in connection
with a sublease entered into during 1995, the Company recorded a non-cash loss
of $293,832 in the consolidated statement of operations for the year ended
December 31, 1995. The loss reflects the Company's future lease commitments for
space for which no future benefit to the Company is anticipated. Aggregate
future minimum rental payments, net of noncancelable subleases, greater than
one year as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
RENTAL SUBLEASE
PAYMENTS INCOME NET
------------- ----------- -------------
<S> <C> <C> <C>
1997 ......... $ 825,501 $169,057 $ 656,444
1998 ......... 838,869 182,511 656,358
1999 ......... 847,086 186,161 660,925
2000 ......... 844,548 189,884 654,664
2001 ......... 351,895 80,166 271,729
---------- -------- ----------
$3,707,899 $807,779 $2,900,120
========== ======== ==========
</TABLE>
Rent expense, net of sublease income of $160,902 and $11,572, was $740,444
and $1,321,612 for the years ended December 31, 1996 and 1995, respectively.
Rent expense, net of sublease income of $81,612 and $74,870, was $244,553 and
$305,305 for the six months ended June 30, 1997 and 1996, respectively.
F-279
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain key
officers of the Company. These employment agreements set forth salary terms and
provide for the issuance of restricted common stock of the Company that will be
released to the officers at specified dates if the officers remain with the
Company. Unearned compensation, representing the difference between the price
of the restricted stock issued to the officers and the estimated fair value of
the stock on the effective date of the agreements, is amortized over the stated
period of performance. Amortization of unearned compensation, which represents
a non-cash charge, was $95,393 and $164,937 for the years ended December 31,
1996 and 1995, respectively, and $82,894 and $35,000 for the six months ended
June 30, 1997 and 1996, respectively.
During 1996, one of the employment agreements with an officer of the
Company was revised. The terms of this revised agreement include a reduction in
the period of performance associated with the restricted common stock mentioned
above and certain cash bonus provisions based on the achievement of specific
criteria set forth in the agreement. Additionally, the officer was granted
options to purchase 50 shares of the Company's common stock at an exercise
price of $2,585 per share. Twenty-five of these options will vest on December
31, 1997 and the remaining 25 options will vest on December 31, 1998. All 50
options were outstanding and there were none exercisable as of December 31,
1996. The fair value of these options, which was determined using the
Black-Scholes Valuation method, was $10,042 per share on the date of grant, and
the assumptions used to estimate the fair value were as follows: risk-free
interest rate 5.71%; expected term of 5 years; expected volatility of 0%; and
dividend yield of 0%. The remaining contractual life of these options was 4.8
years as of December 31, 1996. Had the recognition provisions of SFAS 123 been
implemented and this compensation cost recorded based on the fair value of the
stock options at the date of grant, the Company's net loss would have been
$2,771,000 for the year ended December 31, 1996.
Subsequent to December 31, 1996, an employment agreement with a second key
officer was revised. This revised employment agreement included the grant of
new options to purchase 30 shares of the Company's common stock that will vest
at specified dates in 1997 and 1998 based on the achievement of certain
performance criteria.
OTHER
In the normal course of business, the Company enters into certain
contracts in which specified revenue levels are guaranteed to its clients. Any
material known future losses related to these guarantees are recorded in the
period in which the losses are determined.
CONTINGENCIES
The Company was a party to a suit filed by a former client alleging legal
and investment advisory wrongdoing on the part of the Company and several other
named parties. Pursuant to an agreement dated May 28, 1996, the Company and the
other named parties reached a settlement with the former client. Under the
terms of the agreement, the Company is required to pay $300,000 in aggregate
from March 1997 through March 1999 in three annual installments. Additionally,
the Company could be liable for recapture taxes due by the former client on any
passive income to be generated by certain of the investments in question. The
Company's potential liability related to these recapture taxes is not presently
estimable. The Company's payments related to this settlement agreement are
guaranteed by a shareholder of the Company. As a result of the settlement
agreement, the Company recorded a one-time expense of $300,000 in the
consolidated statement of operations for the year ended December 31, 1995. The
related liability is recorded in accrued expenses as of December 31, 1996 and
June 30, 1997.
F-280
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company, a former employee (current business associate) and a former
client have been named as defendants in a lawsuit, in which the plaintiff
alleges that the Company's former client breached a contract to act in a motion
picture and that the Company and the former employee tortiously interfered with
the former client's contractual relations to the plaintiff. The Company, the
former employee and its former client have each filed motions for summary
judgment, requesting the dismissal of the complaint. The Company is not
presently able to determine the likelihood of any exposure resulting from this
lawsuit.
The Company, a former employee (current business associate) and a client
are defendants in a lawsuit. The plaintiff alleges that the Company's client
breached a contract to act in a motion picture and the former employee (current
business associate) and the Company tortiously interfered with the client's
contractual relations with the plaintiff. The plaintiff seeks unspecified
damages. The parties are engaging in discovery. The Company is not presently
able to determine the likelihood of any exposure resulting from this lawsuit.
In connection with examinations of the consolidated federal tax returns of
ProServ, Inc. and ProServ Financial Services, Inc. for the years 1990 through
1993, the Internal Revenue Service (IRS) has raised questions regarding the tax
treatment of certain significant transactions. Although the Company believes it
has valid defenses to defeat any tax assessment, the Company has accrued
$182,000, reflected in deferred income taxes (see Note 5), for this
contingency, representing the best estimate of the exposure to the Company as
of December 31, 1996 and June 30, 1997.
The French taxing authorities are conducting an audit of ProServ Europe's
tax returns for the years 1993 through 1995. The Company has accrued $77,000,
reflected in deferred income taxes (see Note 5), for this contingency,
representing the best estimate of the exposure to the Company as of December
31, 1996 and June 30, 1997.
In the normal course of business, the Company is involved in various
lawsuits. Management is of the opinion that any liability or loss resulting
from such litigation will not have a material adverse effect on the
consolidated financial statements.
8. EMPLOYEE BENEFIT PLAN
The Company sponsors a qualified defined contribution plan under section
401(k) of the Internal Revenue Code. The defined contribution plan enables all
full time employees who have completed one year of service with the Company to
make voluntary contributions to the plan of up to 15% of their compensation not
to exceed the dollar limits prescribed by the IRS. Additional contributions to
be made by the Company are prescribed in the Plan, subject to certain
limitations. The Company's expense related to the plan totaled approximately
$35,000 and $45,000 for the years ended December 31, 1996 and 1995,
respectively.
9. AGREEMENT AND MEMORANDUM OF UNDERSTANDING
In January 1992, an Agreement and Memorandum of Understanding was executed
with a former officer of the Company under which the former officer represents,
through a separate company, certain former clients of the Company. Under the
terms of the agreements, the revenue on certain playing and endorsement
contracts was divided between the companies based on varying percentages and
terms, including dates of execution, renegotiations and renewals of such
playing and endorsement contracts. Net revenue recognized under this agreement
was approximately $694,000 and $1,228,000 for the years ended December 31, 1996
and 1995, respectively and $81,000 and $184,000 for the six months ended June
30, 1997 and 1996, respectively.
F-281
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 IS UNAUDITED)
10. INVESTMENT IN JOINT VENTURE
On March 30, 1995, the Company and a former executive of the Company
formed a corporate joint venture to produce sports and entertainment events for
television. Under the terms of the original joint venture agreement, the
Company invested $48,000 in cash, certain contracts and events with a fair
value of $400,000, and $52,000 in professional service, valued at cost, to be
contributed over a one year period, collectively representing a 50% interest in
the joint venture. The fair value of the contracts and events was agreed upon
by both original shareholders of the joint venture. As of December 31, 1996 and
1995, the Company had incurred $52,000 and $41,000, respectively, of the
professional services as part of the Company's investment in the joint venture.
In December 1995, the joint venture entered into an agreement with a third
investor for the purchase of a 20% ownership interest in the joint venture for
$550,000 in cash. The agreement stipulated that each previously existing
shareholder in the joint venture would receive a $150,000 payment as a result
of this cash infusion. Upon completion of this transaction, the Company's
interest in the joint venture was reduced to 40%
The Company's basis in the contracts and events that were contributed to
the joint venture was $0 upon the initial contribution. The Company is
amortizing the resulting basis difference over the seven year estimated life of
the related contracts and events.
The joint venture allocates and distributes income and losses in
proportion to each shareholders' percentage ownership. The following represents
a rollforward of the investment in joint venture for the years ending December
31, 1996 and 1995:
<TABLE>
<S> <C> <C>
Balance, January 1, 1995 ..................... $ --
Cash investment .............................. 48,000
Professional services ........................ 41,164
Equity in loss of investee:
Share of investee net loss .................. (52,165)
Amortization of basis difference ............ 45,238
-------
(6,927)
Reduction of investment based on sale of joint
venture interest ............................ (82,237)
---------
Balance, December 31, 1995 ................... --
Professional services ........................ 10,836
Equity in loss of investee:
Amortization of basis difference ............ 57,142
Share of investee net loss .................. (67,978)
-------
(10,836)
---------
Balance December 31, 1996 .................... $ --
=========
</TABLE>
The Company's proportionate share of the joint venture's net loss for the
year ended December 31, 1996 and the six month period ended June 30, 1997 was
approximately $72,000 and $89,000, respectively; however, since the investment
in joint venture balance is $0, these losses were only recognized to the extent
of the amortization of the basis difference in the contracts and events and the
professional services contributed to the joint venture.
F-282
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 IS UNAUDITED)
10. INVESTMENT IN JOINT VENTURE (CONTINUED)
Summarized unaudited financial information of the joint venture are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------- ---------------------------------
1996 1995 1997 1996
--------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Operating revenues ........... $ 910,000 $ 505,000 $ 828,000 $ 713,000
Operating expenses ........... (1,090,000) (609,000) (1,051,000) (1,039,000)
------------ ----------- ------------ ------------
Net loss ..................... $ (180,000) $ (104,000) $ (223,000) $ (326,000)
============ =========== ============ ============
BALANCE SHEET
Total assets ................. $ 1,266,000 $ 904,000
Total liabilities ............ (301,000) (132,000)
------------ ------------
Shareholders' equity ......... $ 965,000 $ 772,000
============ ============
</TABLE>
11. FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Operating revenue, (loss) income from operations and identifiable assets
for the Company's North America and European operations are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------------- --------------------------------
1996 1995 1997 1996
---------------- ---------------- ------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenue
North America .............. $ 10,910,000 $ 14,551,000 $5,472,071 $ 4,369,182
Europe ..................... 2,478,000 3,241,000 966,272 883,834
------------ ------------ ---------- ------------
Total .................... $ 13,388,000 $ 17,792,000 $6,438,343 $ 5,253,016
============ ============ ========== ============
(Loss) income from operations
North America .............. $ (1,465,000) $ (1,421,000) $ (257,554) $ (1,337,216)
Europe ..................... (843,000) 112,000 35,066 (762,948)
------------ ------------ ---------- ------------
Total .................... $ (2,308,000) $ (1,309,000) $ (222,488) $ (2,100,164)
============ ============ ========== ============
Identifiable assets
North America .............. $ 4,786,000 $ 5,384,000 $5,598,000
Europe ..................... 555,000 1,604,000 1,856,000
------------ ------------ ----------
Total .................... $ 5,341,000 $ 6,988,000 $7,454,000
============ ============ ==========
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
The majority shareholder of the Company has entered into a Purchase and
Sale Agreement dated as of June 25, 1997 with The Marquee Group, Inc.
("Marquee"), pursuant to which he has agreed to sell 70.4% of the outstanding
common stock and 100% of the outstanding preferred stock of ProServ, Inc. and
51% of the outstanding capital stock of ProServ TV, the remainder of which is
owned by ProServ, Inc. Pursuant to the agreement, the aggregate purchase price
is $6.5 million, subject to certain adjustments, and 250,000 shares of common
stock of Marquee. The majority shareholder of the Company has the option to
receive the $6.5 million in cash or $3.5 million in cash and a $3.0 million
promissory note payable on January 2, 1998. In June 1997, Marquee deposited
$1.5 million, in escrow,
F-283
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 IS UNAUDITED)
12. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
as a down payment of the purchase price to secure its obligations under the
purchase agreement. In August 1997, the agreement was amended to permit Marquee
to replace its down payment with a $1.5 million letter of credit delivered to
the majority shareholder of the Company.
Marquee has also entered into a Stock Purchase Agreement dated as of July
2, 1997 (the "Non-Employee Stock Purchase Agreement") with the holder of 250
shares of the Company's common stock, pursuant to which Marquee has agreed to
purchase the shares held for an aggregate purchase price of $3.0 million. The
consummation of the purchase will take place concurrently with the consummation
of the purchase of the majority shareholders' shares.
Marquee has also entered into agreements with William J. Allard, the
president and chief operating officer of the Company, and two other officers of
the Company, pursuant to which Marquee has agreed to purchase an aggregate of
120 shares of the Company's Common Stock and options to purchase an aggregate
of 70 shares of the Company's Common Stock for an aggregate purchase price of
$1.3 million.
F-284
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholder
of QBQ Entertainment, Inc.
We have audited the accompanying balance sheet of QBQ Entertainment, Inc.
as of December 31, 1996, and the related statements of operations,
stockholder's equity (deficiency) and cash flows for each of the two years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of QBQ Entertainment, Inc. as
of December 31, 1996, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note 3 to the financial statements, the Company changed
its method of computing rent expense and depreciation and amortization of
property and equipment in 1995.
David Berdon & Co. LLP
New York, New York
June 13, 1997
F-285
<PAGE>
QBQ ENTERTAINMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
------------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................... $ 323,237 $1,243,145
Accounts receivable ......................................... 27,634 39,880
Prepaid expenses ............................................ 6,070 5,189
Loan receivable--stockholder ................................ 60,936 33,820
--------- ----------
TOTAL CURRENT ASSETS ...................................... 417,877 1,322,034
PROPERTY AND EQUIPMENT--NET .................................. 82,235 69,391
CASH--RESTRICTED ............................................. 17,554 16,287
--------- ----------
$ 517,666 $1,407,712
========= ==========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accrued expenses and other liabilities ...................... $ 130,005 $ 84,774
Loan payable--bank .......................................... 170,000 --
Clients' deposits payable ................................... 266,610 1,049,651
--------- ----------
TOTAL CURRENT LIABILITIES ................................. 566,615 1,134,425
--------- ----------
DEFERRED LEASE OBLIGATION .................................... 10,736 6,709
--------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY (DEFICIENCY)
Common stock--no par value; 100 shares authorized, issued and
outstanding ............................................... 100 100
Additional paid-in capital .................................. 900 900
Accumulated earnings (losses) ............................... (60,685) 265,578
--------- ----------
TOTAL STOCKHOLDER'S EQUITY (DEFICIENCY) ................... (59,685) 266,578
--------- ----------
$ 517,666 $1,407,712
========= ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-286
<PAGE>
QBQ ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------- ------------------------------
1996 1995 1997 1996
------------- ------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Commissions ............................ $1,358,922 $1,495,245 $1,013,115 $ 468,137
---------- ---------- ---------- ----------
EXPENSES
Operating .............................. 274,224 299,484 126,963 122,671
General and administrative ............. 930,815 1,071,657 457,246 437,433
Depreciation and amortization .......... 38,043 49,398 12,844 28,212
---------- ---------- ---------- ----------
TOTAL EXPENSES ....................... 1,243,082 1,420,539 597,053 588,316
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS ........... 115,840 74,706 416,062 (120,179)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income ........................ 12,329 13,764 7,863 4,901
Interest expense ....................... (24,329) (1,797) (5,404) (19,663)
Gain on sale of automobile ............. -- -- 25,000 --
---------- ---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) ......... (12,000) 11,967 27,459 (14,762)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME
TAXES .................................. 103,840 86,673 443,521 (134,941)
PROVISION FOR STATE AND
LOCAL INCOME TAXES ..................... 12,521 15,140 41,680 120
---------- ---------- ---------- ----------
NET INCOME (LOSS) ....................... $ 91,319 $ 71,533 $ 401,841 $ (135,061)
========== ========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-287
<PAGE>
QBQ ENTERTAINMENT, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL ACCUMULATED
NUMBER OF PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (LOSSES) TOTAL
----------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE--JANUARY 1, 1995 as
previously reported ................... 100 $100 $900 $ 193,484 $ 194,484
Prior period adjustments ............... -- -- -- (41.410) (41,410)
--- ---- ---- ---------- ----------
BALANCE--JANUARY 1, 1995 as
restated .............................. 100 100 900 152,074 153,074
Net income for the year ended
December 31, 1995 ..................... -- -- -- 71,533 71,533
Distribution to stockholder ............ -- -- -- (282,033) (282,033)
--- ---- ---- ---------- ----------
BALANCE--DECEMBER 31, 1995 ............. 100 100 900 (58,426) (57,426)
Net income for the year ended
December 31, 1996 ..................... -- -- -- 91,319 91,319
Distribution to stockholder ............ -- -- -- (93,578) (93,578)
--- ---- ---- ---------- ----------
BALANCE--DECEMBER 31, 1996 ............. 100 100 900 (60,685) (59,685)
Net income for the six months ended June
30, 1997 .............................. -- -- -- 401,841 401,841
Distribution to stockholder ............ -- -- -- (75,578) (75,578)
--- ---- ---- ---------- ----------
BALANCE--JUNE 30, 1997
(Unaudited) ........................... 100 $100 $900 $ 265,578 $ 266,578
=== ==== ==== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-288
<PAGE>
QBQ ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- ----------------------------
1996 1995 1997 1996
------------ ------------ ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................... $ 91,319 $ 71,533 $ 401,841 $ (135,061)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization .................... 38,043 49,398 12,844 28,212
(Gain) on sale of automobile ..................... -- -- (25,000) --
Decrease (increase) in:
Accounts receivable ............................. 1,639 19,879 (12,246) 16,138
Prepaid expenses ................................ 8,936 (9,556) 881 (3,626)
Increase (decrease) in:
Accrued expenses and other liabilities .......... 37,185 (40,650) (45,231) (21,619)
Clients' deposits payable ....................... 222,035 (21,400) 783,041 1,591,665
Deferred lease obligation ....................... (6,385) (3,052) (4,027) (2,359)
---------- ---------- ---------- ----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES ......................................... 392,772 66,152 1,112,103 1,473,350
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................. (34,440) (21,682) -- (19,288)
Proceeds from sale of automobile .................... -- -- 25,000 --
(Increase) decrease in loans to stockholder ......... (5,034) (55,902) 27,116 143,029
---------- ---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ............................... (39,474) (77,584) 52,116 123,741
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of loan payable--bank .................... (300,000) -- (170,000) --
(Increase) decrease in restricted cash .............. (898) (864) 1,267 (461)
Distributions to stockholder ........................ (93,578) (282,033) (75,578) --
Proceeds from loan payable--bank .................... 170,000 300,000 -- --
---------- ---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............................... (224,476) 17,103 (244,311) (461)
---------- ---------- ---------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS ........................................ 128,822 5,671 919,908 1,596,630
CASH AND CASH EQUIVALENTS--
BEGINNING OF PERIOD ................................ 194,415 188,744 323,237 194,415
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS--
END OF PERIOD ...................................... $ 323,237 $ 194,415 $1,243,145 $1,791,045
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest ......................................... $ 23,479 $ 379 $ 6,253 $ 10,596
========== ========== ========== ==========
Income taxes ..................................... $ 558 $ 64,307 $ 4,104 $ 565
========== ========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-289
<PAGE>
QBQ ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED)
NOTE 1 -- ORGANIZATION
QBQ Entertainment, Inc. (the "Company") was incorporated and commenced
operations in April 1986 as a booking agent in the music and entertainment
industry.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
The Company receives advance deposits, on behalf of its clients, in the
ordinary course of business, to book an artist/entertainer for a future event
(i.e., concert). Commission income is recognized when the event takes place.
The funds held on behalf of the Company's clients are held in a separate bank
account.
(b) Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
and accounts receivable. The Company places its cash and cash equivalents,
which at times exceed federally insured amounts, with a major financial
institution.
Commissions earned during 1996 includes approximately $521,000 from two
clients, which represents approximately 38% of revenue earned during the year
ended December 31, 1996. Commissions earned during 1995 includes approximately
$875,000 from three clients, which represents approximately 58% of revenue
earned during the year ended December 31, 1995.
Commissions earned during the six months (unaudited) ended June 30, 1997
includes approximately $534,000 from one client and accounts for approximately
53% of the commissions earned. Commissions earned during the six months
(unaudited) ended June 30, 1996 includes approximately $369,000 from five
clients and account for approximately 79% of the commissions earned.
(c) Income Taxes
The Company has elected "S" corporation status under the applicable
provisions of the Internal Revenue Code and New York State tax law. The Company
will be treated for federal and New York State income tax purposes
substantially as if it were a partnership while a valid election is in effect,
and the stockholder's respective share in the net income (loss) of the Company
will be reportable on his individual returns. The Company remains liable for
New York City general corporation tax and certain New York State corporate
income taxes.
(d) Property and Equipment
Property and equipment are stated at cost and are being depreciated under
the straight-line method over the estimated useful lives of the related assets,
which range from 3 1/2 to 7 years.
(e) Use of Estimates in Financial Statement Presentation
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 December 31, 1996 and June
30, 1997, and the reported amounts of revenues and expenses during the two
years ended December 31, 1996, and the six months ended June 30, 1997 and 1996.
Actual results could differ from those estimates.
F-290
<PAGE>
QBQ ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED)
(f) Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers as
cash equivalents all highly liquid investments with a maturity of three months
or less when purchased.
(g) Accounts Receivable
The Company has deemed all receivables collectible at December 31, 1996
and June 30, 1997 (unaudited) and does not anticipate any additional probable
material losses as at those dates.
NOTE 3 -- PRIOR PERIOD ADJUSTMENTS
The Company has changed its method of accounting in computing rent expense
and depreciation and amortization of property and equipment in 1995 as a result
of the misapplication of accounting principles prior to the year ended December
31, 1995. Accordingly, accumulated earnings has been reduced by $41,410 as of
January 1, 1995 for the cumulative effect of these prior period adjustments.
The Company has not determined the effect of these changes on income as
previously reported for the year ended December 31, 1994.
NOTE 4 -- LOAN RECEIVABLE -- STOCKHOLDER
At December 31, 1996 and June 30, 1997 (unaudited), $60,936 and $33,820,
respectively, were due from the Company's sole stockholder. These amounts
represent noninterest-bearing demand loans made to the stockholder.
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment -- net consists of the following at December 31,
1996 and June 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------- ------------
(UNAUDITED)
<S> <C> <C>
Furniture and fixtures .................................. $ 70,770 $ 70,770
Equipment ............................................... 170,053 170,053
Automobiles ............................................. 108,235 --
Leasehold improvements .................................. 6,138 6,138
-------- --------
355,196 246,961
Less, accumulated depreciation and amortization ......... 272,961 177,570
-------- --------
$ 82,235 $ 69,391
======== ========
</TABLE>
NOTE 6 -- LOAN PAYABLE -- BANK
Loan payable -- bank at December 31, 1996, amounting to $170,000,
represents borrowings by the Company under a $300,000 unsecured grid demand
promissory loan agreement ("grid loan"). These borrowings were repaid by the
Company during the six months ended June 30, 1997.
Interest charged under the grid loan is payable monthly at the rate of 1%
above the bank's reference rate. Interest expense on the grid loan amounted to
$24,329 and $1,797 for the years ended December 31, 1996 and 1995,
respectively, and $5,404 and $19,663 for the six months (unaudited) ended June
30, 1997 and 1996, respectively.
All borrowings under the grid loan are guaranteed by the Company's
stockholder.
F-291
<PAGE>
QBQ ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED)
NOTE 7 -- LEASE COMMITMENT
The Company occupies premises for its office facilities under a
noncancelable operating lease agreement which commenced on May 15, 1993 and
expires on May 14, 1998. Minimum lease payments required under the terms of
such lease agreement at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 .......... $65,625
1998 .......... 21,875
-------
Total ......... $87,500
=======
</TABLE>
The lease also requires payment of additional sums under escalation
clauses. Rent expense, which is reflected on a straight-line basis over the
term of the lease, amounted to $51,948 for the years ended December 31, 1996
and 1995, and $25,956 for the six months (unaudited) ended June 30, 1997 and
1996. Obligations of $10,736 and $6,709, representing pro-rata future payments,
are reflected in the accompanying December 31, 1996 and June 30, 1997
(unaudited) balance sheets, respectively.
The Company is contingently liable for a standby letter of credit, in the
sum of $15,156, given to its landlord in lieu of a security deposit. This
letter of credit is secured by a certificate of deposit that matures on April
14, 1998.
NOTE 8 -- RETIREMENT PLANS
The Company has two defined contribution plans, a profit sharing plan and
a money purchase plan, both of which cover all eligible employees.
Contributions to the profit-sharing plan are based on 0% to 15% of eligible
employees' annual salaries. Contributions to the money purchase plans are based
on 5% of eligible employees' annual salaries. Costs of the plans charged to
operations for the years ended December 31, 1996 and 1995 amounted to $74,951
and $67,165, respectively, and $37,476 and $33,582 for the six months
(unaudited) ended June 30, 1997 and 1996, respectively.
NOTE 9 -- SUBSEQUENT EVENTS
(a) On July 3, 1997, the Company received approximately $2,959,000 from a
promoter on behalf of one of the Company's clients as an advance deposit for a
series of concerts beginning in March 1998. The Company has placed this deposit
into an interest-bearing escrow account, in which the promoter is entitled to
the interest earned.
(b) In July 1997, the Company entered into an agreement with The Marquee
Group, Inc. and Subsidiaries ("Purchaser") to sell substantially all its assets
for an aggregate purchase price of $7.2 million, of which $3.1 million is
payable at closing, $1.6 million is payable over eight years and $2.5 million
is payable in shares of common stock of the Purchaser.
F-292
<PAGE>
ANNEX I
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
SFX ENTERTAINMENT, INC.,
SFX ACQUISITION CORP.
AND
THE MARQUEE GROUP, INC.
(COMPOSITE VERSION)
- --------------------------------------------------------------------------------
I-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- --------------------------------------------------------------------
<S> <C> <C>
ARTICLE I -- THE MERGER
1.01. THE MERGER ............................................ I-8
1.02. EFFECTIVE TIME; CLOSING ............................... I-8
1.03. EFFECT OF THE MERGER .................................. I-8
1.04. CERTIFICATE OF INCORPORATION; BYLAWS .................. I-8
1.05. DIRECTORS AND OFFICERS ................................ I-8
ARTICLE II -- CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
2.01. CONVERSION OF SECURITIES .............................. I-9
2.02. EXCHANGE OF MARQUEE STOCK CERTIFICATES ................ I-10
2.03. STOCK TRANSFER BOOKS .................................. I-13
2.04. STOCK OPTIONS. ........................................ I-13
2.05. WARRANTS .............................................. I-13
2.06. STOCK APPRECIATION RIGHTS. ............................ I-14
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF MARQUEE
3.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES .......... I-14
3.02. CERTIFICATE OF INCORPORATION AND BYLAWS. .............. I-15
3.03. CAPITALIZATION ........................................ I-15
3.04. AUTHORITY RELATIVE TO THIS AGREEMENT .................. I-16
3.05. NO CONFLICT; REQUIRED FILINGS AND CONSENTS ............ I-16
3.06. PERMITS; COMPLIANCE. .................................. I-17
3.07. SEC FILINGS; FINANCIAL STATEMENTS. .................... I-17
3.08. ABSENCE OF CERTAIN CHANGES OR EVENTS .................. I-18
3.09. ABSENCE OF LITIGATION. ................................ I-20
3.10. EMPLOYEE BENEFIT MATTERS .............................. I-20
3.11. LABOR MATTERS. ........................................ I-22
3.12. INTELLECTUAL PROPERTY. ................................ I-23
3.13. TAXES ................................................. I-23
3.14. OPINION OF FINANCIAL ADVISOR .......................... I-24
3.15. VOTE REQUIRED. ........................................ I-24
3.16. BROKERS ............................................... I-24
3.17. TANGIBLE PROPERTY. .................................... I-25
3.18. MATERIAL AND ACQUISITION CONTRACTS .................... I-25
3.19. CERTAIN BUSINESS PRACTICES ............................ I-26
3.20. BOARD RECOMMENDATION .................................. I-26
3.21. CHANGE IN CONTROL. .................................... I-26
3.22. ENVIRONMENTAL MATTERS. ................................ I-26
3.23. ACCOUNTS RECEIVABLE. .................................. I-28
3.24. INSURANCE. ............................................ I-28
3.25. REAL PROPERTY AND LEASES .............................. I-28
3.26. INTERESTED PARTY TRANSACTIONS. ........................ I-29
3.27. CLIENTS AND EVENTS .................................... I-29
3.28. RESTRICTIONS ON BUSINESS ACTIVITIES. .................. I-29
3.29. CORPORATE RECORDS. .................................... I-29
3.30. STATE TAKEOVER STATUTES. .............................. I-30
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE
- --------------------------------------------------------------------------------
<S> <C> <C>
ARTICLE IV -- REPRESENTATIONS AND WARRANTIES OF SFX AND
ACQUISITION SUB
4.01. CORPORATE ORGANIZATION AND QUALIFICATION .................... I-30
4.02. CERTIFICATE OF INCORPORATION AND BYLAWS. .................... I-30
4.03. OWNERSHIP OF ACQUISITION SUB; NO PRIOR ACTIVITIES. .......... I-30
4.04. CAPITALIZATION .............................................. I-30
4.05. AUTHORITY RELATIVE TO THIS AGREEMENT ........................ I-31
4.06. NO CONFLICT; REQUIRED FILINGS AND CONSENTS .................. I-31
4.07. SEC FILINGS; FINANCIAL STATEMENTS. .......................... I-32
4.08. ABSENCE OF CERTAIN CHANGES OR EVENTS ........................ I-33
4.09. ABSENCE OF LITIGATION. ...................................... I-33
4.10. TAXES ....................................................... I-33
4.11. OPINION OF FINANCIAL ADVISOR ................................ I-34
4.12. BROKERS ..................................................... I-34
4.13. BOARD RECOMMENDATION ........................................ I-34
4.14. PERMITS; COMPLIANCE. ........................................ I-34
4.15. CERTAIN BUSINESS PRACTICES .................................. I-34
4.16. INTERESTED PARTY TRANSACTIONS. .............................. I-35
4.17. ERISA COMPLIANCE ............................................ I-35
ARTICLE V -- CONDUCT OF BUSINESS PENDING THE MERGER
5.01. CONDUCT OF BUSINESS BY MARQUEE PENDING THE MERGER. .......... I-35
5.02. CONDUCT OF BUSINESS BY SFX PENDING THE MERGER. .............. I-37
5.03. OTHER ACTIONS. .............................................. I-37
ARTICLE VI -- ADDITIONAL AGREEMENTS
6.01. REGISTRATION STATEMENT; PROXY STATEMENT. .................... I-37
6.02. STOCKHOLDERS' MEETINGS ...................................... I-39
6.03. APPROPRIATE ACTION; CONSENTS; FILINGS. ...................... I-39
6.04. ACCESS TO INFORMATION. ...................................... I-40
6.05. ACQUISITION PROPOSALS. ...................................... I-41
6.06. DIRECTORS' AND OFFICERS' INDEMNIFICATION .................... I-42
6.07. OBLIGATIONS OF ACQUISITION SUB .............................. I-42
6.08. PUBLIC ANNOUNCEMENTS ........................................ I-42
6.09. NOTIFICATION OF CERTAIN MATTERS. ............................ I-43
6.10. FURTHER ACTION .............................................. I-43
6.11. AFFILIATE AGREEMENTS; TAX TREATMENT. ........................ I-43
6.12. EMPLOYEE BENEFIT PLANS ...................................... I-44
6.13. RELEASES .................................................... I-44
6.14. CERTAIN AGREEMENTS .......................................... I-44
6.15. GOVERNANCE .................................................. I-44
6.16 FINANCING MATTERS ........................................... I-44
ARTICLE VII -- CONDITIONS TO THE MERGER
7.01. CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. ................ I-44
7.02. CONDITIONS TO THE OBLIGATIONS OF SFX AND ACQUISITION SUB I-45
7.03. CONDITIONS TO THE OBLIGATIONS OF MARQUEE .................... I-45
ARTICLE VIII -- TERMINATION, AMENDMENT AND WAIVER
8.01. TERMINATION. ................................................ I-46
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE
- ----------------------------------------------------------------
<S> <C> <C>
8.02. FEES AND EXPENSES; EFFECT OF TERMINATION .......... I-47
8.03. AMENDMENT. ........................................ I-48
8.04. WAIVER ............................................ I-48
ARTICLE IX -- GENERAL PROVISIONS
NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
9.01. AGREEMENTS ........................................ I-49
9.02. NOTICES ........................................... I-49
9.03. CERTAIN DEFINITIONS. .............................. I-50
9.04. SEVERABILITY ...................................... I-50
9.05. ASSIGNMENT; BINDING EFFECT; BENEFIT. .............. I-51
9.06. INCORPORATION OF SCHEDULES ........................ I-51
9.07. SPECIFIC PERFORMANCE .............................. I-51
9.08. GOVERNING LAW. .................................... I-51
9.09. HEADINGS .......................................... I-51
9.10. COUNTERPARTS ...................................... I-51
9.11. WAIVER OF JURY TRIAL .............................. I-51
9.12. ENTIRE AGREEMENT .................................. I-51
</TABLE>
Exhibit A - Marquee Disclosure Schedule
Exhibit B - SFX Disclosure Schedule
Exhibit C - Form of Affiliate Agreements
Exhibit D - SFX Tax Certificate
Exhibit E - Marquee Tax Certificate
Exhibit F - Amendment to Unit Purchase Option Agreement
I-4
<PAGE>
DEFINED TERMS
<TABLE>
<CAPTION>
TERM LOCATION
- ------------------------------------------------------------------ -----------
<S> <C>
Acquisition Contracts ............................................ 3.18
Acquisition Sub .................................................. recitals
Acquisition Sub Common Stock ..................................... 2.01
affiliate ........................................................ 9.03
Affiliate Agreements ............................................. 6.11
Agreement ........................................................ recitals
beneficial owner ................................................. 9.03
Benefit Plans .................................................... 3.10
Blue Sky Laws .................................................... 3.05
business day ..................................................... 9.03
Certificate ...................................................... 2.02
Certificate of Merger ............................................ 1.02
Claim ............................................................ 6.06
Closing .......................................................... 1.02
Code ............................................................. recitals
commercially reasonable efforts .................................. 6.03
Commonly Controlled Entity ....................................... 3.10
control .......................................................... 9.03
Copyrights ....................................................... 3.12
Defined Benefit Plan ............................................. 3.10
Delaware Law ..................................................... recitals
Effective Time ................................................... 1.02
Employment Agreement Amendments .................................. recitals
Environmental and Occupational Safety and Health Claims .......... 3.22
Environmental Laws ............................................... 3.22
Environmental Permits ............................................ 3.22
ERISA ............................................................ 3.10
Escrow Agreement ................................................. recitals
Escrow Releases .................................................. recitals
Exchange Act ..................................................... 3.05
Exchange Agent ................................................... 2.02
Exchange Fund .................................................... 2.02
Exchange Ratio ................................................... 2.01
GAAP ............................................................. 3.07
Governmental Authority ........................................... 3.06
Hazardous Materials .............................................. 3.22
HSR Act .......................................................... 3.05
Indebtedness ..................................................... 3.05
Indemnified Parties .............................................. 6.06
Intellectual Property Assets ..................................... 3.12
Law .............................................................. 3.05
Marks ............................................................ 3.12
Marquee .......................................................... recitals
Marquee Affiliate ................................................ 6.11
Marquee Balance Sheet ............................................ 3.07
Marquee Banker ................................................... 3.14
Marquee Common Stock ............................................. 2.01
Marquee Disclosure Schedule ...................................... Art. III
Marquee Independent Committee .................................... recitals
Marquee Interim Balance Sheet .................................... 3.07
</TABLE>
I-5
<PAGE>
<TABLE>
<CAPTION>
TERM LOCATION
- --------------------------------------------- -----------
<S> <C>
Marquee Permits ............................. 3.06
Marquee SEC Reports ......................... 3.07
Marquee Stockholders' Meeting ............... 6.02
Marquee Subsidiaries ........................ 3.01
Material Adverse Effect ..................... 3.01
Material Contracts .......................... 3.18
Merger ...................................... recitals
Merger Consideration ........................ 2.01
Occupational Safety and Health Laws ......... 3.22
Options ..................................... 2.04
Order ....................................... 7.01
Pension Plan ................................ 3.10
person ...................................... 9.03
Proprietary Information ..................... 3.12
Proxy Statement ............................. 6.01
Registration Statement ...................... 6.01
Reported Price .............................. 2.01
SAR ......................................... 2.06
SEC ......................................... 3.07
Secretary ................................... 1.02
Securities Act .............................. 3.05
Settlement Agreement ........................ recitals
SFX ......................................... recitals
SFX Banker .................................. 4.10
SFX Balance Sheet ........................... 4.07
SFX Class A Common Stock .................... 2.01
SFX Class A Common Stock Price .............. 2.01
SFX Disclosure Schedule ..................... Art. IV
SFX Independent Committee ................... recitals
SFX Interim Balance Sheet ................... 4.07
SFX SEC Reports ............................. 4.06
SFX Subsidiary .............................. 4.04
Shareholders' Agreement ..................... recitals
Specified Expenses .......................... 8.02
Stock Option Plans .......................... 2.04
subsidiary .................................. 9.03
Surviving Corporation ....................... 1.01
Takeover Proposal ........................... 6.05
Tax ......................................... 3.13
Tax Return .................................. 3.13
Terminating Marquee Breach .................. 8.01
Terminating SFX Breach ...................... 8.01
Termination Date ............................ 8.01
Termination Fee ............................. 8.02
Transactions ................................ recitals
TSC ......................................... recitals
Unit Purchase Option ........................ 2.04
Unit Purchase Option Amendment .............. 6.13
Warrants .................................... 2.05
</TABLE>
I-6
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of July 23, 1998, as amended on
September 21, 1998, October 5, 1998, October 16, 1998 and January 24, 1999
(this "Agreement"), by and among SFX ENTERTAINMENT, INC., a Delaware
corporation ("SFX"), SFX Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of SFX ("Acquisition Sub"), and THE MARQUEE GROUP,
INC., a Delaware corporation ("Marquee").
W I T N E S S E T H:
WHEREAS, Acquisition Sub, upon the terms and subject to the conditions of
this Agreement and in accordance with the General Corporation Law of the State
of Delaware ("Delaware Law"), intends to merge with and into Marquee (the
"Merger");
WHEREAS, the Board of Directors of Marquee (including a special committee
of the independent directors of Marquee, the "Marquee Independent Committee")
(a) has determined that the Merger is advisable and in the best interests of
Marquee and its stockholders, (b) has approved and adopted this Agreement and
the transactions contemplated hereby (the "Transactions") and (c) has
recommended the approval and adoption of this Agreement and the approval of the
Merger by, and directed that this Agreement and the Merger be submitted to a
vote of, the stockholders of Marquee;
WHEREAS, the Board of Directors of SFX (including a special committee of
the independent directors of SFX, the "SFX Independent Committee") has
determined that the Merger is in the best interests of SFX and its stockholders
and has approved and adopted this Agreement and the Transactions;
WHEREAS, the Board of Directors of Acquisition Sub has determined that the
Merger is in the best interests of Acquisition Sub and its stockholder and has
approved and adopted this Agreement and the Transactions;
WHEREAS, on July 22, 1998, the attorneys for the plaintiffs and defendants
named therein entered into a Memorandum of Understanding (the "Settlement
Agreement") with respect to the class action complaint filed in Chancery Court
in the State of Delaware, New Castle County, CA #16355NC, and SFX is relying on
such agreement in entering into this Agreement;
WHEREAS, simultaneously herewith, Marquee, SFX, The Sillerman Companies,
Inc. ("TSC") and certain officers and stockholders of Marquee have entered into
agreements to release and waive such officers' and stockholders' rights to
receive shares of Marquee Common Stock (as hereinafter defined) ("Escrow
Releases") pursuant to an escrow agreement dated August 15, 1996, as amended
(the "Escrow Agreement"), and SFX is relying on such agreements in entering
into this Agreement;
WHEREAS, simultaneously herewith, Marquee, SFX, TSC and certain officers
and stockholders of Marquee have entered into an agreement to terminate the
Shareholders' Agreement dated as of March 21, 1996, as amended (the
"Shareholders' Agreement"), and SFX is relying on such agreement in entering
into this Agreement;
WHEREAS, simultaneously herewith, Marquee, SFX and certain officers of
Marquee and its subsidiaries have entered into amendments to existing
employment agreements ("Employment Agreement Amendments"), and SFX is relying
on such amendments in entering into this Agreement; and
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WHEREAS, SFX and Marquee intend that the Merger constitute a tax-free
"reorganization" within the meaning of Section 368(a)(1)(A) and Section
368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, SFX,
Acquisition Sub and Marquee hereby agree as follows:
ARTICLE I -- THE MERGER
SECTION 1.01. THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with Delaware Law, at the Effective
Time (as hereinafter defined), (a) Acquisition Sub shall be merged with and
into Marquee, (b) the separate corporate existence of Acquisition Sub shall
cease, and (c) Marquee shall continue as the surviving corporation of the
Merger (the "Surviving Corporation").
SECTION 1.02. EFFECTIVE TIME; CLOSING. Unless this Agreement shall have
been terminated and the Transactions abandoned pursuant to Article VIII, as
promptly as practicable (and in any event within five business days) following
the satisfaction or waiver of the conditions set forth in Article VII (or such
other date as may be agreed to in writing by each of the parties hereto), the
parties hereto shall cause the Merger to be consummated by filing a certificate
of merger (the "Certificate of Merger") with the Secretary of State of the
State of Delaware (the "Secretary") in such form as is required by, and
executed in accordance with the relevant provisions of, Delaware Law. The term
"Effective Time" means the date and time of the filing of the Certificate of
Merger with the Secretary (or such later time as may be agreed to in writing by
each of the parties hereto and specified in the Certificate of Merger).
Immediately prior to the filing of the Certificate of Merger, a closing (the
"Closing") will be held at the offices of Baker & McKenzie, 805 Third Avenue,
New York, New York (or such other place and time as the parties hereto may
agree).
SECTION 1.03. EFFECT OF THE MERGER. The effect of the Merger shall be as
provided in the applicable provisions of Delaware Law. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all
property, rights, privileges, powers and franchises of Marquee and Acquisition
Sub shall vest in the Surviving Corporation, and all debts, liabilities and
duties of Marquee and Acquisition Sub shall become the debts, liabilities and
duties of the Surviving Corporation.
SECTION 1.04. CERTIFICATE OF INCORPORATION; BYLAWS. (a) The Certificate of
Incorporation of Marquee, as in effect immediately prior to the Effective Time,
shall be the Certificate of Incorporation of the Surviving Corporation, until
thereafter amended as provided therein or by applicable law.
(b) The Bylaws of Marquee, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation, until thereafter
amended as provided therein or by applicable law.
SECTION 1.05. DIRECTORS AND OFFICERS. The directors of Acquisition Sub
immediately prior to the Effective Time shall be the directors of the Surviving
Corporation until the earlier of their resignation or removal or until their
respective successors are elected or appointed and qualified, as the case may
be. Marquee shall obtain such resignations as may be necessary to effect the
foregoing. The officers of Acquisition Sub immediately prior to the Effective
Time shall be the officers of the Surviving Corporation until the earlier of
their resignation or removal or until their respective successors are duly
elected or appointed and qualified, as the case may be.
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ARTICLE II -- CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.01. CONVERSION OF SECURITIES. (a) At the Effective Time, by
virtue of the Merger and without any action on the part of Acquisition Sub,
Marquee or the holders of any of the following shares of capital stock, and
except as otherwise provided herein:
(i) each share of Common Stock, $.01 par value, of Marquee (the "Marquee
Common Stock") then issued and outstanding (other than shares to be
canceled in accordance with Section 2.01(a)(iii)) shall be converted into
the right to receive from SFX a number of duly authorized, validly issued,
fully paid and nonassessable shares of Class A Common Stock, $.01 par
value, of SFX (the "SFX Class A Common Stock"), equal to the Exchange Ratio
(as defined in Section 2.01(b)) (the "Merger Consideration");
(ii) all shares of Marquee Common Stock shall no longer be outstanding
and shall automatically be canceled and cease to exist, and each
certificate previously evidencing any such shares shall thereafter
represent the right to receive the Merger Consideration into which such
shares of Marquee Common Stock were converted in the Merger. The holders of
certificates previously evidencing such shares of Marquee Common Stock
outstanding immediately prior to the Effective Time shall cease to have any
rights with respect to such Marquee Common Stock except as otherwise
provided herein or by Delaware Law. Such certificates previously evidencing
Marquee Common Stock shall be exchanged for the Merger Consideration issued
in consideration therefor upon the surrender of such certificates
previously evidencing Marquee Common Stock in accordance with the
provisions of Section 2.02. No fractional shares of SFX Class A Common
Stock shall be issued, and, in lieu thereof, a cash payment shall be made
pursuant to Section 2.02(e);
(iii) any shares of Marquee Common Stock (A) owned by SFX or Marquee or
any wholly-owned subsidiary of SFX or Marquee or (B) held in escrow
pursuant to the Escrow Agreement shall be canceled and extinguished without
any conversion thereof, and no payment shall be made with respect thereto;
and
(iv) each share of common stock, $.01 par value, of Acquisition Sub (the
"Acquisition Sub Common Stock"), then issued and outstanding shall be
converted into and become a number of fully paid and nonassessable shares
of Common Stock, par value $.01 per share, of the Surviving Corporation
equal to the quotient realized by dividing (A) the aggregate number of
shares of Marquee Common Stock determined on a fully-diluted basis
immediately prior to the Effective Time by (B) the aggregate number of
shares of capital stock of Acquisition Sub issued and outstanding
immediately prior to the Effective Time. The phrase "on a fully-diluted
basis" shall mean, as of any date, the number of shares of Marquee Common
Stock then outstanding (including any shares of Marquee Common Stock that
are owned by and held in the treasury of Marquee), together with the
aggregate number of shares of Marquee Common Stock that Marquee may be
required, as of such date or thereafter, to issue (with or without notice,
lapse of time or the action of any third party) pursuant to any outstanding
securities, options, warrants, commitments, agreements, arrangements or
undertakings of any kind (including, without limitation, the Options and
Warrants (as such terms are defined in Sections 2.04 and 2.05) and assuming
the maximum number of shares of Marquee Common Stock issuable thereunder).
(b) 'Exchange Ratio' shall have the following meaning, subject to
adjustment pursuant to Section 2.01(c):
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(i) if the SFX Class A Common Stock Price (as defined hereinafter) is
less than or equal to $42.75, then 'Exchange Ratio' shall mean 0.1111 of
a share of SFX Class A Common Stock;
(ii) if the SFX Class A Common Stock Price is greater than $42.75 but
less than or equal to $60.00, then 'Exchange Ratio' shall mean a number
of shares of SFX Class A Common Stock equal to the quotient obtained by
dividing $4.75 by the SFX Class A Common Stock Price;
(iii) if the SFX Class A Common Stock Price is greater than $60.00 but
less than or equal to $66.00, then 'Exchange Ratio' shall mean a number
of shares of SFX Class A Common Stock equal to the difference between
(A) 0.1000 less (B) the quotient obtained by dividing 1.25 by the SFX
Class A Common Stock Price; and
(iv) if the SFX Class A Common Stock Price is greater than $66.00,
then 'Exchange Ratio' shall mean a number of shares of SFX Class A
Common Stock equal to the quotient obtained by dividing $5.35 by the SFX
Class A Common Stock Price.
As used in this Agreement, the term 'SFX Class A Common Stock Price' means the
average of the last reported sale price of the SFX Class A Common Stock for the
fifteen consecutive trading days ending on the fifth trading day prior to the
Effective Time on the primary exchange on which the SFX Class A Common Stock is
traded, including the Nasdaq National Market.
(c) If between the date of this Agreement and the Effective Time, except
as otherwise contemplated herein, the outstanding Marquee Common Stock or SFX
Class A Common Stock shall have been changed into a different number of shares
or a different class, by reason of any stock dividend, reclassification,
recapitalization, split, division, combination or exchange of shares, then the
Exchange Ratio shall be correspondingly adjusted to reflect such stock
dividend, reclassification, recapitalization, split, division, combination or
exchange of shares.
SECTION 2.02. EXCHANGE OF MARQUEE STOCK CERTIFICATES.
(a) EXCHANGE AGENT. Promptly after the Effective Time, SFX shall make
available to a bank or trust company organized under the laws of, and having an
office in, the United States or any state thereof (the "Exchange Agent") and
designated by SFX and approved by Marquee (which approval shall not be
unreasonably withheld), for exchange in accordance with this Article II,
through such reasonable procedures as SFX may adopt, certificates representing
shares of SFX Class A Common Stock constituting the Merger Consideration (such
shares of SFX Class A Common Stock, together with any dividends or
distributions with respect thereto, and any cash payable in lieu of any
fractional shares pursuant to Section 2.02(e), being hereinafter referred to as
the "Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable
instructions from SFX, deliver the Merger Consideration contemplated to be
issued pursuant to Section 2.01 and cash contemplated by Section 2.02(e) out of
the Exchange Fund.
(b) EXCHANGE PROCEDURES. As soon as reasonably practicable after the
Effective Time, SFX will instruct the Exchange Agent to mail to each holder of
record of a certificate or certificates which immediately prior to the
Effective Time evidenced outstanding Marquee Common Stock (other than shares
canceled in accordance with Section 2.01(a)(iii)) (each a "Certificate" and
collectively, the "Certificates") (i) a letter of transmittal and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for
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certificates evidencing shares of SFX Class A Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent together with such letter of
transmittal, duly executed, and such other customary documents as may be
required pursuant to such instructions, the holder of such Certificate shall be
entitled to receive in exchange therefor a certificate representing the number
of whole shares of SFX Class A Common Stock which such holder has the right to
receive in respect of the Marquee Common Stock formerly represented by such
Certificate (after taking into account all Marquee Common Stock then held by
such holder), together with any cash in lieu of fractional SFX Class A Common
Stock to which such holder is entitled pursuant to Section 2.02(e) and any
dividends or distributions to which such holder is entitled pursuant to Section
2.02(c), and the Certificate so surrendered shall forthwith be canceled.
Subject to Section 2.02(i), under no circumstances will any holder of a
Certificate be entitled to receive any part of the shares of SFX Class A Common
Stock into which the shares of Marquee Common Stock were converted in the
Merger until such holder shall have surrendered such Certificate. In the event
of a transfer of ownership of Marquee Common Stock which is not registered in
the transfer records of Marquee, the shares of SFX Class A Common Stock into
which such shares of Marquee Common Stock were converted in the Merger may be
issued in accordance with this Article II to the transferee if the Certificate
evidencing such shares of Marquee Common Stock is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 2.02, each Certificate
shall be deemed at any time after the Effective Time to evidence only the right
to receive upon such surrender the certificate representing the number of whole
shares of SFX Class A Common Stock, which the holder has the right to receive
in respect of the Marquee Common Stock formerly represented by such Certificate
(after taking into account all Marquee Common Stock then held by such holder),
together with cash in lieu of fractional shares of SFX Class A Common Stock to
which such holder is entitled pursuant to Section 2.02(e) and any dividends or
distributions to which such holder is entitled pursuant to Section 2.02(c). No
interest will be paid or will accrue on any cash payable to holders of
Certificates pursuant to the provisions of this Article II. SFX agrees, from
and after the Effective Time, to treat the holders of Certificates as holding
of record the whole number of shares of SFX Class A Common Stock which the
holder has the right to receive pursuant to this Agreement for purposes of
voting and determinations of quorums for voting.
(c) DISTRIBUTIONS WITH RESPECT TO UN-EXCHANGED SHARES OF SFX CLASS A
COMMON STOCK. No dividends or other distributions declared or made after the
Effective Time with respect to SFX Class A Common Stock with a record date
after the Effective Time shall be paid to the holder of any un-surrendered
Certificate with respect to the shares of SFX Class A Common Stock into which
such shares of Marquee Common Stock were converted in the Merger, until the
holder of such Certificate shall surrender such Certificate for exchange as
provided herein. Subject to the effect of applicable laws, following surrender
of any such Certificate, there shall be paid to the holder of such Certificate,
in addition to the applicable Merger Consideration as provided in Section
2.02(b) (including any cash paid or other distributions pursuant to Section
2.02(e)), without interest, (i) the amount of dividends or other distributions
with a record date after the Effective Time theretofore paid with respect to
the whole shares of SFX Class A Common Stock evidenced by such Certificate and
(ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and with a payment date subsequent to such surrender payable with
respect to such whole shares of SFX Class A Common Stock.
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(d) NO FURTHER RIGHTS IN MARQUEE COMMON STOCK. All shares of SFX Class A
Common Stock delivered upon conversion of the Marquee Common Stock in
accordance with the terms hereof (along with any cash paid or other
distributions pursuant to Sections 2.02(c) and (e)) shall be deemed to have
been issued in full satisfaction of all rights pertaining to such Marquee
Common Stock.
(e) NO FRACTIONAL SHARES. No certificates or scrip evidencing fractional
shares of SFX Class A Common Stock shall be issued upon the surrender for
exchange of Certificates, but in lieu thereof each holder of Marquee Common
Stock who would otherwise be entitled to receive a fraction of a share of SFX
Class A Common Stock, after aggregating all shares of SFX Class A Common Stock
which such holder would be entitled to receive under Section 2.01, shall
receive an amount equal to the SFX Class A Common Stock Price multiplied by the
fraction of a share of SFX Class A Common Stock to which such holder would
otherwise be entitled, without interest. Except as required by applicable law,
no dividend or distribution of SFX shall relate to such fractional share
interests, and such fractional share interests will not entitle the owner
thereof to vote or to any rights of a stockholder of SFX.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund,
including any interest on any cash portion thereof, which remains undistributed
to the holders of Marquee Common Stock for one year after the Effective Time
shall be delivered to SFX upon demand, and, subject to Section 2.02(g), any
holders of Marquee Common Stock who have not theretofore complied with this
Article II shall thereafter look only to SFX for the shares of SFX Class A
Common Stock, any cash in lieu of fractional shares of SFX Class A Common Stock
and any dividends or other distributions to which they are entitled pursuant to
this Section 2.02.
(g) NO LIABILITY. None of SFX, the Surviving Corporation or the Exchange
Agent shall be liable to any person in respect of any shares of SFX Class A
Common Stock (or dividends or distributions with respect thereto) or cash
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
(h) INVESTMENT OF EXCHANGE FUND. The Exchange Agent shall invest any cash
included in the Exchange Fund as directed by SFX, on a daily basis. Any
interest and other income resulting from such investments shall be paid to SFX.
(i) LOST CERTIFICATES. If any Certificate shall have been lost, stolen or
destroyed, then, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Corporation, the execution of an indemnity agreement by such
person and/or the posting by such person of a bond in such reasonable amount as
the Surviving Corporation may reasonably direct, as indemnity against any claim
that may be made against it with respect to such Certificate, the Exchange
Agent will issue in exchange for such lost, stolen or destroyed Certificate the
Merger Consideration, cash in lieu of fractional shares of SFX Class A Common
Stock and unpaid dividends and distributions on shares of SFX Class A Common
Stock deliverable in respect thereof pursuant to this Agreement.
(j) WITHHOLDING RIGHTS. SFX or the Exchange Agent shall be entitled to
deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of shares of Marquee Common Stock such amounts as SFX
or the Exchange Agent is required to deduct and withhold with respect to the
making of such payment under the Code or under any provision of state, local or
foreign tax law. To the extent that amounts are so withheld and paid over to
the appropriate taxing authority by SFX or the
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Exchange Agent, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of the shares of Marquee Common
Stock in respect of which such deduction and withholding were made by SFX or
the Exchange Agent.
SECTION 2.03. STOCK TRANSFER BOOKS. At the Effective Time, the stock
transfer books of Marquee shall be closed, and there shall be no further
registration of transfers of Marquee Common Stock thereafter on the records of
Marquee. At or after the Effective Time, any Certificates presented to the
Exchange Agent or SFX for any reason shall be converted into the right to
receive the Merger Consideration, cash in lieu of fractional shares of SFX
Class A Common Stock and any dividends or other distributions to which they are
entitled pursuant to Section 2.02.
SECTION 2.04. STOCK OPTIONS. At the Effective Time, each then outstanding
(a) option to purchase shares of Marquee Common Stock granted by Marquee
pursuant to Marquee's 1996 and 1997 Stock Option Plan (collectively, the "Stock
Option Plans"), (b) option to purchase shares of Marquee Common Stock, dated
October 7, 1997, granted by Marquee to Robert F.X. Sillerman, (c) option to
purchase Marquee Common Stock, dated October 14, 1997, granted by Marquee to
Adam Kornfeld, (d) option to purchase Marquee Common Stock, dated August 26,
1997 or September 11, 1997, granted by Marquee to The Huff Alternative Income
Fund, L.P., (e) option to purchase Marquee Common Stock, dated September 11,
1997 granted by Marquee to TSC, and (f) unit purchase option (the "Unit
Purchase Option"), dated December 11, 1996, granted by Marquee to Royce
Investment Group, Inc. (collectively, the "Options"), shall, as of the
Effective Time, automatically and without any action on the part of the holder
thereof, be assumed by SFX. The holders of such Options shall continue to have,
and be subject to, the same terms and conditions set forth in the stock option
plans and agreements pursuant to which such Options were issued as in effect
immediately prior to the Effective Time, except that (i) such Options shall be
exercisable for that number of whole shares of SFX Class A Common Stock equal
to the product of the number of shares of Marquee Common Stock covered by the
Option immediately prior to the Effective Time multiplied by the Exchange Ratio
rounded up to the nearest whole number of shares of SFX Class A Common Stock,
and (ii) the per share exercise price for the shares of SFX Class A Common
Stock issuable upon the exercise of such assumed Option shall be equal to the
quotient determined by dividing the exercise price per share of Marquee Common
Stock specified for such Option under the applicable stock option plan or
agreement in effect immediately prior to the Effective Time by the Exchange
Ratio, rounding the resulting exercise price down to the nearest whole cent. At
the Effective Time, SFX shall reserve for issuance the number of shares of SFX
Class A Common Stock that will become issuable upon the exercise of the Options
pursuant to this Section 2.04. Nothing in this Section 2.04 shall affect the
schedule of vesting (or the acceleration thereof) with respect to the Options
to be assumed by SFX as provided in this Section 2.04. Notwithstanding anything
to the contrary, nothing herein shall require SFX to issue fractional shares of
SFX Class A Common Stock upon the exercise of any Option.
SECTION 2.05. WARRANTS. At the Effective Time, each then outstanding
warrant to purchase Marquee Common Stock (a) issued pursuant to that certain
warrant agreement, dated December 5, 1996, by and among Marquee, Continental
Stock Transfer & Trust Company, Royce Investment Group, Inc and Continental
Broker-Dealer Corporation and (b) issuable upon exercise of the Unit Purchase
Option (collectively, the "Warrants") shall be assumed by SFX. The holders of
such Warrants shall continue to have, and be subject to, the same terms and
conditions set forth in such Warrants (including, without limitation, any
provision contained therein relating to the repurchase or redemption thereof),
except that (i)
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such Warrants shall be exercisable for that number of shares of SFX Class A
Common Stock equal to the product of the number of shares of Marquee Common
Stock covered by the Warrant immediately prior to the Effective Time multiplied
by the Exchange Ratio, and (ii) the per share exercise price for the shares of
SFX Class A Common Stock issuable upon the exercise of such assumed Warrant
shall be equal to the quotient determined by dividing the exercise price per
share of Marquee Common Stock specified for such Warrant in effect immediately
prior to the Effective Time by the Exchange Ratio, rounding the resulting
exercise price down to the nearest whole cent. Notwithstanding anything to the
contrary, nothing herein shall require SFX to issue fractional shares of SFX
Class A Common Stock upon the exercise of any Warrant. At the Effective Time,
SFX shall reserve for issuance the number of shares of SFX Class A Common Stock
that will become issuable upon the exercise of such Warrants pursuant to this
Section 2.05.
SECTION 2.06. STOCK APPRECIATION RIGHTS. At the Effective Time, each then
outstanding (a) cash-only stock appreciation right ("SAR") issued by Marquee to
Arthur Barron, dated February 12, 1998, (b) SAR issued by Marquee to Myles
Schumer, dated February 12, 1998, and (c) SAR issued by Marquee to each of
Arthur Barron, Myles Schumer and Howard Tytel, dated February 12, 1998 shall,
as of the Effective Time, automatically and without any action on the part of
the holder thereof, be assumed by SFX. The holders of such SARs shall continue
to have, and be subject to, the same terms and conditions set forth in the
agreements pursuant to which such SARs were issued as in effect immediately
prior to the Effective Time, except that (i) such SARs shall be exercisable for
cash representing that number of whole shares of SFX Class A Common Stock equal
to the product of the number of shares of Marquee Common Stock covered by the
SAR immediately prior to the Effective Time multiplied by the Exchange Ratio
rounded up to the nearest whole number of shares of SFX Class A Common Stock,
and (ii) the per share strike price for the cash representing shares of SFX
Class A Common Stock issuable upon the exercise of such assumed SAR shall be
equal to the quotient determined by dividing the strike price per share of
Marquee Common Stock specified for such SAR under the applicable agreement
immediately prior to the Effective Time by the Exchange Ratio, rounding the
resulting strike price down to the nearest whole cent. The holders of the SARs
will be entitled to receive only cash upon exercise of the SARs in lieu of
shares of SFX Class A Common Stock as such amount shall be determined in
accordance with the agreements pursuant to which the SARs were issued.
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF MARQUEE
Except as set forth in the disclosure schedule delivered by Marquee to SFX
attached hereto as Exhibit A (the "Marquee Disclosure Schedule"), which
identifies exceptions by specific section references, Marquee hereby represents
and warrants to SFX and Acquisition Sub that:
SECTION 3.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Marquee is a
corporation, and each subsidiary of Marquee (each a "Marquee Subsidiary" and
collectively, the "Marquee Subsidiaries," which terms shall be deemed to
include all corporations and other entities that become subsidiaries of Marquee
subsequent to the date hereof) is a corporation or other entity, in each case
(i) duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and (ii) which has the requisite corporate or
other power and authority to own, lease and operate its properties and to carry
on its business as it is now being conducted. Marquee and each Marquee
Subsidiary are duly qualified or licensed as a foreign corporation (or other
entity) to do business, and are in good standing, in each jurisdiction where
the character of the properties owned, leased
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or operated by them or the nature of their business makes such qualification or
licensing necessary, except for such failures to be so qualified or licensed
and in good standing that would not, individually or in the aggregate, have a
Material Adverse Effect on Marquee. As used in this Agreement, the term
"Material Adverse Effect" means, with respect to any person, any change or
effect that, individually or when taken together with all other changes or
effects that have occurred on or prior to the date of determination of the
occurrence of the Material Adverse Effect and which are continuing as of that
date, is or is reasonably likely to be materially adverse to the financial
condition, business, results of operations or prospects of such person and its
subsidiaries, taken as a whole. As of the date hereof, a true and correct list
of all Marquee Subsidiaries, together with the jurisdiction of organization of
each Marquee Subsidiary and the percentage of the outstanding capital stock (or
other ownership interest) of each Marquee Subsidiary owned by Marquee and each
other Marquee Subsidiary, is set forth in Section 3.01 of the Marquee
Disclosure Schedule. Except as specifically disclosed in Section 3.01 of the
Marquee Disclosure Schedule, Marquee does not directly or indirectly own any
equity or similar interest in, or any interest convertible into or exchangeable
or exercisable for any equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity.
SECTION 3.02. CERTIFICATE OF INCORPORATION AND BYLAWS. Marquee has made
available to SFX true, complete and correct copies of the Certificate of
Incorporation and Bylaws (or comparable organizational documents) of Marquee
and each Marquee Subsidiary, each as amended to date. Neither Marquee nor any
Marquee Subsidiary is in violation of any provision of its Certificate of
Incorporation or Bylaws or other organizational document, as applicable.
SECTION 3.03. CAPITALIZATION. The authorized capital stock of Marquee
consists of 25,000,000 shares of common stock and 5,000,000 shares of preferred
stock. As of July 20, 1998, 17,918,003 shares of Marquee Common Stock were
issued and outstanding, all of which are validly issued, fully paid and
non-assessable and not subject to preemptive rights, and no shares have been
issued or become outstanding between such date and the date hereof, other than
pursuant to exercise of outstanding options or warrants described in Sections
2.04, 2.05 and 2.06 hereof, in Section 3.03(a) of the Marquee Disclosure
Schedule or in a Marquee SEC Report (as defined herein) filed as of the date
hereof. As of the date hereof, no shares of preferred stock of Marquee were
issued and outstanding. Except as set forth in Sections 2.04, 2.05 and 2.06
hereof or as specified in Section 3.03(a) of the Marquee Disclosure Schedule or
as disclosed in a Marquee SEC Report filed as of the date hereof, there are no
options, warrants, stock appreciation rights or other rights, agreements,
arrangements or commitments of any character (including, without limitation,
employment and acquisition agreements) relating to the issued or unissued
capital stock of, or other equity interests in, Marquee or any Marquee
Subsidiary or obligating Marquee or any Marquee Subsidiary to issue or sell any
shares of capital stock of, or other equity interests in, Marquee or any
Marquee Subsidiary. Except as set forth in Section 3.03(b) of the Marquee
Disclosure Schedule, there are no outstanding contractual obligations of
Marquee or any Marquee Subsidiary to repurchase, redeem or otherwise acquire
any shares of Marquee Common Stock or any capital stock of, or any equity
interest in, any Marquee Subsidiary. Each outstanding share of capital stock
of, or other equity interest in, each Marquee Subsidiary is duly authorized,
validly issued, fully paid and nonassessable, and each such share or interest
owned by Marquee or another Marquee Subsidiary is free and clear of all
security interests, liens, claims, pledges, options, rights of first refusal,
agreements, limitations on Marquee's or such other Marquee Subsidiary's voting
rights, charges and other
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encumbrances of any nature whatsoever. There are no notes, bonds, debentures or
other indebtedness of Marquee having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
the stockholders of Marquee may vote.
SECTION 3.04. AUTHORITY RELATIVE TO THIS AGREEMENT. Marquee has all
necessary corporate power and authority to execute and deliver this Agreement
and, with respect to the Merger, upon the approval and adoption of this
Agreement by Marquee's stockholders in accordance with this Agreement and
Delaware Law, to perform its obligations hereunder and to consummate the
Transactions. The execution and delivery of this Agreement by Marquee and the
consummation by Marquee of the Transactions have been duly and validly
authorized by all necessary corporate action, and no other corporate
proceedings on the part of Marquee are necessary to authorize this Agreement or
to consummate the Transactions (other than, with respect to the Merger, the
approval and adoption of this Agreement by the stockholders of Marquee as set
forth in Section 3.15 and the filing and recordation of an appropriate
Certificate of Merger with the Secretary as required by Delaware Law). This
Agreement has been duly and validly executed and delivered by Marquee and,
assuming the due authorization, execution and delivery of this Agreement by SFX
and Acquisition Sub, constitutes a legal, valid and binding obligation of
Marquee, enforceable against Marquee in accordance with its terms.
SECTION 3.05. NO CONFLICT; REQUIRED FILINGS AND CONSENTS. (a) The
execution and delivery of this Agreement by Marquee do not, and the performance
of this Agreement by Marquee will not, subject to, (x) with respect to the
Merger, obtaining the requisite approval and adoption of this Agreement by
Marquee's stockholders in accordance with this Agreement and Delaware Law, and
(y) obtaining the consents, approvals, authorizations and permits and making
the filings described in Section 3.05(b) of this Agreement, (i) conflict with
or violate the Certificate of Incorporation or Bylaws of Marquee or any Marquee
Subsidiary, (ii) conflict with or violate any domestic (federal, state or
local) or foreign law, rule, regulation, order, judgment or decree
(collectively, "Law" or "Laws") applicable to Marquee or any Marquee Subsidiary
or by which any property or asset of Marquee or any Marquee Subsidiary is bound
or affected, or (iii) except as described in Section 3.05(a)(iii) of the
Marquee Disclosure Schedule, result in any breach of or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or give to others any right of termination, unilateral amendment,
acceleration or cancellation of, or give to others any right to invalidate or
terminate any purchase or other right to acquire property under, or result in
the creation of a lien or other encumbrance on any property or asset of Marquee
or any Marquee Subsidiary or require the consent of any third party pursuant
to, any note, bond, mortgage, indenture, evidence of Indebtedness, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Marquee or any Marquee Subsidiary is a party or by which Marquee or
any Marquee Subsidiary or any property or asset of Marquee or any Marquee
Subsidiary is bound or affected, except, in any of the cases enumerated in
clauses (ii) and (iii), for such conflicts, violations, breaches, defaults,
rights, liens and consents which individually or in the aggregate (x) would not
reasonably be expected to have a Material Adverse Effect on Marquee, and (y)
would not prevent or delay consummation of the Transactions or otherwise
prevent Marquee from timely performance of its obligations under this
Agreement. For purposes of this Agreement, "Indebtedness" shall mean, with
respect to any person, without duplication, (i) all obligations of such person
for borrowed money, or with respect to deposits or advances of any kind to such
person, (ii) all obligations of such person evidenced by bonds, debentures,
notes or similar instruments, (iii) all obligations of such person under
conditional
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sale or other title retention agreements relating to property purchased by such
person, (iv) all obligations of such person issued or assumed as the deferred
purchase price of property or services (excluding obligations of such person to
creditors for raw materials, inventory, services and supplies incurred in the
ordinary course of such person's business), (v) all capitalized lease
obligations of such person, (vi) all obligations of others secured by a lien on
property or assets owned or acquired by such person, whether or not the
obligations secured thereby have been assumed, (vii) all obligations of such
person under interest rate or currency hedging transactions (valued at the
termination value thereof), (viii) all letters of credit issued for the account
of such person and (ix) all guarantees and arrangements having the economic
effect of a guarantee of such person of any Indebtedness of any other person.
(b) The execution and delivery of this Agreement by Marquee do not, and
the performance of this Agreement by Marquee will not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
governmental or regulatory authority, domestic or foreign, except (i) pursuant
to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Securities Act of 1933, as amended (the "Securities Act"), state securities or
"blue sky" laws ("Blue Sky Laws"), the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), and filing and recordation of an
appropriate Certificate of Merger with the Secretary as required by Delaware
Law, and (ii) where failure to obtain such consents, approvals, authorizations
or permits, or to make such filings or notifications, would not reasonably be
likely to have a Material Adverse Effect on Marquee, would not prevent or delay
consummation of the Transactions, and would not otherwise prevent Marquee from
timely performing its obligations under this Agreement in any material respect.
SECTION 3.06. PERMITS; COMPLIANCE. Each of Marquee and the Marquee
Subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exceptions, consents, certificates,
approvals and orders of any United States (federal, state or local) or foreign
government, or governmental, regulatory or administrative authority, agency or
commission or court of competent jurisdiction ("Governmental Authority")
legally necessary for Marquee or any Marquee Subsidiary to own, lease and
operate its properties or to carry on its business as it is now being
conducted, except for those which the failure to possess would not individually
or in the aggregate reasonably be expected to have a Material Adverse Effect on
Marquee (the "Marquee Permits") and, as of the date hereof, no suspension or
cancellation of any of the Marquee Permits is pending or, to the knowledge of
Marquee, threatened. Neither Marquee nor any Marquee Subsidiary is in conflict
with, or in default or violation of, or, with the giving of notice or the
passage of time, would be in conflict with, or in default or violation of, (i)
any Law applicable to Marquee or any Marquee Subsidiary or by which any
property or asset of Marquee or any Marquee Subsidiary is bound or affected,
except in the case of any such conflict, default or violation which would not
reasonably be expected to have a Material Adverse Effect, or (ii) any of the
Marquee Permits.
SECTION 3.07. SEC FILINGS; FINANCIAL STATEMENTS. (a) Marquee has filed all
forms, reports and documents required to be filed by it with the Securities and
Exchange Commission (collectively, the "Marquee SEC Reports"). The Marquee SEC
Reports, after giving effect to any amendments thereto, (i) were prepared in
all material respects in accordance with the requirements of the Securities Act
and the Exchange Act, as the case may be, and the rules and regulations
thereunder and (ii) did not, at the time they were filed, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in
the light
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of the circumstances under which they were made, not misleading. No Marquee
Subsidiary is currently required to file any form, report or other document
with the Securities and Exchange Commission (the "SEC").
(b) Each of the financial statements (including, in each case, any notes
thereto) contained in the Marquee SEC Reports was prepared in accordance with
United States generally accepted accounting principles applied on a consistent
basis ("GAAP") throughout the periods indicated (except as may be indicated in
the notes thereto and except that financial statements included with quarterly
reports on Form 10-QSB or Form 10-Q do not contain all GAAP notes to such
financial statements), and each fairly presented in all material respects the
financial position, results of operations and changes in stockholders' equity
and cash flows of Marquee and its consolidated subsidiaries as of the
respective dates thereof and for the respective periods indicated therein
(subject, in the case of unaudited statements, to normal and recurring year-end
adjustments which were not and are not expected, individually or in the
aggregate, to have a Material Adverse Effect on Marquee).
(c) Except (i) to the extent set forth on the audited consolidated balance
sheet of Marquee as of December 31, 1997, including the notes to the audited
financial statements of which such balance sheet is a part and which is
included in Marquee's Form 10-KSB for the year ended December 31, 1997 (the
"Marquee Balance Sheet"), or (ii) to the extent set forth on the consolidated
balance sheet of Marquee as of March 31, 1998, including the notes to the
financial statements of which such balance sheet is a part and which is
included in Marquee's Form 10-Q for the three months ended March 31, 1998 (the
"Marquee Interim Balance Sheet"), neither Marquee nor any Marquee Subsidiary
has any liability or obligation of any nature (whether accrued, absolute,
contingent or otherwise) which would be required to be reflected on a balance
sheet, or in the notes thereto, prepared in accordance with GAAP, except for
liabilities and obligations incurred in (x) the ordinary course of business
consistent with past practice since March 31, 1998 which would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on Marquee or (y) connection with this Agreement.
(d) Marquee has heretofore made available to SFX true, complete and
correct copies of all amendments and modifications (if any) that have not been
filed by Marquee with the SEC to all agreements, documents and other
instruments that previously had been filed by Marquee as exhibits to the
Marquee SEC Reports and are currently in effect.
(e) Assuming that the representations and warranties of Marquee contained
in this section are true and correct, SFX has determined that Marquee's
historical financial performance, as reported in the Marquee SEC Reports for
the six months ended June 30, 1998, is satisfactory to SFX for purposes of this
Agreement.
SECTION 3.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since March 31, 1998,
Marquee has conducted its business only in the ordinary course and in a manner
consistent with Marquee's past practice, and, except as set forth in Sections
3.08 and 5.01 of the Marquee Disclosure Schedule, as disclosed in a Marquee SEC
Report filed as of the date hereof or as contemplated by this Agreement, there
has not been:
(a) any amendment or other change to the Certificate of Incorporation or
Bylaws of Marquee or any Marquee Subsidiary;
(b) any issuance, sale, pledge, disposal, grant, encumbrance, or
authorization of the issuance, sale, pledge, disposition, grant or encumbrance
by Marquee or any Marquee Subsidiary of (i) any shares of their capital stock
of any class, or any options, warrants, convertible securities or other rights
of any kind to acquire any shares of such capital stock,
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or any other ownership interest (including, without limitation, any phantom
interest), of Marquee or any Marquee Subsidiary (except for the issuance of
shares of capital stock pursuant to the exercise of Options and Warrants
outstanding on March 31, 1998), or (ii) any of their assets;
(c) any declaration, setting aside, making or payment of any dividend or
other distribution, payable in cash, stock, property or otherwise, with respect
to any of the capital stock of Marquee or any Marquee Subsidiary;
(d) any reclassification, combination, split or division by Marquee or any
Marquee Subsidiary of any of their capital stock or redemption, purchase or
other acquisition, directly or indirectly, of any of their capital stock or
securities or obligations convertible into or exchangeable or exercisable for
such capital stock;
(e) any commitment or incurrence by Marquee or any Marquee Subsidiary of
any capital expenditure in excess of $50,000;
(f) any incurrence of any indebtedness for borrowed money in excess of
$50,000 or issuance of any debt securities or assumption, guarantee or
endorsement, or otherwise becoming responsible as an accommodation, for the
obligations of any person, or making of any loans or advances;
(g) any acquisition by Marquee or any Marquee Subsidiary (including,
without limitation, by merger, consolidation or acquisition of stock or assets)
of any interest in any corporation, partnership, other business organization or
any division thereof or any assets;
(h) any contract or agreement entered into or modified, amended or
terminated by Marquee or any Marquee Subsidiary material to their businesses,
results of operations or financial condition;
(i) any (i) increase in the compensation payable or to become payable to
any director, officer or other employee, or consultant or advisor, of Marquee
or any Marquee Subsidiary, (ii) grant of any bonus to, or grant of any
severance or termination pay to, except pursuant to existing compensation and
benefit plans, practices or arrangements that have been previously disclosed to
SFX, any director, officer or other employee, or consultant or advisor, of
Marquee or any Marquee Subsidiary, (iii) employment or severance agreement that
has a potential duration of more than 90 days or that involves an aggregate
payment of more than $50,000, entered into with any director, officer or other
employee, or consultant or advisor, of Marquee or any Marquee Subsidiary, or
(iv) collective bargaining agreement entered into or amended;
(j) any bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension, retirement, deferred compensation or other plan,
trust or fund established, adopted, entered into or amended for the benefit of
any director, officer or class of employees of Marquee or any Marquee
Subsidiary;
(k) any settlement or compromise by Marquee or any Marquee Subsidiary of
any pending or threatened litigation which would reasonably be expected to have
a Material Adverse Effect on Marquee or which relates to the Transactions;
(l) any event, circumstance or fact (whether or not covered by insurance),
individually or in the aggregate, (i) having or reasonably likely to have a
Material Adverse Effect on Marquee or (ii) likely to prevent or delay
consummation of the Transactions or to otherwise prevent Marquee from timely
performance of its obligations under this Agreement; or
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(m) any material change by Marquee or any Marquee Subsidiary in its
accounting methods, principles or practices, except as may be required by GAAP.
SECTION 3.09. ABSENCE OF LITIGATION. Section 3.09 of the Marquee
Disclosure Schedule sets forth each instance in which any of Marquee and the
Marquee Subsidiaries (i) is subject to any outstanding injunction, judgment,
order, decree, ruling, or charge or (ii) is a party or, to the knowledge of
Marquee and the Marquee Subsidiaries, is threatened to be made a party to any
action, suit, proceeding, hearing, or investigation of, in, or before any court
or quasi- judicial or administrative agency of any federal, state, local, or
foreign jurisdiction or before any arbitrator, which has not otherwise been
disclosed in the Marquee SEC Reports filed as of the date of this Agreement and
which (x) would reasonably be expected to have a Material Adverse Effect on
Marquee or (y) would prevent or delay consummation of the Transactions or
otherwise prevent Marquee from timely performance of its obligations under this
Agreement. Neither Marquee nor any Marquee Subsidiary nor any property or asset
of Marquee or any Marquee Subsidiary is in violation of any order, writ,
judgment, injunction, decree, determination or award.
SECTION 3.10. EMPLOYEE BENEFIT MATTERS. Except as disclosed in Section
3.10 of the Marquee Disclosure Schedule or as disclosed in a Marquee SEC Report
filed as of the date hereof:
(a) Marquee has delivered or made available to SFX each "employee pension
benefit plan" (as defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) (a "Pension Plan"), each "employee
welfare benefit plan" (as defined in Section 3(1) of ERISA), each stock option,
stock purchase, deferred compensation plan or arrangement and each other
employee fringe benefit plan or arrangement maintained, contributed to or
required to be maintained or contributed to by Marquee, any of the Marquee
Subsidiaries or any other person or entity that, together with Marquee, is
treated as a single employer under Section 414(b), (c), (m) or (o) of the Code
(each, a "Commonly Controlled Entity") which is currently in effect for the
benefit of any current or former employees, officers, directors or independent
contractors of Marquee or any of the Marquee Subsidiaries or with respect to
which Marquee or any Commonly Controlled Entity has any material contingent
liability (collectively, "Benefit Plans"). Marquee has delivered or made
available to SFX true, complete and correct copies of (i) the most recent
annual report on Form 5500 filed with the Internal Revenue Service with respect
to each Benefit Plan for which the filing of any such report is required by
ERISA or the Code, (ii) the most recent summary plan description for each
Benefit Plan for which the preparation of any such summary plan description is
required by ERISA, (iii) each currently effective trust agreement, insurance or
group annuity contract and each other funding or financing arrangement relating
to any Benefit Plan and (iv) a schedule of employer expenses with respect to
each Benefit Plan for the current plan year of each Benefit Plan.
(b) Each Benefit Plan has been administered in material compliance with
its terms, the applicable provisions of ERISA, the Code and all other
applicable laws and the terms of all applicable collective bargaining
agreements. To the knowledge of Marquee, there are no investigations by any
governmental agency, termination proceedings or other claims (except routine
claims for benefits payable under the Benefit Plans), suits or proceedings
pending or threatened against any Benefit Plan or asserting any rights or
claims to benefits under any Benefit Plan that, individually or in the
aggregate, (i) are reasonably likely to result in a Material Adverse Effect on
Marquee or (ii) would prevent or delay consummation of the Transactions or
otherwise prevent Marquee from timely performance of its obligations under this
Agreement.
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(c) There has been no application for waiver of the minimum funding
standards imposed by Section 412 of the Code with respect to any Pension Plan.
No Pension Plan has or had at any time during the current plan year an
"accumulated funding deficiency" within the meaning of Section 412(a) of the
Code.
(d) Each Pension Plan that is intended to be a tax-qualified plan has been
the subject of a determination letter from the Internal Revenue Service to the
effect that such Pension Plan and related trust is qualified and exempt from
Federal income taxes under Sections 401(a) and 501(a), respectively, of the
Code. To the knowledge of Marquee, (i) no such determination letter has been
revoked, (ii) revocation of such letter has not been threatened, and (iii) such
Pension Plan has not been amended since the effective date of its most recent
determination letter in any respect that would adversely affect its
qualification. Marquee has delivered or made available to SFX a copy of the
most recent determination letter received with respect to each Pension Plan for
which such a letter has been issued, as well as a copy of any pending
application for a determination letter. To the knowledge of Marquee, no event
has occurred that could subject any Pension Plan to any tax under Section 511
of the Code that, individually or in the aggregate, will result in a Material
Adverse Effect on Marquee or would prevent or delay consummation of the
Transactions or otherwise prevent Marquee from timely performance of its
obligations under this Agreement.
(e) Neither Marquee nor any of the Marquee Subsidiaries has engaged in a
"prohibited transaction" (as defined in Section 4975 of the Code or Section 406
of ERISA) that involves the assets of any Benefit Plan that, to Marquee's
knowledge, is reasonably likely to subject Marquee, any of the Marquee
Subsidiaries, any employee of Marquee or any Marquee Subsidiary or, to the
knowledge of Marquee, a non-employee trustee, non-employee administrator or
other non-employee fiduciary of any trust created under any Benefit Plan to any
tax or penalty on prohibited transactions imposed by Section 4975 of the Code
that individually, or in the aggregate, is reasonably likely to result in a
Material Adverse Effect on Marquee. Within the past five years, no Pension Plan
that is subject to Title IV of ERISA has been terminated other than in a
standard termination in accordance with Section 4041(b) of ERISA or, to the
knowledge of Marquee, has been the subject of a "reportable event" (as defined
in Section 4043 of ERISA and the regulations thereunder) for which the
reporting requirement has not been waived by applicable regulations, and no
such Pension Plan is reasonably expected to be terminated other than in such a
standard termination. None of Marquee, any of the Marquee Subsidiaries or, to
the knowledge of Marquee, any non-employee trustee, non-employee administrator
or other non-employee fiduciary of any Benefit Plan has breached the fiduciary
duty provisions of ERISA or any other applicable law in a manner that,
individually or in the aggregate, is reasonably likely to, result in a Material
Adverse Effect on Marquee.
(f) Neither Marquee nor any of the Marquee Subsidiaries sponsors or
maintains any Pension Plan that is a "defined benefit pension plan" (as defined
in Section 3(35) of ERISA) (a "Defined Benefit Plan").
(g) No Commonly Controlled Entity has incurred any liability under Title
IV of ERISA (other than for contributions not yet due to a Defined Benefit Plan
and other than for the payment of premiums to the Pension Benefit Guaranty
Corporation not yet due), which liability, to the extent currently due, has not
been fully paid (or accrued on such entity's financial statements) and would
not, individually or in the aggregate, be reasonably likely to result in a
Material Adverse Effect on Marquee.
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(h) No Commonly Controlled Entity has engaged in a transaction described
in Section 4069 of ERISA that could subject Marquee to liability at any time
after the date hereof that individually, or in the aggregate, is reasonably
likely to result in a Material Adverse Effect on Marquee.
(i) Neither Marquee nor the Marquee Subsidiaries contributes to or
participates in any multi-employer plan (as defined in Section 3(31) or
4001(a)(3) of ERISA). No Commonly Controlled Entity has withdrawn from any
multi-employer plan (as defined in Section 3(37) or 4001(a)(3) of ERISA) where
such withdrawal has resulted in any "withdrawal liability" (as defined in
Section 4201 of ERISA) that has not been fully paid.
(j) Prior to the date hereof, Marquee has made available to SFX copies of
all agreements and Benefit Plans under which any employee of Marquee or any of
the Marquee Subsidiaries will be entitled to any additional benefits or any
acceleration of the time of payment or vesting of any benefits under any
Benefit Plan or under any employment, severance, termination or compensation
agreement as a result of the transactions contemplated by this Agreement.
Section 3.10(j) of the Marquee Disclosure Schedule sets forth any severance
payments contained in such agreements or Benefit Plans which provide for
payments in excess of $100,000 to any such employee.
(k) No Benefit Plan provides that payments pursuant to such Benefit Plan
may be made in securities of a Commonly Controlled Entity, nor does any trust
maintained pursuant to any Benefit Plan hold any securities of a Commonly
Controlled Entity.
(l) Notwithstanding any of the foregoing to the contrary, the
representations and warranties of this Section 3.10, other than clauses (a) and
(i), shall not apply to any multi-employer plan (as defined in Section 3(37) or
4001(a)(3) of ERISA), nor shall they apply with respect to any actions or
omissions of a Pension Plan prototype plan sponsor of which Marquee has no
knowledge.
(m) There are no arrangements or contracts with any employee, director or
independent contractor that require any deferred compensation or benefits to be
paid or provided following either the consummation of the transactions
contemplated under this Agreement or the termination of service.
SECTION 3.11. LABOR MATTERS. Neither Marquee nor any Marquee Subsidiary is
a party to any collective bargaining agreement, memorandum of understanding,
settlement or other labor union contract applicable to persons employed by
Marquee or any Marquee Subsidiary. There are no material representation or
certificate proceedings or petitions seeking a representation proceeding
pending or, to the knowledge of Marquee, threatened to be brought or filed with
the National Labor Relations Board or any other labor relations tribunal or
authority. To the knowledge of Marquee, there are no material organizing
activities of Marquee or any of the Marquee Subsidiaries, with respect to any
group of employees of Marquee or the Marquee Subsidiaries and no union or labor
organization has been recognized by Marquee or any Marquee Subsidiary as an
exclusive bargaining representative for employees of Marquee or any Marquee
Subsidiary.
There (i) is no grievance, arbitration, unfair labor practice,
investigation, employment discrimination or other labor or employment related
charge, complaint or claim against Marquee or any Marquee Subsidiary pending
before any court, arbitrator, mediator or governmental agency or tribunal, or,
to Marquee's knowledge, threatened, and (ii) has been no adjudication by any
court, arbitrator, mediator, or governmental agency or tribunal, that, in the
case of either (i) or (ii), has or that would reasonably be expected to have a
Material Adverse Effect on Marquee or otherwise limit or affect the business
operations of Marquee.
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SECTION 3.12. INTELLECTUAL PROPERTY. (a) The term "Intellectual Property
Assets" includes: (i) all fictional business names, designs, trade names, trade
dress, registered and unregistered trademarks, and service marks used or
intended to be used by Marquee or any Marquee Subsidiary in relation to its
goods or services or events, including, without limitation, those names
identified on Marquee Disclosure Schedule 3.12(a)(i) (collectively, "Marks");
(ii) all copyrights authored or placed in a tangible medium by any employee of,
or any person retained by, Marquee or any Marquee Subsidiary within the scope
of such employment or retention, or otherwise acquired by Marquee or any
Marquee Subsidiary, including, without limitation, those names identified on
Marquee Disclosure Schedule 3.12(a)(ii) (collectively, "Copyrights"); (iii) all
proprietary information, confidential materials, trade secrets, know-how,
inventions, improvements, marketing plans, strategies, forecasts, customer
information, customer lists, and the like, developed, designed, made, or
conceived by any employee of, or any person retained by, Marquee or any Marquee
Subsidiary, within the scope of such employment or retention, or otherwise
acquired by Marquee or any Marquee Subsidiary (collectively, "Proprietary
Information"); and (iv) all rights of Marquee or any Marquee Subsidiary to any
intellectual property of a third party, including, without limitation, licenses
with respect to any trade name, trademark, service mark, patent, copyright,
trade secret, or other proprietary right of a third party.
(b) There are no outstanding and, to Marquee's knowledge, no threatened
disputes or disagreements with respect to any contract, agreement or
arrangement relating to the Intellectual Property Assets to which Marquee or
any Marquee Subsidiary is a party or by which Marquee or any Marquee Subsidiary
is bound. The Intellectual Property Assets are all those necessary for the
operation of Marquee's and the Marquee Subsidiaries' businesses as they are
currently conducted or contemplated to be conducted by Marquee. Marquee or a
Marquee Subsidiary is the owner of all right, title and interest in and to each
of the Intellectual Property Assets, free and clear of all liens, security
interests, charges, encumbrances, equities, and other adverse claims, and has
the right to use all of the Intellectual Property Assets without payment to a
third party.
(c) All applications and registrations for any Mark, Copyright or
Proprietary Information are currently in compliance with all formal legal
requirements, are valid and in full force and effect, and are not subject to
any fees or taxes or actions falling due within ninety days after the Closing.
No application or registration for a Mark has been or is now involved in any
opposition, invalidation, or cancellation and, to Marquee's knowledge, (i) no
such action is threatened with respect to any such application or registration,
and (ii) there is no potentially interfering registration or application of any
third party.
(d) To Marquee's knowledge, no Mark, Copyright, or Proprietary Information
is infringed or violated by a third party or has been subject to any adverse
claim or challenged or threatened in any way by a third party.
(e) Neither Marquee nor any Marquee Subsidiary infringes or violates, or
has received notice that either is alleged to infringe or violate, any trade
name, trademark, service mark, patent, copyright, trade secret or other
proprietary right of any third party.
SECTION 3.13. TAXES. Except as described in Section 3.13 of the Marquee
Disclosure Schedule:
(a) Marquee and each of the Marquee Subsidiaries have filed all material
Tax Returns (as hereinafter defined) that they were required to file, or
requests for extensions to file such returns have been timely filed, have been
granted and have not expired. All such Tax Returns were correct and complete in
all material respects. All Taxes (as hereinafter defined)
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shown as due on any Tax Return filed by any of Marquee and the Marquee
Subsidiaries have been paid. No claim has ever been made by an authority in a
jurisdiction where any of Marquee and the Marquee Subsidiaries does not file
Tax Returns that it is or may be subject to taxation by such jurisdiction.
There are no Tax liens on any of the assets of any of Marquee and the Marquee
Subsidiaries that arose in connection with any failure (or alleged failure) to
pay any Tax other than those which in the aggregate would not have a Material
Adverse Effect on Marquee or Taxes being contested in good faith by appropriate
proceedings.
(b) No deficiencies for any Taxes have been proposed, asserted or assessed
against Marquee or any of the Marquee Subsidiaries that are not adequately
provided for on its financial statements, except for deficiencies that
individually or in the aggregate would not have a Material Adverse Effect on
Marquee, and no requests for waivers of the time to assess any such Taxes have
been granted or are pending. The U.S. Federal income Tax returns of Marquee and
each Marquee Subsidiary consolidated in such returns have been either examined
by and settled with the U.S. Internal Revenue Service or closed by virtue of
the applicable statute of limitations. There is no audit, examination,
deficiency or refund litigation pending with respect to Taxes, and, during the
past three years, no taxing authority has given written notice of the intent to
commence any such examination, audit deficiency or refund litigation.
(c) Marquee and the Marquee Subsidiaries shall not be required to include
in a taxable period ending after the Effective Time any taxable income
attributable to income that economically accrued in a prior taxable period as a
result of Section 481 of the Code, the installment method of accounting or any
comparable provision of state or local Tax law.
(d) Each of Marquee and the Marquee Subsidiaries has withheld and paid all
Taxes required to have been withheld and paid in connection with amounts paid
or owing to any employee, independent contractor, creditor, stockholder or
other third party.
(e) As used in this Agreement, "Taxes" shall include all Federal, state,
local, foreign and other income, franchise, use, property, sales, excise and
other taxes, tariffs or governmental charges of any nature whatsoever, domestic
or foreign, including any interest, penalties or additions with respect
thereto. "Tax Return" means any return, report, declaration, claim for refund,
information statement or other documentation (including any additional or
supporting material and including any amendment thereof) filed or maintained,
or required to be filed or maintained, in connection with the calculation,
determination, assessment or collection of any Tax.
SECTION 3.14. OPINION OF FINANCIAL ADVISOR. Marquee has received the
written opinion of Prudential Securities, Inc. (the "Marquee Banker") on the
date of this Agreement to the effect that, as of the date hereof (January 24,
1999), the Merger Consideration is fair, from a financial point of view, to the
holders of Marquee Common Stock.
SECTION 3.15. VOTE REQUIRED. The affirmative vote of the holders of a
majority of the voting power of the then outstanding shares of Marquee Common
Stock is the only vote of the holders of any class or series of capital stock
of Marquee necessary to approve the Merger.
SECTION 3.16. BROKERS. No broker, finder or investment banker (other than
the Marquee Banker) is entitled to any brokerage, finder's or other fee or
commission in connection with the Transactions based upon arrangements made by
or on behalf of Marquee or any Marquee Subsidiary.
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SECTION 3.17. TANGIBLE PROPERTY. Marquee and the Marquee Subsidiaries have
good title to, or a valid leasehold interest in, the tangible personal
properties and assets used by them or shown on the Marquee Balance Sheet or the
Marquee Interim Balance Sheet or acquired after the date thereof (except those
sold or otherwise disposed of for fair value since the date of the Marquee
Balance Sheet or the Marquee Interim Balance Sheet in the ordinary course of
business consistent with past practice and not in violation of this Agreement),
which are free and clear of any mortgage, pledge, lien, encumbrance, charge, or
other security interest, other than (a) mechanic's, materialmen's and similar
liens arising or incurred in the ordinary course of business, (b) purchase
money liens and liens securing rental payments under capital lease
arrangements, (c) liens which would not reasonably be expected to have a
Material Adverse Effect on Marquee, (d) liens and encumbrances identified and
reflected on the Marquee Balance Sheet or the Marquee Interim Balance Sheet, as
the case may be, and (e) mortgages, pledges, liens, encumbrances, charges or
other security interests that do not, individually, or in the aggregate,
materially adversely affect the current use of such property. All of the assets
of Marquee and the Marquee Subsidiaries have been maintained in all material
respects in accordance with the past practice of Marquee and the Marquee
Subsidiaries and generally accepted industry practice, are in good operating
condition and are usable in the ordinary course of business, except as would
not, individually or in the aggregate, have a Material Adverse Effect on
Marquee.
SECTION 3.18. MATERIAL AND ACQUISITION CONTRACTS. (a) Section 3.18(a) of
the Marquee Disclosure Schedule lists each contract which is required by its
terms or is currently expected to result in the payment or receipt by Marquee
or any Marquee Subsidiary of more than $100,000 per year or $250,000 in the
aggregate over the term of the contract (collectively, "Material Contracts"),
to which Marquee or any Marquee Subsidiary is a party, except for contracts
which have been filed and publicly available prior to the date of this
Agreement in any Marquee SEC Reports; provided, however, that Section 3.18(a)
of the Marquee Disclosure Schedule shall contain a list of all employment
agreements and shall set forth the material terms of any oral contracts. There
are no oral contracts that, individually or in the aggregate, are material to
Marquee and the Marquee Subsidiaries, taken as a whole. Each Material Contract
is in full force and effect and, to the knowledge of Marquee, is enforceable
against the parties thereto in accordance with its terms. No condition or state
of facts exists that, with notice or the passage of time, or both, would
constitute a default by Marquee or any Marquee Subsidiary or, to the knowledge
of Marquee, any third party under such Material Contracts, except for such
defaults which individually or in the aggregate would not reasonably be
expected to have a Material Adverse Effect on Marquee. Marquee or the
applicable Marquee Subsidiary has duly complied in all material respects with
the provisions of each Material Contract to which it is a party.
(b) Section 3.18(b) of the Marquee Disclosure Schedule lists each
contract, agreement, arrangement or letter of intent (whether binding or
non-binding) entered into by Marquee or any Marquee Subsidiary subsequent to
March 31, 1998 for the acquisition (whether by merger or otherwise) of the
assets or operations of any person for which the consideration payable by
Marquee exceeds $100,000 or results in the issuance of Marquee Common Stock
(collectively, and together with any contract or agreement entered into on a
basis consistent with and pursuant to the terms of any such arrangement or
letter of intent, "Acquisition Contracts"). Marquee has delivered or made
available to SFX a true, complete and correct copy of each Acquisition
Contract, as amended to the date hereof. Each Acquisition Contract is in full
force and effect and, to the knowledge of Marquee, is enforceable against the
parties thereto in accordance with its terms. No condition or state of facts
exists that, with notice or the passage of time, or both, would constitute a
default by Marquee or any
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Marquee Subsidiary or, to the best knowledge of Marquee, any third party under
such Acquisition Contracts. Marquee or the applicable Marquee Subsidiary has
duly complied in all material respects with the provisions of each Acquisition
Contract to which it is a party.
SECTION 3.19. CERTAIN BUSINESS PRACTICES. Marquee, each Marquee Subsidiary
and, to the knowledge of Marquee, each director, officer, authorized agent or
employee of Marquee or any Marquee Subsidiary have not, directly or indirectly,
(a) used any funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity, (b) made any unlawful payment
to foreign or domestic government officials or employees or to foreign or
domestic political parties or campaigns or violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended, (c) made any other unlawful
payment, (d) violated any of the provisions of Section 999 of the Code or
Section 8 of the Export Administration Act, as amended, or (e) established or
maintained any fund or asset that has not been recorded in the books and
records of Marquee and the Marquee Subsidiaries, except, in each case, as would
not individually or in the aggregate reasonably be expected to have a Material
Adverse Effect on Marquee.
SECTION 3.20. BOARD RECOMMENDATION. At a meeting duly called and held in
compliance with Delaware Law, (a) the Marquee Independent Committee has
unanimously adopted a resolution approving the Merger and recommended that the
Board of Directors of Marquee approve this Agreement and the Transactions, (b)
the Board of Directors of Marquee has unanimously adopted a resolution (with
two abstentions) (i) approving the Merger, based on a determination that the
Merger is in the best interests of the Marquee stockholders, and (ii) approving
and adopting this Agreement and the Transactions and recommending approval and
adoption of this Agreement and the Transactions by the stockholders of Marquee.
SECTION 3.21. CHANGE IN CONTROL. Except as set forth in Section 3.21 of
the Marquee Disclosure Schedule or as disclosed in a Marquee SEC Report filed
as of the date hereof, neither Marquee nor any Marquee Subsidiary is a party to
any contract, agreement or understanding which is currently expected to result
in the payment or receipt by Marquee or any Marquee Subsidiary of $50,000 or
more individually and $100,000 or more in the aggregate which contains a
"change in control," "potential change in control" or similar provision. Except
as set forth in Section 3.21 of the Marquee Disclosure Schedule, neither the
execution and delivery of this Agreement nor the consummation of the
Transactions will (a) result in any payment (whether of severance pay or
otherwise) becoming due from Marquee or any Marquee Subsidiary to any person,
(b) materially increase any benefits otherwise payable by Marquee or any
Marquee Subsidiary or (c) result in the acceleration of the time of payment or
vesting of any such benefits.
SECTION 3.22. ENVIRONMENTAL MATTERS. (a) For purposes of this Agreement,
the following terms shall have the following meanings: (i) "Hazardous
Materials" means (A) those substances, pollutants, contaminants or hazardous
waste regulated under the following federal statutes and their state
counterparts, as in effect at the relevant time, and all regulations
thereunder: the Hazardous Materials Transportation Act, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Federal Water Pollution Control Act, the
Safe Drinking Water Act, the Atomic Energy Act, the Federal Insecticide,
Fungicide, and Rodenticide Act, the Toxic Substances Control Act and the Clean
Air Act, (B) petroleum and petroleum products, byproducts and breakdown
products including crude oil and any fractions thereof, (C) polychlorinated
biphenyls, (D) asbestos, asbestos-containing material, or urea formaldehyde or
material that contains it, and (E) any substance with respect to which a
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federal, state or local agency requires environmental investigation,
monitoring, reporting or remediation, and (ii) "Environmental Laws" means any
federal, state, foreign, or local Law, rule or regulation, as in effect at the
relevant time, and including any judicial or administrative order, consent
decree or judgment, relating to pollution or protection of the environment,
health, safety or natural resources, including without limitation, those
relating to (A) the environment or public health and safety or (B) the
manufacture, handling, transport, use, treatment, storage or disposal of
Hazardous Materials; (iii) "Occupational Safety and Health Laws" means any
legal requirement designed to provide safe and healthful working conditions and
reduce occupational safety and health hazards.
(b) Except as would not, individually or in the aggregate, be reasonably
likely to have a Material Adverse Effect on Marquee and except as disclosed in
a Marquee SEC Report filed as of the date hereof: (i) Marquee and each Marquee
Subsidiary are in material compliance with all applicable Environmental Laws
and Occupational Safety and Health Laws, (ii) Marquee and each Marquee
Subsidiary have obtained all permits, approvals, identification numbers,
licenses or other governmental authorizations required under any applicable
Environmental Laws ("Environmental Permits") and are in compliance with their
requirements, (iii) such Environmental Permits will remain with the Surviving
Corporation pursuant to the Merger without the consent of any Governmental
Authority, (iv) to Marquee's knowledge there are no underground or aboveground
storage tanks or any surface impoundments, landfills, dumps, septic tanks,
pits, sumps or lagoons (collectively, "Tanks") in which Hazardous Materials are
being or have been treated, stored or disposed of on any owned or leased real
property, and there were no such Tanks on any real property formerly owned,
leased or occupied by Marquee or any Marquee Subsidiary during the period of
such ownership or occupancy, (v) there is, to the knowledge of Marquee, no
friable asbestos or asbestos-containing material on any owned or leased real
property in violation of applicable Environmental Laws, (vi) Marquee and the
Marquee Subsidiaries have not released, discharged or disposed of Hazardous
Materials except in compliance with applicable Environmental Law and have no
knowledge of a threat of release of Hazardous Materials on any owned or leased
real property or on any real property formerly owned, leased or occupied by
Marquee or any Marquee Subsidiary not in compliance with applicable
Environmental Laws, (vii) other than routine operational matters neither
Marquee nor any of the Marquee Subsidiaries is undertaking, and neither Marquee
nor any of the Marquee Subsidiaries has completed, any investigation or
assessment or remedial or response action relating to any such release,
discharge or disposal of or contamination with Hazardous Materials at any site,
location or operation, either voluntarily or pursuant to the order of any
Governmental Authority or the requirements of any Environmental Law, and (viii)
there are no pending or, to the knowledge of Marquee, past or threatened
actions, suits, demands, demand letters, claims, liens, notices of
non-compliance or violation, notices of liability or potential liability,
investigations, proceedings, consent orders or consent agreements relating in
any way to Environmental Laws, Occupational Safety and Health Laws, any
Environmental Permits or any Hazardous Materials ("Environmental and
Occupational Safety and Health Claims") against Marquee or any Marquee
Subsidiary or any of their property or property to which Hazardous Materials
generated, manufactured, received, transferred, used or processed by Marquee or
any Marquee Subsidiary have been transported, treated, stored, handled,
transferred, disposed, recycled or received and to the knowledge of Marquee
there are no existing circumstances that can reasonably be expected to form the
basis of any such Environmental and Occupational Safety and Health Claim.
(c) Marquee and the Marquee Subsidiaries have delivered to SFX or
Acquisition Sub copies of any environmental reports, studies or analyses in its
possession or under its control relating to owned or leased real property or
the operations of Marquee or the Marquee Subsidiaries.
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SECTION 3.23. ACCOUNTS RECEIVABLE. Except as would not have a Material
Adverse Effect on Marquee, all of the accounts receivable reflected in the
Marquee Balance Sheet or the Marquee Interim Balance Sheet or created
thereafter (a) are valid receivables subject to no set-offs or counterclaims,
(b) are current and collectible and (c) will be collected in accordance with
their terms at their recorded amounts, subject only to the reserve for bad
debts set forth in the Marquee Balance Sheet or the Marquee Interim Balance
Sheet, as the case may be, as adjusted for operations and transactions through
the Effective Time in accordance with the past custom and practice of Marquee
and the Marquee Subsidiaries.
SECTION 3.24. INSURANCE. Section 3.24 of the Marquee Disclosure Schedule
sets forth a list of each insurance policy (including policies providing
property, casualty, liability, and workers' compensation coverage and bond and
surety arrangements) to which any of Marquee or any Marquee Subsidiary has been
a party, a named insured, or otherwise the beneficiary of coverage at any time
within the past one year. With respect to each such insurance policy designated
as "current": (a) the policy is in full force and effect, (b) Marquee has not
received notice from any insurance carrier of the intention of such carrier to
discontinue any such policy, (c) neither Marquee nor any Marquee Subsidiary is,
and, to the knowledge of Marquee, no other party to the policy is, in breach or
default (including with respect to the payment of premiums or the giving of
notices), and no event has occurred which, with notice or the lapse of time,
would constitute such a breach or default, or permit termination, modification,
or acceleration, under the policy, and (d) no party to the policy has
repudiated any provision thereof. Section 3.24 of the Marquee Disclosure
Schedule lists any self-insurance arrangements affecting any of Marquee and the
Marquee Subsidiaries. All material assets and risks of Marquee and each Marquee
Subsidiary are covered by valid and currently effective insurance policies in
such types and amounts as are consistent with customary practices and standards
of companies engaged in business and operations similar to those of Marquee or
such Marquee Subsidiary.
SECTION 3.25. REAL PROPERTY AND LEASES.
(a) Section 3.25(a) of the Marquee Disclosure Schedule lists and describes
briefly all real property that any of Marquee and each Marquee Subsidiary owns.
With respect to each such parcel of owned real property and except as noted in
Section 3.25(a) of the Marquee Disclosure Schedule: (i) the identified owner
has good and marketable title to the parcel of real property, free and clear of
any liens or encumbrances, easement, covenant, or other restriction, except for
installments of special assessments not yet delinquent, recorded easements,
covenants, and other restrictions, and utility easements, building
restrictions, zoning restrictions, and other easements and restrictions
existing generally with respect to properties of a similar character which do
not affect materially and adversely the current use, occupancy, or value, or
the marketability of title, of the property subject thereto, (ii) there are no
leases, subleases, licenses, concessions, or other agreements, written or oral,
granting to any party or parties the right of use or occupancy of any portion
of the parcel of real property that would have a Material Adverse Effect on
Marquee's use of such property, and (iii) there are no outstanding options or
rights of first refusal to purchase, lease or occupy the parcel of real
property, or any portion thereof or interest therein which would have a
Material Adverse Effect on Marquee's use of such property.
(b) Section 3.25(b) of the Marquee Disclosure Schedule lists and describes
briefly all real property leased or subleased to any of Marquee and any Marquee
Subsidiary. With respect to each lease and sublease (i) the lease or sublease
is legal, valid, binding and enforceable against Marquee or such Marquee
Subsidiary, and in full force and effect in all
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material respects, (ii) to the knowledge of Marquee, no party to the lease or
sublease is in material breach or default, and no event has occurred which,
with notice or lapse of time, would constitute a material breach or default or
permit termination, modification, or acceleration thereunder, (iii) no party to
the lease or sublease has repudiated any material provision thereof, (iv) there
are no material disputes, oral agreements, or forbearance programs in effect as
to the lease or sublease, (v) none of Marquee or any Marquee Subsidiary has
assigned, transferred, conveyed, mortgaged, deeded in trust, or encumbered any
interest in the leasehold or sub-leasehold, and (vi) except as would not have a
Material Adverse Effect on Marquee, all facilities leased or subleased
thereunder have received all approvals of governmental authorities (including
material licenses and permits) legally required in connection with the
operation thereof, and have been operated and maintained in accordance with
applicable laws, rules, and regulations in all material respects.
SECTION 3.26. INTERESTED PARTY TRANSACTIONS. No event or transaction has
occurred or been entered into that would be required to be, and has not been,
reported by Marquee as a "Certain Relationship or Related Transaction" pursuant
to Item 404 of Regulation S-K promulgated by the SEC. Except as disclosed in
the Marquee SEC Reports filed as of the date of this Agreement, neither Marquee
nor any Marquee Subsidiary has any liability or any other obligation of any
nature whatsoever to any officer, director or affiliate of Marquee or of any
Marquee Subsidiary.
SECTION 3.27. CLIENTS AND EVENTS. No client, sponsor or customer of
Marquee or any Marquee Subsidiary that during the 12 month period preceding the
date of this Agreement individually accounted for at least 1%, or in the
aggregate accounted for 5%, of Marquee's consolidated gross revenues (i) has
indicated to Marquee or any Marquee Subsidiary that it will stop, or decrease
materially the rate of, buying services or products of Marquee and the Marquee
Subsidiaries or (ii) has at any time on or after March 31, 1998 decreased
materially its usage of the services or products of Marquee and the Marquee
Subsidiaries. Marquee and the Marquee Subsidiaries have not received any notice
or other indication of the termination or reduction of Marquee's or any Marquee
Subsidiary's involvement in or receipt of fees from any event that Marquee or
such Marquee Subsidiary promoted, organized or otherwise derived revenues from
during such preceding 12 month period, except for such events that individually
accounted for less than 1%, or in the aggregate accounted for 5%, of Marquee's
consolidated gross revenues during such preceding 12 month period.
SECTION 3.28. RESTRICTIONS ON BUSINESS ACTIVITIES. To the knowledge of
Marquee, there is no material agreement, judgment, injunction, order or decree
binding upon Marquee or any Marquee Subsidiary that has, or reasonably could be
expected to have, the effect of prohibiting or materially impairing any current
or future business practice of Marquee or any Marquee Subsidiary, any
acquisition of property by Marquee or any Marquee Subsidiary or the conduct of
business by Marquee or any Marquee Subsidiary as currently conducted or as
proposed to be conducted by Marquee or any Marquee Subsidiary.
SECTION 3.29. CORPORATE RECORDS. The books of account, minute books, stock
record books and other records of Marquee and the Marquee Subsidiaries are
complete and correct and have been maintained in accordance with sound business
practices. The minute books of Marquee and the Marquee Subsidiaries made
available to SFX contain true, complete and correct records of all meetings of
directors and stockholders or actions by written consent since the time of
incorporation of Marquee and each Marquee Subsidiary, and reflect all
transactions referred to in such minutes accurately in all material respects.
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SECTION 3.30. STATE TAKEOVER STATUTES. The Board of Directors of Marquee
has taken all actions so that the restrictions contained in Section 203 of
Delaware Law applicable to a "business combination" (as defined in such Section
203) will not apply to the execution, delivery or performance of this Agreement
or the consummation of the Merger or the other Transactions. To Marquee's
knowledge, no other state takeover statute or similar statute or regulation
applies or purports to apply to this Agreement or any of the Transactions.
ARTICLE IV -- REPRESENTATIONS AND WARRANTIES OF SFX AND
ACQUISITION SUB
Except as set forth in the Disclosure Schedule delivered by SFX to Marquee
attached hereto as Exhibit B (the "SFX Disclosure Schedule"), which identifies
exceptions by specific section references, SFX and Acquisition Sub hereby,
jointly and severally, represent and warrant to Marquee that:
SECTION 4.01. CORPORATE ORGANIZATION AND QUALIFICATION. SFX is a
corporation, and each subsidiary of SFX (each a "SFX Subsidiary" and
collectively, the "SFX Subsidiaries") is a corporation or other entity, in each
case (a) duly organized, validly existing and in good standing under the laws
of the jurisdiction of its organization and (b) which has the requisite
corporate or other power and authority to own, lease and operate its properties
and to carry on its business as it is now being conducted. SFX and each SFX
Subsidiary are duly qualified or licensed as a foreign corporation (or other
entity) to do business, and are in good standing, in each jurisdiction where
the character of the properties owned, leased or operated by them or the nature
of their business makes such qualification or licensing necessary, except for
such failures to be so qualified or licensed and in good standing that would
not, individually or in the aggregate, have a Material Adverse Effect on SFX.
SECTION 4.02. CERTIFICATE OF INCORPORATION AND BYLAWS. SFX has heretofore
made available to Marquee a complete and correct copy of the Certificate of
Incorporation and Bylaws of SFX, and the Certificate of Incorporation and
Bylaws of Acquisition Sub, each as amended to date. Neither SFX nor Acquisition
Sub is in violation of any provision of its Certificate of Incorporation or
Bylaws.
SECTION 4.03. OWNERSHIP OF ACQUISITION SUB; NO PRIOR ACTIVITIES.
Acquisition Sub is a direct or indirect wholly-owned subsidiary of SFX.
Acquisition Sub was formed solely for the purpose of engaging in the
transactions contemplated by this Agreement. Except for obligations or
liabilities incurred in connection with its incorporation or organization and
the Transactions and except for this Agreement and any other agreements or
arrangements contemplated by this Agreement, Acquisition Sub has not incurred,
directly or indirectly, through any subsidiary or affiliate, any obligations or
liabilities or engaged in any business activities of any type or kind
whatsoever or entered into any agreements or arrangements with any person.
SECTION 4.04. CAPITALIZATION. The authorized capital stock of SFX consists
of 100,000,000 shares of SFX Class A Common Stock, 10,000,000 shares of Class B
Common Stock, par value $.01 per share, and 25,000,000 shares of preferred
stock, par value $.01 per share. As of July 20, 1998, 28,753,194 shares of SFX
Class A Common Stock were issued and outstanding, all of which are validly
issued, fully paid and nonassessable and not subject to preemptive rights, and
no shares have been issued or become outstanding between such date and the date
hereof, other than pursuant to exercise of outstanding options or warrants of
SFX described in Section 4.04 of the SFX Disclosure Schedule or as disclosed in
an SFX
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SEC Report (as defined herein) filed prior to the date hereof. As of the date
hereof, (a) 1,697,037 shares of Class B Common Stock of SFX were issued and
outstanding, all of which are validly issued, fully paid and nonassessable and
not subject to preemptive rights, and (b) no shares of preferred stock were
issued and outstanding. The authorized capital stock of Acquisition Sub
consists of 1,000 shares of common stock, of which, as of the date of this
Agreement, 100 shares are issued and outstanding and held by SFX. Except as
contemplated by this Agreement, as set forth in Section 4.04 of the SFX
Disclosure Schedule or as disclosed in an SFX SEC Report filed prior to the
date hereof, as of the date of this Agreement, there are no options, warrants
or other rights, agreements, arrangements or commitments of any character
relating to the issued or unissued capital stock of SFX or any SFX Subsidiary,
obligating SFX or any SFX Subsidiary to issue or sell any shares of capital
stock of, or other equity interests in, SFX or any SFX Subsidiary. Except as
disclosed in an SFX SEC Report, there are no outstanding contractual
obligations of SFX or any SFX Subsidiary to repurchase, redeem or otherwise
acquire any shares of SFX Common Stock, or any capital stock of, or any equity
interests in, any SFX subsidiary. The shares of SFX Class A Common Stock to be
issued pursuant to the Merger will be duly authorized, validly issued, fully
paid and non-assessable and not subject to preemptive rights created by
statute, SFX's Certificate of Incorporation or Bylaws or any agreement to which
SFX is a party or by which SFX is bound and will, when issued, be registered
under the Securities Act and the Exchange Act and registered or exempt from
registration under applicable Blue Sky Laws.
SECTION 4.05. AUTHORITY RELATIVE TO THIS AGREEMENT. Each of SFX and
Acquisition Sub has all necessary corporate power and authority to execute and
deliver this Agreement, to perform its obligations hereunder and to consummate
the Transactions. The execution and delivery of this Agreement by SFX and
Acquisition Sub and the consummation by SFX and Acquisition Sub of the
Transactions have been duly and validly authorized by all necessary corporate
action, and no other corporate proceedings on the part of SFX or Acquisition
Sub are necessary to authorize this Agreement or to consummate the Transactions
(other than, with respect to the issuance of SFX Class A Common Stock pursuant
to the Merger, the applicable rules and regulations of the Nasdaq Stock Market,
and with respect to the Merger, the filing and recordation of an appropriate
Certificate of Merger with the Secretary as required by Delaware Law). This
Agreement has been duly and validly executed and delivered by SFX and
Acquisition Sub and, assuming the due authorization, execution and delivery of
this Agreement by Marquee, constitutes a legal, valid and binding obligation of
each of SFX and Acquisition Sub enforceable against each of SFX and Acquisition
Sub in accordance with its terms.
SECTION 4.06. NO CONFLICT; REQUIRED FILINGS AND CONSENTS. (a) The
execution and delivery of this Agreement by SFX and Acquisition Sub do not, and
the performance of this Agreement by SFX and Acquisition Sub will not, subject
to obtaining the consents, approvals, authorizations and permits and making the
filings described in Section 4.06(b) of the SFX Disclosure Schedule or in
Section 4.06(b) of this Agreement, (i) conflict with or violate the Certificate
of Incorporation or Bylaws of SFX or any SFX Subsidiary, (ii) conflict with or
violate any Law applicable to SFX or any SFX Subsidiary or by which any
property or asset of any of them is bound or affected or (iii) except as
specified in Section 4.06(a)(iii) of the SFX Disclosure Schedule, result in any
breach of or constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or other encumbrance on any property or asset of SFX or any
SFX Subsidiary or require the consent of any third party pursuant to, any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or
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other instrument or obligation to which SFX or any SFX Subsidiary is a party or
by which SFX or any SFX Subsidiary or any property or asset of any of them is
bound or affected, except, in any cases enumerated in clauses (ii) and (iii),
for any such conflicts, violations, breaches, defaults or other occurrences
which would not, individually or in the aggregate, reasonably be likely to have
a Material Adverse Effect on SFX or prevent SFX and Acquisition Sub from timely
performing their respective obligations under this Agreement and consummating
the Transactions.
(b) The execution and delivery of this Agreement by SFX and Acquisition
Sub do not, and the performance of this Agreement by SFX and Acquisition Sub
will not, require any consent, approval, authorization or permit of, or filing
with or notification to, any governmental or regulatory authority, domestic or
foreign, except (i) pursuant to the Exchange Act, the Securities Act, Blue Sky
Laws, the HSR Act and filing and recordation of an appropriate Certificate of
Merger with the Secretary as required by Delaware Law, (ii) such filings with
and approvals of the Nasdaq Stock Market to permit the shares of SFX Class A
Common Stock to be listed, and (iii) where failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications,
would not reasonably be likely to have a Material Adverse Effect on SFX and
would not prevent or delay consummation of the Transactions, or otherwise
prevent SFX or Acquisition Sub from performing their respective obligations
under this Agreement.
SECTION 4.07. SEC FILINGS; FINANCIAL STATEMENTS. (a) SFX has filed all
forms, reports and documents required to be filed by it with the SEC
(collectively, the "SFX SEC Reports"). The SFX SEC Reports after giving effect
to any amendments thereto, (i) were prepared in all material respects in
accordance with the requirements of the Securities Act and the Exchange Act, as
the case may be, and the rules and regulations thereunder and (ii) did not, at
the time they were filed, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each
case, any notes thereto) contained in the SFX SEC Reports was prepared in
accordance with GAAP throughout the periods indicated (except as may be
indicated in the notes thereto and except that financial statements included
with interim reports do not contain all GAAP notes to such financial
statements) and each fairly presented in all material respects the consolidated
financial position, results of operations and changes in stockholders' equity
and cash flows of SFX and its consolidated subsidiaries as of the respective
dates thereof and for the respective periods indicated therein (subject, in the
case of unaudited statements, to normal and recurring year-end adjustments
which were not and are not expected, individually or in the aggregate, to have
a Material Adverse Effect on SFX).
(c) Except (i) to the extent set forth on the audited consolidated balance
sheet of SFX as of December 31, 1997, including the notes to the audited
financial statements of which such balance sheet is a part and which is
included in SFX's Form 10-K for the year ended December 31, 1997 (the "SFX
Balance Sheet"), or (ii) to the extent set forth on the consolidated balance
sheet of SFX as of March 31, 1998, including the notes to the financial
statements of which such balance sheet is a part and which is included in SFX's
Form 10-Q for the three months ended March 31, 1998 (the "SFX Interim Balance
Sheet"), neither SFX nor any SFX Subsidiary has any liability or obligation of
any nature (whether accrued, absolute, contingent or otherwise) which would be
required to be reflected on a balance sheet, or in the notes thereto, prepared
in accordance with GAAP, except for liabilities and
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obligations incurred in (x) the ordinary course of business consistent with
past practice since March 31, 1998 which would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on SFX or
(y) connection with this Agreement.
(d) SFX has heretofore made available to Marquee true, complete and
correct copies of all amendments and modifications (if any) that have not been
filed by SFX with the SEC to all agreements, documents and other instruments
that previously had been filed by SFX as exhibits to the SFX SEC Reports and
are currently in effect.
SECTION 4.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. (a) Since March 31,
1998, except in the ordinary course and in a manner consistent with SFX's past
practice or as contemplated by, or disclosed pursuant to, this Agreement,
including Section 4.08 of the SFX Disclosure Schedule, or disclosed in any SFX
SEC Report filed since March 31, 1998, there has not been (i) any event or
events (whether or not covered by insurance), individually or in the aggregate,
having or reasonably likely to have a Material Adverse Effect on SFX, (ii) any
material change by SFX in its accounting methods, principles or practices, or
(iii) any declaration, setting aside or payment of any dividend or distribution
in respect of any capital stock of SFX or any redemption, purchase or other
acquisition of any of its securities.
(b) As of the date hereof and the Effective Time, except for obligations
or liabilities incurred in connection with its incorporation or organization
and the Transactions and except for this Agreement and any other agreements or
arrangements contemplated by this Agreement, Acquisition Sub has not and will
not have incurred, directly or indirectly, through any subsidiary or affiliate,
any obligations or liabilities or engaged in any business activities of any
type or kind whatsoever or entered into any agreements or arrangements with any
person.
SECTION 4.09. ABSENCE OF LITIGATION. Section 4.09 of the SFX Disclosure
Schedule sets forth each instance in which any of SFX and the SFX Subsidiaries
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party or, to the knowledge of SFX and the SFX
Subsidiaries, is threatened to be made a party to any action, suit, proceeding,
hearing, or investigation of, in, or before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator, which has not otherwise been disclosed in the SFX SEC
Reports filed as of the date of this Agreement and which (x) would reasonably
be expected to have a Material Adverse Effect on SFX or (y) would prevent or
delay consummation of the Transactions or otherwise prevent SFX from timely
performance of its obligations under this Agreement. Neither SFX nor any SFX
Subsidiary nor any property or asset of SFX or any SFX Subsidiary is in
violation of any order, writ, judgment, injunction, decree, determination or
award.
SECTION 4.10. TAXES. Except as described in Section 4.10 of the SFX
Disclosure Schedule:
(a) SFX and each of the SFX Subsidiaries have filed all material Tax
Returns that they were required to file, or requests for extensions to file
such returns have been timely filed, granted and have not expired, or requests
for extensions to file such returns have been timely filed, have been granted
and have not expired. All such Tax Returns were correct and complete in all
material respects. All Taxes shown as due on any Tax Return by any of SFX and
the SFX Subsidiaries have been paid. No claim has ever been made by an
authority in a jurisdiction where any of SFX and the SFX Subsidiaries does not
file Tax Returns that it is or may be subject to taxation by such jurisdiction.
There are no Tax liens on any of the
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assets of any of SFX and the SFX Subsidiaries that arose in connection with any
failure (or alleged failure) to pay any Tax other than those which in the
aggregate would not have a Material Adverse Effect or Taxes being contested in
good faith by appropriate proceedings.
(b) No deficiencies for any Taxes have been proposed, asserted or assessed
against SFX or any of the SFX Subsidiaries that are not adequately provided for
on its financial statements, except for deficiencies that individually or in
the aggregate would not have a Material Adverse Effect on SFX, and no requests
for waivers of the time to assess any such Taxes have been granted or are
pending. The U.S. Federal income Tax Returns of SFX and each SFX Subsidiary
consolidated in such returns have been either examined by and settled with the
U.S. Internal Revenue Service or closed by virtue of the applicable statute of
limitations. There is no audit, examination, deficiency or refund litigation
pending with respect to Taxes, and, during the past three years, no taxing
authority has given written notice of the intent to commence any such
examination, audit deficiency or refund litigation.
(c) SFX and the SFX Subsidiaries shall not be required to include in a
taxable period ending after the Effective Time any taxable income attributable
to income that economically accrued in a prior taxable period as a result of
Section 481 of the Code, the installment method of accounting or any comparable
provision of state or local Tax law.
(d) Each of SFX and the SFX Subsidiaries has withheld and paid all Taxes
required to have been withheld and paid in connection with amounts paid or
owing to any employee, independent contractor, creditor, stockholder or other
third party.
SECTION 4.11. OPINION OF FINANCIAL ADVISOR. SFX has received the written
opinion of Lehman Brothers (the "SFX Banker") on the date of this Agreement to
the effect that, as of the date hereof (January 24, 1999), the Merger
Consideration to be offered by SFX in the Merger is fair, from a financial
point of view, to SFX.
SECTION 4.12. BROKERS. No broker, finder or investment banker (other than
the SFX Banker) is entitled to any brokerage, finder's or other fee or
commission in connection with the Transactions based upon arrangements made by
or on behalf of SFX or any SFX Subsidiary.
SECTION 4.13. BOARD RECOMMENDATION. At a meeting duly called and held in
compliance with Delaware Law, (a) the SFX Independent Committee has unanimously
adopted a resolution approving the Merger and recommended that the Board of
Directors of SFX approve the Merger, (b) the Board of Directors of SFX has
unanimously adopted a resolution (with two abstentions) (i) approving the
Merger, based on a determination that the Merger is in the best interests of
the SFX stockholders, and (ii) approving and adopting this Agreement and the
Transactions.
SECTION 4.14. PERMITS; COMPLIANCE. Each of SFX and the SFX Subsidiaries is
in possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exceptions, consents, certificates, approvals and orders
of any Governmental Authority legally necessary for SFX or any SFX Subsidiary
to own, lease and operate its properties or to carry on its business as it is
now being conducted, except for those which the failure to possess would not
individually or in the aggregate reasonably be expected to have a Material
Adverse Effect on SFX.
SECTION 4.15. CERTAIN BUSINESS PRACTICES. As of the date of this
Agreement, SFX, each SFX Subsidiary and, to the knowledge of SFX, each
director, officer, authorized agent or employee of SFX or any SFX Subsidiary
have not, directly or indirectly, (a) used any funds for unlawful
contributions, gifts, entertainment or other unlawful
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expenses relating to political activity, (b) made any unlawful payment to
foreign or domestic government officials or employees or to foreign or domestic
political parties or campaigns or violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended, (c) made any other unlawful payment, (d)
violated any of the provisions of Section 999 of the Code or Section 8 of the
Export Administration Act, as amended, or (e) established or maintained any
fund or asset that has not been recorded in the books and records of SFX and
the SFX Subsidiaries, except, in each case, as would not individually or in the
aggregate reasonably be expected to have a Material Adverse Effect on SFX.
SECTION 4.16. INTERESTED PARTY TRANSACTIONS. No event or transaction has
occurred or been entered into that would be required to be, and has not been,
reported by SFX as a "Certain Relationship or Related Transaction" pursuant to
Item 404 of Regulation S-K promulgated by the SEC. Except as disclosed in the
SFX SEC Reports filed as of the date of this Agreement, SFX does not have any
liability or any other obligation of any nature whatsoever to any officer,
director or affiliate of SFX.
SECTION 4.17. ERISA COMPLIANCE. With respect to each "employee benefit
plan" (as defined in Section 3(1) of ERISA) maintained or contributed to by
SFX, no event has occurred and, to the knowledge of SFX, no condition or set of
circumstances exists, in connection with which SFX could be subject to any
liabilities (except liabilities for benefits claims and funding obligations
payable in the ordinary course) under ERISA, the Code or any other applicable
law that are individually or in the aggregate reasonably likely to have a
Material Adverse Effect on SFX.
ARTICLE V -- CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 5.01. CONDUCT OF BUSINESS BY MARQUEE PENDING THE MERGER. Marquee
covenants and agrees that, from the date of this Agreement until the earlier of
(x) the date on which this Agreement is terminated and (y) the Effective Time,
except as contemplated by this Agreement, Marquee shall, and shall cause the
Marquee Subsidiaries to, carry on their respective businesses in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted and in compliance in all material respects with all applicable Laws.
Without limiting the generality of the foregoing, during the aforementioned
period, except as contemplated by this Agreement, Marquee shall not, and shall
not permit any Marquee Subsidiary to, without the consent of SFX (which shall
not be unreasonably withheld):
(a) (i) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock, other than dividends and
distributions by a direct or indirect wholly owned Marquee Subsidiary to its
parent, (ii) split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock or (iii) other than as set forth
in Section 5.01(b) of the Marquee Disclosure Schedule or as set forth in the
agreements specifically identified thereon, purchase, redeem or otherwise
acquire any shares of capital stock of Marquee or any Marquee Subsidiary or any
other securities thereof or any rights, warrants or options to acquire any such
shares or other securities;
(b) issue, deliver, sell, pledge or otherwise encumber any shares of its
capital stock, any other voting securities or any securities convertible into,
or any rights, warrants or options to acquire, any such shares, voting
securities or convertible securities other than as set forth in Section 5.01(b)
of the Marquee Disclosure Schedule or as set forth in the agreements
specifically identified thereon;
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(c) amend its Certificate of Incorporation, Bylaws or other comparable
organizational documents;
(d) except as and to the extent set forth in the Acquisition Contracts,
acquire or agree to acquire by merging or consolidating with, or by purchasing
a substantial portion of the assets of, or by any other manner, (i) any
business or any corporation, limited liability company, partnership, joint
venture, association or other business organization or division thereof or (ii)
any assets that, individually or in the aggregate, are material to Marquee and
the Marquee Subsidiaries, taken as a whole;
(e) sell, lease, license, mortgage or otherwise encumber or subject to any
lien or otherwise dispose of any of its properties or assets, other than in the
ordinary course of business consistent with past practice, that are material to
Marquee and the Marquee Subsidiaries, taken as a whole;
(f) except in the ordinary course of business consistent with past
practice, except as set forth in Section 5.01(f) of the Marquee Disclosure
Schedule or as set forth in the agreements specifically identified thereon and
except for intercompany Indebtedness between Marquee and any Marquee Subsidiary
or between Marquee Subsidiaries, (i) incur or guarantee any Indebtedness, or
(ii) make any loans, advances or capital contributions to, or investments in,
any other person, other than to Marquee or any direct or indirect wholly owned
Marquee Subsidiary or to officers and employees of Marquee or any Marquee
Subsidiary for travel, business or relocation expenses in the ordinary course
of business;
(g) make or agree to make any new capital expenditures which in the
aggregate are in excess of $50,000;
(h) make any tax election that could reasonably be expected to have a
Material Adverse Effect on Marquee or settle or compromise any material income
tax liability;
(i) except as required by Law, and except in the ordinary course of
business or as would not (x) reasonably be expected to have a Material Adverse
Effect on Marquee or (y) prevent or delay consummation of the Transactions or
otherwise prevent Marquee from timely performance of its obligations under this
Agreement, enter into (other than entry into the Acquisition Contracts and the
agreement contemplated by Section 7.02(d)), modify, amend or terminate any
material contract or agreement to which Marquee or any Marquee Subsidiary is a
party or waive, release or assign any material rights or claims thereunder;
(j) except as required by Law, modify, amend or terminate any Acquisition
Contract or waive, release or assign any material rights or claims thereunder;
(k) make any material change to its accounting methods, principles or
practices, except as may be required by GAAP;
(l) fail to act in the ordinary course of business consistent with past
practice of Marquee, exercising commercially reasonable care to (i) preserve
substantially intact Marquee's and each Marquee Subsidiary's present business
organization, (ii) keep available the services of any employee with an
employment contract with Marquee or any Marquee Subsidiary, and (iii) preserve
its present relationships with clients, sponsors, suppliers and others having
significant business dealings with them;
(m) fail to use commercially reasonable efforts to maintain the material
assets of Marquee and each Marquee Subsidiary in their current physical
condition, except for ordinary wear and tear and damage, provided that nothing
contained herein shall be deemed to prohibit Marquee or the Marquee
Subsidiaries from undertaking or completing any capital expenditures permitted
by clause (g) hereof;
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(n) merge or consolidate with or into any other legal entity or dissolve
or liquidate any Marquee Subsidiary;
(o) except as required by the terms and provisions of written contracts
between Marquee or any Marquee Subsidiary and an employee thereof as in
existence on the date of this Agreement or as set forth in Section 5.01(o) of
the Marquee Disclosure Schedule or as set forth in the agreements specifically
identified thereon, (i) adopt or amend any Benefit Plan other than in the
ordinary course of business consistent with past practice or as required by
Law, or (ii) materially increase in any manner the aggregate compensation or
fringe benefits (including, without limitation, commissions) of any officer,
director, or employee or other personnel of Marquee or any Marquee Subsidiary
(whether employees or independent contractors) other than as required by Law;
(p) pay, discharge or satisfy any material (on a consolidated basis for
Marquee and the Marquee Subsidiaries taken as a whole) claims, liabilities, or
obligations (absolute, accrued, asserted or un-asserted, contingent or
otherwise), other than in the ordinary course of business consistent with past
practice, or fail to pay or otherwise satisfy (except if being contested in
good faith) any material (on a consolidated basis for Marquee and the Marquee
Subsidiaries, taken as a whole) accounts payable, liabilities or obligations
when due and payable;
(q) engage in any transactions with any of its affiliates other than (i)
transactions between Marquee and any Marquee Subsidiary or among Marquee
Subsidiaries, or (ii) transactions disclosed as of the date of this Agreement
in the Marquee SEC Reports; or
(r) authorize, or commit or agree to take, any of the foregoing actions.
SECTION 5.02. CONDUCT OF BUSINESS BY SFX PENDING THE MERGER. SFX covenants
and agrees that, from the date of this Agreement until the earlier of (x) the
date on which this Agreement is terminated and (y) the Effective Time, unless
Marquee shall otherwise agree in writing or except as otherwise required by
this Agreement, SFX shall, and shall cause the SFX Subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, except where the failure
to so act would not adversely affect SFX's ability to perform its obligations
hereunder. Notwithstanding anything herein to the contrary, nothing contained
in this Agreement shall prohibit SFX from (i) consummating acquisitions with
respect to which definitive agreements have been executed as of the date
hereof, (ii) entering into transactions, on an arm's length basis, in
connection with the consummation of such acquisitions, including, without
limitation, debt and/or equity financing, or (iii) entering into additional
acquisition agreements on an arm's length basis.
SECTION 5.03. OTHER ACTIONS. Between the date of this Agreement and the
Effective Time, Marquee and SFX shall use their best efforts to cause the
conditions to the Merger set forth in Article VII to be satisfied. Marquee and
SFX shall not, and shall not permit any of their respective subsidiaries to,
take any action that would, or that could reasonably be expected to, result in
(i) any of the representations and warranties of such party set forth in this
Agreement becoming untrue or (ii) any of the conditions to the Merger set forth
in Article VII not being satisfied.
ARTICLE VI -- ADDITIONAL AGREEMENTS
SECTION 6.01. REGISTRATION STATEMENT; PROXY STATEMENT. (a) Within 105 days
after the execution of this Agreement, SFX and Marquee shall prepare and file
with the SEC a preliminary proxy statement or a registration statement on Form
S-4 (together with all amendments
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thereto, the "Registration Statement") including therein a proxy statement to
be sent to the stockholders of Marquee (the "Proxy Statement") and prospectus,
in connection with the registration under the Securities Act of the shares of
SFX Class A Common Stock to be issued to the holders of the Marquee Common
Stock pursuant to the Merger. SFX and Marquee shall cooperate with each other
in connection with any other filings with the SEC that either is obligated to
make as a result of the Transactions. SFX and Marquee each shall use all
reasonable efforts to cause the Registration Statement to become effective as
promptly as practicable, and, prior to the effective date of the Registration
Statement, SFX shall take all or any action required under any applicable
federal or state securities laws in connection with the issuance of shares of
SFX Class A Common Stock pursuant to the Merger. Each of Marquee and SFX shall
pay its own expenses incurred in connection with the Registration Statement,
Proxy Statement and the Marquee Stockholders' Meeting (as defined herein),
including, without limitation, the fees and disbursements of their respective
counsel, accountants and other representatives, except that Marquee and SFX
each shall pay one-half of any filing fees and printing expenses incurred in
connection therewith. Marquee shall furnish all information concerning Marquee
as SFX may reasonably request, and SFX shall furnish all information concerning
SFX as Marquee may reasonably request, in each case in connection with such
actions and the preparation of the Registration Statement and Proxy Statement.
As promptly as practicable after the Registration Statement shall have become
effective, Marquee shall mail the Proxy Statement to its stockholders. The
Proxy Statement shall include the unanimous recommendation of the Marquee
Independent Committee and the recommendation of the Board of Directors of
Marquee in favor of the Merger, unless otherwise required by the applicable
fiduciary duties of the directors as determined by such directors in good faith
after consultation with independent legal counsel.
No amendment or supplement to the Proxy Statement or the Registration
Statement will be made by SFX or Marquee without the approval of the other
party, which shall not be unreasonably withheld. SFX and Marquee each will
advise the other, promptly after it receives notice thereof, of the time when
the Registration Statement has become effective or any supplement or amendment
has been filed, the issuance of any stop order, the suspension of the
qualification of the SFX Class A Common Stock issuable in connection with the
Merger for offering or sale in any jurisdiction, or any request by the SEC for
amendment of the Proxy Statement or the Registration Statement or comments
thereon and responses thereto or requests by the SEC for additional
information.
SFX shall prepare and submit to the Nasdaq Stock Market a listing
application covering the shares of SFX Class A Common Stock issuable in the
Merger (including shares issuable upon exercise of Options and Warrants), and
shall use its commercially reasonable efforts to obtain, prior to the Effective
Time, approval for the listing of such shares of SFX Class A Common Stock,
subject to official notice of issuance. Marquee shall cooperate fully with SFX
with respect to such listing.
SFX shall use commercially reasonable efforts to maintain the
effectiveness of the Registration Statement (and maintain the current status of
the Prospectus contained therein) for so long as the Options and Warrants
remain outstanding.
(b) SFX represents, warrants and agrees that the information supplied by
SFX or its representatives for inclusion in the Registration Statement and the
Proxy Statement shall not, at (i) the time the Registration Statement is
declared effective, (ii) the time the Proxy Statement (or any amendment thereof
or supplement thereto) is first mailed to the stockholders of Marquee, (iii)
the time of the Marquee Stockholders' Meeting, and (iv) the Effective Time
(with respect to the Registration Statement only), contain any statement which,
at such time and in light of the circumstances under which it is made, is false
or misleading with respect to any material fact, or omit to state any material
fact required to be stated therein, or necessary in order to make the
statements therein not false or misleading. If at any time prior to the
Effective Time any event or circumstance relating to SFX or any SFX Subsidiary,
or their respective officers or directors, should be discovered by SFX which
should be set forth in an amendment or a supplement to the Registration
Statement or Proxy Statement, SFX shall promptly inform Marquee.
Notwithstanding the foregoing, SFX and Acquisition Sub make no representation
or warranty with respect to any information supplied by Marquee or any of its
representatives which is contained in the Registration Statement or Proxy
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Statement. All documents that SFX is responsible for filing with the SEC in
connection with the Transactions will comply as to form and substance in all
material aspects with the applicable requirements of the Securities Act and the
rules and regulations promulgated thereunder and the Exchange Act and the rules
and regulations promulgated thereunder.
(c) Marquee represents, warrants and agrees that the information supplied
by Marquee or its representatives for inclusion in the Registration Statement
and the Proxy Statement shall not, at (i) the time the Registration Statement
is declared effective, (ii) the time the Proxy Statement (or any amendment
thereof or supplement thereto) is first mailed to the stockholders of Marquee,
(iii) the time of the Marquee Stockholders' Meeting, and (iv) the Effective
Time (with respect to the Registration Statement only), contain any statement
which, at such time and in light of the circumstances under which it is made,
is false or misleading with respect to any material fact, or omit to state any
material fact required to be stated therein, or necessary in order to make the
statements therein not false or misleading. If at any time prior to the
Effective Time any event or circumstance relating to Marquee or any Marquee
Subsidiary, or their respective officers or directors, should be discovered by
Marquee which should be set forth in an amendment or a supplement to the
Registration Statement or Proxy Statement, Marquee shall promptly inform SFX.
Notwithstanding the foregoing, Marquee makes no representation or warranty with
respect to any information supplied by SFX or Acquisition Sub or any of their
representatives in the Registration Statement or Proxy Statement. All documents
that Marquee is responsible for filing with the SEC in connection with the
Transactions will comply as to form and substance in all material respects with
the applicable requirements of the Securities Act and the rules and regulations
promulgated thereunder and the Exchange Act and the rules and regulations
promulgated thereunder.
(d) Marquee, SFX and Acquisition Sub each hereby (i) consents to the use
of its name and, on behalf of its subsidiaries and affiliates, the names of
such subsidiaries and affiliates, and to the inclusion of financial statements
and business information relating to such party and its subsidiaries and
affiliates (in each case, to the extent required by applicable securities
laws), in the Registration Statement and the Proxy Statement, (ii) agrees to
use all reasonable efforts to obtain the written consent of any person or
entity retained by it which may be required to be named (as an expert or
otherwise) in the Registration Statement or the Proxy Statement, and (iii)
agrees to cooperate fully, and agrees to use all reasonable efforts to cause
its subsidiaries and affiliates to cooperate fully, with any legal counsel,
investment banker, accountant or other agent or representative retained by any
of the parties specified in clause (i) above in connection with the preparation
of any and all information required, as determined after consultation with each
party's counsel, to be disclosed by applicable securities laws in the
Registration Statement or the Proxy Statement.
SECTION 6.02. STOCKHOLDERS' MEETINGS. Marquee shall call a meeting of its
stockholders (the "Marquee Stockholders' Meeting") as promptly as practicable
for the purpose of voting upon the approval of this Agreement and the Merger,
and Marquee shall use all commercially reasonable efforts to hold the Marquee
Stockholders' Meeting as soon as practicable after the date on which the
Registration Statement becomes effective. Without limiting the generality of
the foregoing, Marquee agrees that its obligations pursuant to the preceding
sentence shall not be affected by the commencement, public proposal, public
disclosure or communication to Marquee of any Takeover Proposal (as defined
hereinafter), unless this Agreement has been terminated. Unless otherwise
required under applicable fiduciary duties of Marquee's directors, as
determined in good faith after consultation with independent legal counsel,
Marquee shall use all commercially reasonable efforts to solicit from its
stockholders proxies in favor of the approval of this Agreement and the Merger,
and shall take all other action reasonably necessary or advisable to secure the
vote or consent of stockholders required by Delaware Law to obtain such
approvals.
SECTION 6.03. APPROPRIATE ACTION; CONSENTS; FILINGS. (a) Marquee, SFX and
Acquisition Sub shall use their commercially reasonable efforts to (i) take, or
cause to be taken, all appropriate action, and do, or cause to be done, all
things necessary, proper or advisable under applicable Laws or required to be
taken by any Governmental Authority or otherwise to consummate and make
effective the Transactions as promptly as practicable, (ii) obtain from all
applicable
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Governmental Authorities all consents, licenses, permits, waivers, approvals,
authorizations or orders legally required to be obtained or made by SFX or
Marquee or any of their subsidiaries in connection with the authorization,
execution and delivery of this Agreement and the consummation of the
Transactions, including, without limitation, the Merger, and (iii) as promptly
as practicable, make all necessary filings, and thereafter make any other
required submissions, with respect to this Agreement and the Merger required
under (A) the Securities Act, the Exchange Act and any other applicable federal
or state securities Laws, (B) the rules and regulations of the Nasdaq National
Market,
(C) Delaware Law, (D) the HSR Act and any related governmental request
thereunder, and (E) all other applicable Laws; provided that SFX and Marquee
shall cooperate fully with each other in connection with the making of all such
filings, including providing copies of all such documents to the non-filing
party and its advisors prior to filing and, if requested, accepting all
reasonable additions, deletions or changes suggested in connection therewith.
Marquee and SFX shall use reasonable best efforts to furnish to each other all
information required for each application or other filing to be made pursuant
to the rules and regulations of the Nasdaq National Market and all applicable
Laws (including all information required to be included in the Proxy Statement
and the Registration Statement) in connection with the Transactions.
Notwithstanding anything herein to the contrary, the withdrawal and prompt
re-filing of SFX's filings with respect to the Merger pursuant to the HSR Act
on or about September 18, 1998, shall not be deemed to violate this Agreement,
nor shall the taking of any reasonable action in dealing with inquires with
respect to the Merger by the Department of Justice be deemed to violate this
Agreement; provided, however, that nothing contained herein shall be deemed to
require consummation of the Merger on any terms other than as set forth in this
Agreement.
(b) (i) Each of SFX and Marquee shall give (or shall cause their
respective subsidiaries to give) any notices to third parties, and use, and
cause their respective subsidiaries to use, their commercially reasonable
efforts to obtain any third party consents, (A) legally necessary to
consummate the Transactions, (B) disclosed or required to be disclosed in
the Marquee Disclosure Schedule or the SFX Disclosure Schedule or (C)
required to prevent a Material Adverse Effect on SFX or Marquee from
occurring prior to or after the Effective Time; provided, however, that
"commercially reasonable efforts" as used in this Agreement shall not
require any party to undertake extraordinary or unreasonable measures to
obtain any approvals or consents, including, without limitation, the
initiation or prosecution of legal proceedings. At Closing, Marquee will
deliver landlord estoppel certificates in form reasonably satisfactory to
SFX.
(ii) If SFX or Marquee fails to obtain any third party consent described
in subsection (b)(i) above, then it shall use its commercially reasonable
efforts, and shall take any actions reasonably requested by the other
party, to minimize any adverse effect upon Marquee and SFX, their
respective subsidiaries, and their respective businesses resulting, or
which could reasonably be expected to result after the Effective Time, from
the failure to obtain such consent.
(c) From the date of this Agreement until the earlier of (x) the
termination of this Agreement and (y) the Effective Time, each party shall
promptly notify the other party of any actual or, to the best knowledge of the
first party, threatened action, proceeding or investigation by or before any
Governmental Authority or any other person (i) challenging or seeking material
damages in connection with the Merger, the conversion of Marquee Common Stock
into SFX Class A Common Stock pursuant to the Merger or the Transactions or
(ii) seeking to restrain or prohibit the consummation of the Merger or the
Transactions or otherwise limit the right of SFX to own or operate all or any
portion of the businesses or assets of Marquee, which in either case is
reasonably likely to have a Material Adverse Effect on Marquee prior to the
Effective Time, or a Material Adverse Effect on SFX (including the Surviving
Corporation) after the Effective Time.
SECTION 6.04. ACCESS TO INFORMATION. (a) From the date hereof until the
earlier of (x) the termination of this Agreement and (y) the Effective Time,
SFX and Marquee will each provide to the other, during normal business hours
and upon reasonable notice, access to all information and documents which the
other may reasonably request regarding the business, assets, liabilities,
employees and other aspects of the other party, other than information and
documents that in the opinion of such other party's counsel may not be
disclosed under applicable Law.
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(b) Marquee shall cooperate fully (with SFX responsible for all reasonable
costs and expenses) with SFX in connection with certain financing transactions
SFX may undertake. In connection therewith, at the request of SFX, Marquee
(with SFX responsible for all reasonable costs and expenses) will cause its
officers, directors, employees, representatives, consultants and advisors to
assist in the preparation of offering memoranda and pro forma financial
information and to participate in any road show presentations SFX shall
undertake in connection therewith, provided that such assistance shall not
unreasonably interfere with the performance by any of such officers, directors,
employees, representatives, consultants or advisors of services for Marquee. In
furtherance of the foregoing, Marquee shall use its best efforts to cause its
auditors to provide and allow the filing of consents and "comfort letters" and
other documentation as may be required for the inclusion of any financial
statements of Marquee prepared at the request of SFX, to allow such financial
statements to be used in public or private financing documents.
SECTION 6.05. ACQUISITION PROPOSALS. Neither Marquee nor any Marquee
Subsidiary shall initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Takeover Proposal, or enter into discussions or
negotiate with any person or entity in furtherance of such inquiries to obtain
a Takeover Proposal, or enter into an agreement with respect to any Takeover
Proposal or agree to or endorse any Takeover Proposal, or authorize or permit
any of the officers, directors or employees of Marquee or any Marquee
Subsidiary or any investment banker, financial advisor, attorney, accountant or
other representative retained by Marquee or any Marquee Subsidiary to take any
such action, and Marquee shall promptly notify SFX of all relevant terms and
conditions of any such inquiries and proposals received by Marquee or any
Marquee Subsidiary or by any such officer, director, investment banker,
financial advisor or attorney (including the identity of the person from whom
such inquiry or proposal was received), and if such inquiry or proposal is in
writing, Marquee shall deliver or cause to be delivered to SFX a copy of such
inquiry or proposal; provided, however, that nothing contained in this
Agreement shall prohibit the Board of Directors of Marquee or any Marquee
Subsidiary or their representatives from (i) furnishing information to,
facilitating, entering into discussions or negotiations with, or agreeing with,
any person or entity in connection with an unsolicited bona fide Takeover
Proposal that involves consideration to Marquee's stockholders with a value
that the Board of Directors of Marquee reasonably believes, after consultation
with the Marquee Banker, is superior to the consideration provided for in the
Merger, if, and only to the extent that (A) the Board of Directors of Marquee,
after consultation with independent legal counsel determines in good faith that
such action is required for the Board of Directors of Marquee to comply with
its fiduciary duties to stockholders imposed by applicable Law and (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, Marquee (x) provides as promptly as practicable
written notice to SFX of Marquee's intention to furnish such information to, or
begin such discussions or negotiations with, such person or entity and (y)
obtains from such person or entity a customary confidentiality agreement, or
(ii) complying with Rule 14e-2 promulgated under the Exchange Act with regard
to a Takeover Proposal. For purposes of this Agreement, "Takeover Proposal"
shall mean any of the following involving Marquee or any Marquee Subsidiary:
(i) any merger, consolidation, share exchange, business combination, or other
similar transaction (other than the transactions contemplated by this
Agreement), (ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 25% or more of the assets of Marquee and the Marquee
Subsidiaries, taken as a whole, in a single transaction or series of
transactions, (iii) any tender offer or exchange offer for 25% or more of any
outstanding class of capital stock of Marquee or the filing of a registration
statement under the Securities Act in connection therewith, (iv) the
acquisition by any person of "beneficial ownership" or the right to acquire
beneficial ownership of, or the formation of any "group" (as such terms are
defined under Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder) which beneficially owns, or has the right to acquire
beneficial ownership of, 25% or more of the then outstanding shares of any
class of capital stock of Marquee, or (v) any public announcement of a
proposal, plan or intention to do any of the foregoing.
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SECTION 6.06. DIRECTORS' AND OFFICERS' INDEMNIFICATION. (a) From and after
the Effective Time, the Surviving Corporation shall indemnify, defend and hold
harmless each person who is now, who has been at any time prior to the date of
this Agreement or who becomes prior to the Effective Time, an officer or
director of Marquee or any of the Marquee Subsidiaries, or an employee of
Marquee or any of the Marquee Subsidiaries who acts as a fiduciary under any
employee benefit plan of Marquee or any of the Marquee Subsidiaries
(collectively, the "Indemnified Parties") against all losses, expenses
(including reasonable attorneys' fees), claims, damages, liabilities or amounts
that are paid in settlement of, or otherwise in connection with, any threatened
or actual claim, action, suit, proceeding or investigation (a "Claim"), based
in whole or in part on or arising in whole or in part out of the fact that the
Indemnified Party (or the person controlled by the Indemnified Party) is or was
a director, officer or such an employee of Marquee or any of the Marquee
Subsidiaries and pertaining to any matter existing or arising out of actions or
omissions occurring at or prior to the Effective Time (including, without
limitation, any Claim arising out of this Agreement or any of the
Transactions), whether asserted or claimed prior to, at or after the Effective
Time, in each case to the fullest extent permitted under Delaware Law or the
Surviving Corporation's Certificate of Incorporation and Bylaws, and shall pay
any expenses, as incurred, in advance of the final disposition of any such
action or proceeding to each Indemnified Party to the fullest extent permitted
under Delaware Law or the Surviving Corporation's Certificate of Incorporation
and Bylaws; provided, however, that the Surviving Corporation shall not be
liable for any settlement effected without its written consent (which shall not
be unreasonably withheld). Without limiting the foregoing, in the event any
such claim is brought against any of the Indemnified Parties, such Indemnified
Parties may retain counsel (including local counsel) satisfactory to them and
which shall be reasonably satisfactory to SFX, and the Surviving Corporation
shall pay all fees and expenses of such counsel for such Indemnified Parties.
The Indemnified Parties as a group shall retain only one law firm (plus
appropriate local counsel) to represent them with respect to each such Claim
unless there is, as determined by counsel to the Indemnified Parties, under
applicable standards of professional conduct, a conflict or a reasonable
likelihood of a conflict on any significant issue between the positions of any
two or more Indemnified Parties, in which event each such Indemnified Party
shall be entitled to retain separate legal counsel at the expense of the
Surviving Corporation. SFX hereby unconditionally and irrevocably guarantees
the full and prompt payment and performance of any and all of the Surviving
Corporation's obligations under this Agreement. The indemnification provisions
in the Surviving Corporation's Certificate of Incorporation and Bylaws shall
not be amended, repealed or otherwise modified for a period of six years from
the Effective Time in any matter that would affect adversely the rights
thereunder of any Indemnified Party, unless such modification shall be required
by Delaware Law.
(b) For a period of six (6) years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by Marquee covering all
of the individuals currently covered thereby (provided that the Surviving
Corporation may substitute therefor policies of at least the same coverage and
amounts containing terms and conditions which are no less advantageous to such
officers and directors) with respect to claims arising from facts or events
which occurred at or prior to the Effective Time; provided, however, that the
Surviving Corporation shall not be required to pay annual premiums for such
insurance in excess of 200% in the aggregate of Marquee's current annual
premium unless SFX continues to maintain its directors' and officers' liability
insurance despite a comparable increase; and provided further, that if the
premium for such coverage exceeds such amount, the Surviving Corporation shall
purchase a policy with the greatest coverage available for such 200% of the
annual premium.
SECTION 6.07. OBLIGATIONS OF ACQUISITION SUB. SFX shall take all action
necessary to cause Acquisition Sub to perform its obligations under this
Agreement and to consummate the Merger on the terms and subject to the
conditions set forth in this Agreement and hereby irrevocably and
unconditionally guarantees all such obligations of Acquisition Sub.
SECTION 6.08. PUBLIC ANNOUNCEMENTS. SFX and Marquee shall consult with
each other before issuing any press release or otherwise making any public
statements with respect to this
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Agreement or any Transaction and shall not issue any such press release or make
any such public statement prior to such consultation. Prior to the Effective
Time, Marquee will not issue any other press release or otherwise make any
public statements regarding its business, except, in each case, as may be
required by Law or any listing agreement with the American Stock Exchange or
any other exchange to which Marquee is a party. Marquee and SFX shall consult
with each other concerning the means by which the employees, clients, sponsors
and suppliers of, and others having dealings with, Marquee and the Marquee
Subsidiaries will be informed of the Transactions.
SECTION 6.09. NOTIFICATION OF CERTAIN MATTERS. (a) Between the date of
this Agreement and the Closing Date, each of Marquee and SFX shall promptly
notify the other party in writing (i) if it becomes aware of any fact or
condition that causes or constitutes a breach of any of its representations and
warranties as of the date of this Agreement, (ii) if it becomes aware of the
occurrence after the date of this Agreement of any fact or condition that would
(except as expressly contemplated by this Agreement) cause or constitute a
breach of any such representation or warranty had such representation or
warranty been made as of the time of occurrence or discovery of such fact or
condition, (iii) in the event of any breach of any covenant contained in this
Agreement or (iv) of the occurrence of any event or change (A) making, or which
insofar as can be reasonably foreseen would make, the satisfaction of the
conditions contained in Article VII impossible or unlikely or (B) having, or
which insofar as can be reasonably foreseen would have, a Material Adverse
Effect on such party. The delivery of any such notice shall not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
(b) If any fact, condition or event described in paragraph (a) above would
require any change in the Marquee Disclosure Schedule or the SFX Disclosure
Schedule if such disclosure schedule were dated the date of the occurrence or
discovery of any such fact or condition, then Marquee or SFX, as the case may
be, will promptly deliver to the other party a supplement to such disclosure
schedule specifying such change. If the receiving party does not deliver
written notice of termination pursuant to Section 8.01(e) or Section 8.01(f)
within 20 days after delivery of such supplement, then the portions of the
applicable disclosure schedule relating to the delivering party's
representations and warranties (but no other portion of such disclosure
schedule) shall be deemed to have included the information set forth in such
supplement as if set forth therein on the date hereof and for all purposes
hereof, including, without limitation, Sections 7.02(a) and 7.03(a).
SECTION 6.10. FURTHER ACTION. At any time and from time to time, each
party to this Agreement agrees, subject to the terms and conditions of this
Agreement, to take such actions and to execute and deliver such documents as
may be necessary to effectuate the purposes of this Agreement at the earliest
practicable time, including, without limitation, any required documents to
permit SFX to assume the Options and Warrants; provided, however, that this
Section shall not require either party to undertake extraordinary or
commercially unreasonable measures in connection therewith, including, without
limitation, the initiation or prosecution of legal proceedings.
SECTION 6.11. AFFILIATE AGREEMENTS; TAX TREATMENT. (a) Section 6.11(a) of
the Marquee Disclosure Schedule lists the names and addresses of those persons
who are, in Marquee's reasonable judgment, "affiliates" of Marquee within the
meaning of Rule 145 under the Securities Act (each, a "Marquee Affiliate").
Marquee shall use all best efforts to obtain Affiliate Agreements in the form
of Exhibit C hereto ("Affiliate Agreements") from (i) at least 30 days prior to
the Effective Time, each of the officers, directors and stockholders of Marquee
specified in Section 6.11(a) of the Marquee Disclosure Schedule and (ii) any
person who may be deemed to have become an Marquee Affiliate (under Rule 145
under the Securities Act) after the date of this Agreement and on or prior to
the Effective Time as soon as practicable after the date on which such person
attains such status. Each party hereto shall use its best efforts to cause the
Merger to qualify as a reorganization qualifying under the provisions of
Section 368(a) of the Code, including, without limitation, that SFX agrees
that, with respect to the Merger, it will, and will cause the Surviving
Corporation to, satisfy the continuity of business enterprise requirements
within the meaning of Treas. Reg. ss. 1.368-1(d).
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(b) Both on the date that is two days prior to the date the Proxy
Statement is first mailed to stockholders of Marquee and on the date that the
Merger is consummated, Marquee and SFX shall receive an opinion of Baker &
McKenzie, reasonably satisfactory in form and substance to Marquee and its
counsel Paul, Hastings, Janofsky & Walker LLP and SFX, based, in each case,
upon representation letters substantially in the form of Exhibits D and E,
dated on or about the date of such opinion, and such other facts and
representations as counsel may reasonably deem relevant, to the effect that (i)
the Merger will be treated for federal income tax purposes as a reorganization
qualifying under the provisions of Section 368(a) of the Code, (ii) SFX,
Acquisition Sub and Marquee will each be a party to that reorganization within
the meaning of Section 368(b) of the Code, and (iii) neither the stockholders
of Marquee nor Marquee shall recognize any gain or loss or dividend income for
U.S. federal income Tax purposes as a result of the Merger, other than (in the
case of the stockholders of Marquee) to the extent such stockholders receive
cash in lieu of fractional shares in the Merger.
SECTION 6.12. EMPLOYEE BENEFIT PLANS. SFX and Marquee agree that the
Benefit Plans in effect at the date of this Agreement shall, to the extent
practicable, remain in effect until otherwise determined by SFX after the
Effective Time. To the extent such Benefit Plans are not continued, it is the
current non-binding intent of the parties that employee benefit plans of SFX
which are no less favorable, in the aggregate, to the employees covered by such
plans shall be provided.
SECTION 6.13. RELEASES. Marquee shall use its commercially reasonable
efforts to obtain, prior to the Effective Time, the amendment to the Unit
Purchase Option in the form attached hereto as Exhibit F from the holder(s) of
the Unit Purchase Option ("Release Agreement").
SECTION 6.14. CERTAIN AGREEMENTS. Marquee shall use its best efforts to
enter into the agreements (and consummate the transactions contemplated
therein) listed in Section 6.14 of the SFX Disclosure Schedule substantially in
such manner as set forth therein.
SECTION 6.15. GOVERNANCE. At or prior to the Effective Time, SFX will
cause Robert M. Gutkowski to be appointed as a non-voting observer to the Board
of Directors of SFX.
SECTION 6.16. FINANCING MATTERS. SFX hereby agrees to provide financing to
Marquee, on mutually acceptable terms and in an amount not to exceed US$5.0
million in the aggregate, solely for purposes of permitting Marquee to make the
acquisition described on Schedule 6.16 hereof. If this Agreement is terminated
for any reason, the amount of such financing, together with interest thereon at
the rate stated therein, shall be repaid by Marquee to SFX within one year of
such termination.
ARTICLE VII -- CONDITIONS TO THE MERGER
SECTION 7.01. CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. The obligations
of Marquee, SFX and Acquisition Sub to consummate the Merger are subject to the
satisfaction of the following conditions:
(a) this Agreement and the Transactions contemplated hereby shall have
been approved and adopted by the affirmative vote of the stockholders of
Marquee in accordance with Delaware Law and Marquee's Certificate of
Incorporation and Bylaws;
(b) no Governmental Authority shall have enacted, issued, promulgated,
enforced or entered any order, executive order, stay, decree, judgment or
injunction (each an "Order") or Law which is in effect and which has the effect
of making the Merger illegal or otherwise prohibiting consummation of the
Merger; provided, however, that each of the parties shall have used all
reasonable efforts to prevent the entry of any such Order that may be entered;
(c) the Registration Statement shall have been declared effective, and no
stop order suspending the effectiveness of the Registration Statement shall be
in effect;
(d) SFX and Marquee shall have received from the Nasdaq Stock Market
evidence that the shares of SFX Class A Common Stock to be issued to the
stockholders of Marquee in the Merger shall be listed on the Nasdaq National
Market immediately following the Effective Time;
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(e) any applicable waiting period under the HSR Act relating to the Merger
shall have expired or been terminated; provided, however, that the condition
set forth in this Section 7.01(e) shall be deemed satisfied if such waiting
period is terminated on the condition that SFX divest of, or take any other
action with respect to, any interest to be acquired by it in QBQ Entertainment,
Inc., provided that Marquee cooperates with SFX if any action is to be taken
prior to the Closing;
(f) SFX and Marquee shall have received the tax opinion provided for in
Section 6.11; and
(g) all other consents, authorizations, orders and approvals of (or
filings or registrations with) any third party or governmental commission,
board or other regulatory body required in connection with the execution,
delivery and performance of this Agreement shall have been obtained or made,
except (x) for filings in connection with the Merger and any other documents
required to be filed after the Effective Time and (y) where the failure to have
obtained or made any such consent, authorization, order, approval, filing or
registration would not have a Material Adverse Effect on either the business of
Marquee and the Marquee Subsidiaries, taken as a whole, following the Effective
Time, or the business of SFX and the SFX Subsidiaries, taken as a whole,
following the Effective Time.
SECTION 7.02. CONDITIONS TO THE OBLIGATIONS OF SFX AND ACQUISITION
SUB. The obligations of SFX and Acquisition Sub to consummate the Merger are
subject to the satisfaction of the following further conditions:
(a) Marquee shall have performed or complied in all material respects with
all agreements and covenants required by this Agreement to be performed by it
on or prior to the Effective Time, and the representations and warranties of
Marquee set forth in this Agreement shall be true and correct (without regard
to any materiality qualifications or references to Material Adverse Effect
contained in any specific representation or warranty), as of the date of this
Agreement and as of the Closing Date as though made on and as of the Closing
Date, except to the extent such representations and warranties expressly relate
to an earlier date (in which case as of such date); provided that this
paragraph (a) shall be deemed satisfied so long as the failure of all such
representations and warranties to be true and correct would not have a Material
Adverse Effect on Marquee, and SFX shall have received a certificate signed on
behalf of Marquee by the chief executive officer and the chief financial
officer of Marquee to such effect;
(b) SFX shall have received a signed Affiliate Agreement from each Marquee
Affiliate and any other person who may be deemed to have become an affiliate of
Marquee (under Rule 145 under the Securities Act) after the date of this
Agreement and at or prior to the Effective Time;
(c) since the date of this Agreement, there shall not have occurred any
Material Adverse Effect relating to Marquee, and SFX shall have received a
certificate, subject to a knowledge qualification, of the chief executive
officer and chief financial officer of Marquee to that effect;
(d) Marquee shall have entered into a credit agreement with BankBoston,
N.A. on substantially the same terms as set forth in the commitment letter
between Marquee and BankBoston, N.A. dated June 19, 1998, a copy of which has
been provided to SFX;
(e) each of the Escrow Releases, the Settlement Agreement and the
Employment Agreement Amendments shall remain in full force and effect; and
(f) Marquee shall have (i) consummated the acquisition set forth in
Section 7.02(f) of the Marquee Disclosure Schedule substantially as described
therein or (ii) entered into an agreement to acquire one or more comparable
entities (including, without limitation, in terms of EBITDA and operations) on
comparable terms and conditions (including, without limitation, purchase
price), such entity or entities, terms and conditions being acceptable to SFX
(including the SFX Independent Committee) and the SFX Banker in their sole
discretion.
SECTION 7.03. CONDITIONS TO THE OBLIGATIONS OF MARQUEE. The obligations of
Marquee to consummate the Merger are subject to the satisfaction of the
following additional conditions:
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(a) SFX and Acquisition Sub shall have performed or complied in all
material respects with all agreements and covenants required by this Agreement
to be performed by them on or prior to the Effective Time, and the
representations and warranties of SFX and Acquisition Sub set forth in this
Agreement shall be true and correct (without regard to any materiality
qualifications or references to Material Adverse Effect contained in any
specific representation or warranty), as of the date of this Agreement and as
of the Closing Date as though made on and as of the Closing Date, except to the
extent such representations and warranties expressly relate to an earlier date
(in which case as of such date); provided that this paragraph (a) shall be
deemed satisfied so long as the failure of all such representations and
warranties to be true and correct would not have a Material Adverse Effect on
SFX, and Marquee shall have received a certificate signed on behalf of SFX by
the chief executive officer and the chief financial officer of SFX to such
effect; and
(b) since the date of this Agreement, there shall not have occurred any
Material Adverse Effect relating to SFX, and Marquee shall have received a
certificate, subject to a knowledge qualification, of the chief executive
officer and the chief financial officer of SFX to that effect.
ARTICLE VIII -- TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. TERMINATION. This Agreement may be terminated and the Merger
and the other Transactions may be abandoned at any time prior to the Effective
Time, notwithstanding any requisite approval and adoption of this Agreement and
the Transactions, as follows:
(a) by mutual written consent duly authorized by the Boards of Directors
(including the Marquee Independent Committee or the SFX Independent Committee,
as the case may be) of each of SFX and Marquee;
(b) by either SFX or Marquee, if either (i) the Effective Time shall not
have occurred on or before April 30, 1999 (the "Termination Date"); provided,
however, that the right to terminate this Agreement under this Section 8.01(b)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before such date; or (ii) there shall be any
Order which is final and nonappealable preventing the consummation of the
Merger, except if the party relying on such Order has not complied with its
obligations under Section 6.03(a) and under the proviso to Section 7.01(b);
(c) by SFX, if (i) the Marquee Independent Committee or the Board of
Directors of Marquee fails to recommend, withdraws, or materially modifies or
materially changes, their recommendations of this Agreement or the Merger in a
manner adverse to SFX or shall have resolved to do any of the foregoing, (ii)
the Marquee Independent Committee or the Board of Directors of Marquee shall
have recommended to the stockholders of Marquee a Takeover Proposal or shall
have failed to recommend against accepting a Takeover Proposal or take no
position with respect thereto or shall have resolved to do any of the
foregoing, or (iii) any person (other than SFX, Acquisition Sub or any
affiliate thereof) shall have acquired "beneficial ownership" or the right to
acquire beneficial ownership of, or any "group" (as such terms are defined
under Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder) shall have been formed which beneficially owns, or has
the right to acquire beneficial ownership of, more than 25% of the then
outstanding shares of any class of capital stock of Marquee;
(d) by Marquee or SFX, if the stockholders of Marquee shall have failed to
approve and adopt this Agreement, the Merger and the other Transactions at a
meeting duly convened therefor;
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(e) by SFX, upon a breach of any representation, warranty, covenant or
agreement on the part of Marquee set forth in this Agreement, or if any
representation or warranty of Marquee shall have become untrue, in either case
such that the conditions set forth in Section 7.02 would not be satisfied (a
"Terminating Marquee Breach"); provided, however, that such Terminating Marquee
Breach cannot be or has not been cured within 30 days after the giving of
written notice to the breaching party of such breach ("Material Breach")
(provided that SFX is not then in Material Breach of any representation,
warranty, covenant or agreement set forth in this Agreement);
(f) by Marquee, upon breach of any representation, warranty, covenant or
agreement on the part of SFX set forth in this Agreement, or if any
representation or warranty of SFX shall have become untrue, in either case such
that the conditions set forth in Section 7.03 would not be satisfied
("Terminating SFX Breach"); provided, however, that such Terminating SFX Breach
cannot be or has not been cured within 30 days after the giving of written
notice to the breaching party of such breach (provided that Marquee is not then
in Material Breach of any representation, warranty, covenant or agreement set
forth in this Agreement);
(g) by Marquee or the Marquee Independent Committee, upon the revocation
by the Marquee Banker of its written fairness opinion if such revocation was
(i)(A) directly related to a material misstatement or omission contained in the
information regarding SFX provided to the Marquee Banker by SFX, and (B)
Marquee does not directly or indirectly solicit such a revocation or (ii) a
direct result of a Material Adverse Effect with respect to SFX;
(h) by SFX or the SFX Independent Committee, upon the revocation by the
SFX Banker of its written fairness opinion if such revocation was (i)(A)
directly related to a material misstatement or omission contained in the
information regarding Marquee provided to the SFX Banker by Marquee, and (B)
SFX does not directly or indirectly solicit such a revocation or (ii) a direct
result of a Material Adverse Effect with respect to Marquee; or
(i) by Marquee, if Marquee accepts a Takeover Proposal in accordance with
its obligations under Section 6.05; provided that it complies with the
applicable requirements of Section 8.02.
SECTION 8.02. FEES AND EXPENSES; EFFECT OF TERMINATION. (a) Except as
provided in Section 6.01 and below in this Section 8.02, and except for filing
fees under the HSR Act in connection with the transactions contemplated by this
Agreement, 50% of which shall be paid by SFX and 50% of which shall be paid by
Marquee, all fees and expenses incurred in connection with the Merger, this
Agreement and the Transactions shall be paid by the party incurring such fees
or expenses, whether or not the Merger is consummated.
(b) Marquee shall pay, or shall cause to be paid, upon demand in same day
funds to SFX a termination fee (the "Termination Fee") of $900,000, and
Specified Expenses (as defined herein), if:
(i) this Agreement is terminated pursuant to Section 8.01(i) or Section
8.01(c) (except in the event a termination occurs pursuant to Section
8.01(c)(i) due to the occurrence of an event described in Section 8.01(f)
or 8.01(g)); or
(ii) this Agreement is terminated pursuant to Section 8.01(b)(i) or
8.01(d) and in either event a Takeover Proposal has been made prior to such
termination and definitive documentation with respect to such Takeover
Proposal is entered into within 12 months of such termination.
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(c) Except in connection with a termination pursuant to which the
Termination Fee would otherwise be due and owing, Marquee shall pay SFX upon
demand a fee in same day funds of $500,000, if this Agreement is terminated
pursuant to Section 8.01(d).
(d) The fees and expenses pursuant to this section shall be paid without
reservation of rights or protests, and Marquee, upon making such payment, shall
be deemed to have released and waived any and all rights that it may have to
recover such amounts.
(e) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to Section 8.01, all obligations of the parties hereto
shall terminate except the obligations of the parties pursuant to this Section
8.02 and Article IX.
No termination of this Agreement pursuant to Section 8.01(e), (f), (g) or
(h) shall prejudice the ability of a non-breaching party from seeking damages
from any other party for any breach of this Agreement, including, without
limitation, attorneys' fees and the right to pursue any remedy at law or in
equity. Notwithstanding the foregoing, if SFX is required to file suit to seek
the Termination Fee or Specified Expenses, and it ultimately succeeds on the
merits, it shall be entitled to all expenses, including attorneys' fees, which
it has incurred in enforcing its rights under this Section 8.02.
(f) As used herein, "Specified Expenses" means all reasonable
out-of-pocket expenses and fees actually incurred or accrued by a party or on
its behalf in connection with the Transactions prior to the termination of this
Agreement (including, without limitation, all fees and expenses of counsel,
financial advisors, banks or other entities providing financing to such party
(including financing, commitment and other fees payable thereto), accountants
and other experts and consultants to such party and its affiliates, and all
printing and advertising expenses) and in connection with the negotiation,
preparation, execution, performance and termination of this Agreement, the
structuring of the Transactions, any agreements relating thereto and any
filings to be made in connection therewith; provided, however, that the
aggregate amount of Specified Expenses shall not exceed $500,000.
SECTION 8.03. AMENDMENT. This Agreement may be amended by the parties at
any time before or after the approval of this Agreement and the Merger by the
stockholders of Marquee; provided, however, that after any such approval, there
shall not be made any amendment that by Law requires further approval by the
stockholders of Marquee without such further approval. This Agreement may not
be amended except by an instrument in writing signed on behalf of each of the
parties.
SECTION 8.04. WAIVER. At any time prior to the Effective Time, any party
hereto with the consent of its Independent Committee and Board of Directors may
(a) extend the time for the performance of any obligation or other act of any
other party hereto, (b) waive any inaccuracy in the representations and
warranties contained herein or in any document delivered pursuant hereto and
(c) waive compliance with any agreement or condition contained herein. Any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed by the party or parties to be bound thereby. The failure of any
party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of such rights.
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<PAGE>
ARTICLE IX -- GENERAL PROVISIONS
SECTION 9.01. NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. The representations, warranties and agreements in this Agreement
and any certificate delivered pursuant hereto by any person shall terminate at
the Effective Time, except that the agreements set forth in Articles I and II
and Sections 6.06 and 6.10 and the agreements delivered pursuant to this
Agreement shall survive the Effective Time indefinitely, or for such other term
specified in any such agreements, and except that this Section 9.01 shall not
limit any covenant or agreement of the parties which by its terms contemplates
performance after the Effective Time.
SECTION 9.02. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
facsimile, telegram or telex or by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties at the following
addresses (or at such other address for a party as shall be specified in a
notice given in accordance with this Section 9.02):
if to SFX or Acquisition Sub:
SFX Entertainment, Inc.
650 Madison Avenue, 16th Floor
New York, New York 10022
Attention: Robert F.X. Sillerman
Facsimile: (212) 753-3188
with copies to:
Baker & McKenzie
Two Allen Center, Suite 1200
1200 Smith Street
Houston, Texas 77002-4579
Attention: Amar Budarapu
Facsimile: (713) 427-5099
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10128
Attention: Howard L. Shecter
Facsimile: (212) 309-7044
if to Marquee:
The Marquee Group, Inc.
888 Seventh Avenue
New York, New York 10019
Attention: Robert M. Gutkowski
Facsimile: (212) 977-4625
with a copy to:
Paul, Hastings, Janofsky & Walker LLP
399 Park Avenue, 31st Floor
New York, New York 10022
Attention: William F. Schwitter
Facsimile: (212) 319-4090
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<PAGE>
SECTION 9.03. CERTAIN DEFINITIONS. Unless the context requires otherwise,
for purposes of this Agreement, the term:
(a) "affiliate" of a specified person means a person who, directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such specified person;
(b) "beneficial owner" with respect to any shares means a person who shall
be deemed to be the beneficial owner of such shares (i) which such person or
any of its affiliates or associates (as such term is defined in Rule 12b-2
promulgated under the Exchange Act) beneficially owns, directly or indirectly,
(ii) which such person or any of its affiliates or associates has, directly or
indirectly, (A) the right to acquire (whether such right is exercisable
immediately or subject only to the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of consideration rights,
exchange rights, warrants or options, or otherwise, or (B) the right to vote
pursuant to any agreement, arrangement or understanding, (iii) which are
beneficially owned, directly or indirectly, by any other persons with whom such
person or any of its affiliates or associates or any person with whom such
person or any of its affiliates or associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of any
such shares, or (iv) pursuant to Section 13(d) of the Exchange Act and any
rules or regulations promulgated thereunder;
(c) "business day" means any day on which the principal offices of the SEC
in Washington, D.C. are open to accept filings, or, in the case of determining
a date when any payment is due, any day on which banks are not required or
authorized to close in New York, New York;
(d) "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting securities, as
trustee or executor, by contract or credit arrangement or otherwise;
(e) "person" means an individual, corporation, partnership, limited
partnership, syndicate, person (including, without limitation, a "person" as
defined in Section 13(d)(3) of the Exchange Act), trust, association or entity
or government, political subdivision, agency or instrumentality of a
government; and
(f) "subsidiary" or "subsidiaries" of any person means any corporation,
partnership, joint venture or other legal entity of which such person (either
alone or through or together with any other subsidiary), owns or has rights to
acquire, directly or indirectly, more than 50% of the stock or other equity
interests the holders of which are generally entitled to vote for the election
of the board of directors or other governing body of such corporation or other
legal entity.
SECTION 9.04. SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
Law, or public policy, then all other conditions and provisions of this
Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of the Transactions is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the Transactions be consummated as originally
contemplated to the fullest extent possible.
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<PAGE>
SECTION 9.05. ASSIGNMENT; BINDING EFFECT; BENEFIT. Neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto (whether by operation of law or otherwise) without
the prior written consent of the other parties; provided, however, that the
rights, interests and obligations hereunder of Acquisition Sub may be assigned
to any SFX Subsidiary. Subject to the preceding sentence, this Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns. Notwithstanding anything contained in this
Agreement to the contrary, except for the provisions of Article II and Section
6.06, nothing in this Agreement, expressed or implied, is intended to confer on
any person other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
SECTION 9.06. INCORPORATION OF SCHEDULES. The Marquee Disclosure Schedule
and the SFX Disclosure Schedule referred to herein and all Exhibits attached
hereto and referred to herein are hereby incorporated herein and made a part
hereof for all purposes as if fully set forth herein.
SECTION 9.07. SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at Law or equity.
SECTION 9.08. GOVERNING LAW. EXCEPT TO THE EXTENT THAT DELAWARE LAW IS
MANDATORILY APPLICABLE TO THE MERGER AND THE RIGHTS OF THE STOCKHOLDERS OF
MARQUEE AND ACQUISITION SUB, THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
RULES OF CONFLICTS OF LAW THEREOF. ALL ACTIONS AND PROCEEDINGS ARISING OUT OF
OR RELATING TO THIS AGREEMENT SHALL BE HEARD AND DETERMINED IN ANY COURT
SITTING IN THE CITY OF NEW YORK, STATE OF NEW YORK.
SECTION 9.09. HEADINGS. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect
in any way the meaning or interpretation of this Agreement.
SECTION 9.10. COUNTERPARTS. This Agreement may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
and delivered shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.
SECTION 9.11. WAIVER OF JURY TRIAL. Each of SFX, Marquee and Acquisition
Sub hereby irrevocably waives all right to trial by jury in any action,
proceeding or counterclaim (whether based on contract, tort or otherwise)
arising out of or relating to this Agreement or the actions of SFX, Marquee or
Acquisition Sub in the negotiation, administration, performance and enforcement
thereof.
SECTION 9.12. ENTIRE AGREEMENT. This Agreement, the Marquee Disclosure
Schedule, the SFX Disclosure Schedule, the Exhibits attached hereto, and all
documents delivered by the parties in connection herewith constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings among the parties with
respect thereto. No addition to or modification of any provision of this
Agreement shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, SFX, Acquisition Sub and Marquee have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
SFX ENTERTAINMENT, INC.
By: /s/ Robert F.X. Sillerman
------------------------------------
Robert F.X. Sillerman
Executive Chairman and
Member of the Office of the Chairman
SFX ACQUISITION CORP.
By: /s/ Robert F.X. Sillerman
------------------------------------
Robert F.X. Sillerman
Executive Chairman
THE MARQUEE GROUP, INC.
By: /s/ Robert M. Gutkowski
------------------------------------
Robert M. Gutkowski
President and Chief Executive
Officer
I-52
<PAGE>
ANNEX II -- OPINION OF PRUDENTIAL SECURITIES INCORPORATED
PRIVATE AND CONFIDENTIAL
January 24, 1999
The Board of Directors
The Marquee Group, Inc.
888 7th Avenue, 37th Floor
New York, NY 10019
Members of the Board,
We understand that The Marquee Group, Inc., a Delaware corporation (the
"Company"), SFX Entertainment, Inc., a Delaware corporation ("SFX"), and SFX
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of SFX
(the "Acquisition Sub"), propose to amend the Agreement and Plan of Merger
dated as of July 23, 1998 (as amended through October 16, 1998, the
"Agreement"). Pursuant to the Agreement, as amended, the Acquisition Sub shall
merge with and into the Company and the Company shall be the surviving
corporation (the "Merger"). In the Merger each outstanding share of common
stock, par value $0.01 per share, of the Company (the "Company Common Stock")
will be converted into the right to receive the number of shares of Class A
common stock, par value $0.01 per share, of SFX (the "SFX Common Stock") equal
to a ratio (the "Exchange Ratio") determined in the following manner:
(i) if the SFX Average Price (as defined below) is less than or
equal to $42.75, the Exchange Ratio shall mean 0.1111 of a share
of the SFX Common Stock;
(ii) if the SFX Average Price is greater than $42.75 but less than or
equal to $60.00, then the Exchange Ratio shall mean a number of
shares of SFX Common Stock equal to the quotient obtained by
dividing $4.75 by the SFX Average Price;
(iii) if the SFX Average Price is greater than $60.00 but less than or
equal to $66.00, then the Exchange Ratio shall mean a number of
shares of SFX Common Stock equal to (a) 0.1000 less (b) the
quotient obtained by dividing $1.25 by the SFX Average Price;
(iv) if the SFX Average Price is greater than $66.00, the Exchange
Ratio shall mean a number of shares equal to the quotient
obtained by dividing $5.35 by the SFX Average Price.
The "SFX Average Price" shall equal the average of the last reported sale price
of the SFX Common Stock as reported by the Nasdaq National Market for the
fifteen consecutive trading days ending on the fifth trading day prior to the
effective time of the Merger.
You have requested our opinion as to the fairness from a financial point
of view of the Exchange Ratio to the holders of the Company Common Stock (other
than Robert F.X. Sillerman and Howard J. Tytel).
In conducting our analysis and arriving at the opinion expressed herein,
we have reviewed such materials and considered such financial and other factors
as we deemed relevant under the circumstances, including:
(i) the Agreement and a draft dated January 20, 1999 of amendment
no. 4 to the Agreement ("Amendment No. 4");
(ii) certain publicly-available historical financial and operating
data concerning the Company including, but not limited to, (a)
the Annual Reports to Stockholders and Annual Reports on Form
10-KSB of the Company for the fiscal years ended December 31,
1996 and 1997, (b) the Quarterly Reports on Form 10-Q for the
quarters ended March 31, June 30 and September 30, 1998 and (c)
the Company's Prospectus, dated October 7, 1997, relating to the
sale of 7,500,000 shares of the Company Common Stock;
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(iii) certain publicly-available historical financial and operating
data concerning SFX including, but not limited to, (a) the Annual
Report on Form 10-K for the fiscal year ended December 31, 1997,
(b) the Quarterly Reports on Form 10-Q for the quarters ended
March 31, June 30, and September 30, 1998, (c) SFX's Prospectus,
dated May 20, 1998, relating to the sale of 7,000,000 shares of
SFX Common Stock, (d) Prospectus Supplement No. 3 to SFX's
Prospectus, dated June 30, 1998, relating to the sale of
3,740,034 shares of SFX Common Stock and (e) the Current Report
on Form 8-K, dated November 23, 1998;
(iv) certain information relating to the Company, including financial
forecasts prepared by the management of the Company;
(v) certain information relating to the acquisitions of Alphabet
City Industries, Inc., Alphabet City Sports Records, Inc.,
Cambridge Sports International, Park Associates Limited,
Tollin/Robbins Productions, Tollin/Robbins Management, LLC, and
Tony Stephens Associates Limited by the Company (the
"Acquisitions"), including selected financial data and certain
financial forecasts prepared by the management of the Company in
connection with the Acquisitions;
(vi) certain information relating to SFX, including financial
forecasts prepared by the management of SFX;
(vii) the financial terms of certain recent transactions we deemed
relevant to our inquiry;
(viii) the historical stock prices and trading volumes of the Company
Common Stock and the SFX Common Stock; and
(ix) such other financial studies, analyses and investigations that
we deemed appropriate.
We have assumed, with your consent, that the draft dated January 20, 1999
of Amendment No. 4 which we reviewed (as referred to above) will conform in all
material respects to that document when in final form.
We have discussed with the senior management of the Company and SFX: (i)
the prospects for their respective businesses, (ii) their estimates of such
businesses' future financial performance, (iii) the financial impact of the
Merger on the respective companies, and (iv) such other matters as we deemed
relevant.
In connection with our review and analysis and in arriving at our opinion,
we have relied upon the accuracy and completeness of the financial and other
information that is publicly-available or was provided to us by the Company and
SFX and we have not undertaken any independent verification of such information
or any independent valuation or appraisal of any of the assets or liabilities
of the Company or SFX. With respect to certain financial forecasts provided to
us by the management of the Company for the Company and the companies acquired
in the Acquisitions (the "Acquired Companies") and by the management of SFX for
SFX, we have assumed that such information (and the assumptions and bases
therefor) represents the Company's management's best currently available
estimate as to the future financial performance of the Company and the Acquired
Companies, and SFX's management's best currently available estimate as to the
future financial performance of SFX. For purposes of our opinion, we have
assumed the Merger qualifies as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended. Further, our opinion
is based on economic, financial and market conditions as they exist and can
only be evaluated as of the date hereof and we assume no responsibility to
update or revise our opinion based upon events or circumstances occurring after
the date hereof.
In connection with our advisory assignment, we have not been authorized by
the Company or its Board of Directors to solicit, nor have we solicited,
indications of interest from third parties for the acquisition of all or part
of the Company. Our opinion does not address, nor should it be construed to
address, the relative merits of the Merger or any alternative business
strategies that may be available to the Company. In addition, this opinion does
not in any manner address the prices at which the SFX Common Stock will trade
following consummation of the Merger.
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We have been retained by the Company to render this opinion and provide
other financial advisory services in connection with the Merger and will
receive an advisory fee for such services, a portion of which fee is contingent
upon the consummation of the Merger. As you know, we have in the past provided
investment banking services to the Company and SFX and have received customary
fees for the rendering of such services. In particular, we served as an
underwriter for SFX's offering of 7,000,000 shares of SFX Common Stock on May
20, 1998. In addition, we may serve as an underwriter in connection with a
contemplated public offering of SFX Common Stock. We also publish equity
research reports relating to the Company. In the ordinary course of business we
may actively trade the shares of the Company Common Stock and the SFX Common
Stock for our own account and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities.
This letter and the opinion expressed herein are for the use of the Board
of Directors of the Company. This opinion does not constitute a recommendation
to the stockholders of the Company as to how such stockholders should vote or
as to any other action stockholders should take regarding the Merger. This
opinion may not be reproduced, summarized, excerpted from or otherwise publicly
referred to or disclosed in any manner without our prior consent, except that
the Company may include this opinion in its entirety in any proxy statement or
information statement relating to the Merger sent to the Company's
stockholders.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Exchange Ratio is fair to the holders of Company Common
Stock (other than Robert F.X. Sillerman and Howard J. Tytel) from a financial
point of view.
Very truly yours,
PRUDENTIAL SECURITIES INCORPORATED
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of Delaware Law 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 Certificate of Incorporation provides that no director of SFX will
be personally liable to SFX 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 or its
stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o under Section 174 of Delaware Law; 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 is not
personally liable as set forth above, no director will be liable to SFX or its
stockholders to such further extent as permitted by any law enacted after the
date of the SFX Certificate of Incorporation, including any amendment to
Delaware Law.
The SFX Certificate of Incorporation requires SFX 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 (1) is or was a director or officer
of SFX or (2) is or was serving at the request of SFX 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 Delaware Law. 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
or elects to continue to serve as a director or officer of SFX while this
provision of the SFX Certificate of Incorporation is in effect. The right to
indemnification includes the right to be paid by SFX for expenses incurred in
defending any such action, suit or proceeding in advance of its final
disposition to the maximum extent permitted under Delaware Law. If a claim for
indemnification or advancement of expenses is not paid in full by SFX within 60
days after a written claim has been received by SFX, the claimant may, at any
time thereafter, bring suit against SFX 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
Delaware Law, but the burden of proving this defense will be on SFX.
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.
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The SFX Bylaws require SFX to indemnify its officers, directors, employees
and agents to the full extent permitted by Delaware Law. The SFX Bylaws also
require SFX 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'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 as authorized by relevant sections of
Delaware Law. The indemnification and advancement of expenses provided in the
SFX Bylaws are not to be deemed exclusive of any other rights provided by any
agreement, vote of stockholders or disinterested directors or otherwise.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ------------------------------------------------------------------------------------------------
<S> <C>
2.1 Distribution Agreement between SFX Entertainment, SFX Broadcasting and SFX Buyer
(incorporated by reference to Amendment No. 1 to Form S-1 (File No. 333-50079) filed with the
SEC on May 5, 1998)
2.2 Amended and Restated Tax Sharing Agreement between SFX Entertainment, SFX Broadcasting
and SBI Holding Corporation (incorporated by reference to Amendment No. 1 to Exhibit 1.1
to Current Report on Form 8-K (File No. 000-24017) filed with the SEC on June 3, 1998)
2.3 Employee Benefits Agreement between SFX Entertainment and SFX Broadcasting
(incorporated by reference to Amendment No. 1 to Form S-1 (File No. 333-50079) filed with the
SEC on May 5, 1998)
2.4 Amendment No. 1 to Distribution Agreement among SFX Entertainment, Inc., SFX
Broadcasting, Inc. and SBI Holding Corporation (incorporated by reference to Exhibit 2.1 to
Form 8-K (File No. 000-24017) filed with the SEC on June 3, 1998)
3.1 Amended and Restated Certificate of Incorporation of SFX Entertainment (incorporated by
reference to Amendment No. 1 to Form S-1 (File No. 333-50079) filed with the SEC on May 5,
1998)
3.2 Bylaws of SFX Entertainment (incorporated by reference to Amendment No. 2 to Form S-1
(File No. 333-43287) filed with the SEC on February 2, 1998)
4.1 Indenture, dated February 11, 1998, by and among SFX Entertainment, Inc., certain of its
subsidiaries and the Chase Manhattan Bank (incorporated by reference to Current Report on
Form 8-K of SFX Broadcasting, Inc. (File No. 000-22486) filed with the SEC on February 18,
1998)
4.2+ Indenture, dated November 25, 1998, by and among SFX Entertainment, Inc., certain of its
subsidiaries and Chase Manhattan Bank
4.3+ Registration Rights Agreement, dated as of November 25, 1998, relating to the 91/8% Senior
Subordinated Notes due December 1, 2008
5.1+ Opinion of Baker & McKenzie
8.1+ Opinion of Baker & McKenzie regarding certain tax matters
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- -----------------------------------------------------------------------------------------------
<S> <C>
10.1 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 (incorporated by reference to Registration Statement on
Form S-1 (File No. 333-43287) filed with the SEC)
10.2 Stock Purchase Agreement, dated as of December 11, 1997, among each of the shareholders of
BGP Presents, Inc. and BGP Acquisitions, LLC (incorporated by reference to Registration
Statement on Form S-1 (File No. 333-43287) filed with the SEC)
10.3 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. (incorporated by reference to Registration Statement on Form S-1 (File
No. 333-43287) filed with the SEC).
10.4 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. (incorporated by reference to Registration Statement on Form
S-1 (File No. 333-43287) filed with the SEC).
10.5 Stock Purchase Agreement, dated as of December 12, 1997 by and between Pace Entertainment
Corporation and SFX Entertainment, Inc. (incorporated by reference to Registration Statement
on Form S-1 (File No. 333-43287) filed with the SEC)
10.6 Agreement and Plan of Merger, dated as of August 24, 1997, as amended on February 9, 1998,
among SFX Buyer, SFX Buyer Sub and SFX Broadcasting, Inc. (composite version)
(incorporated by reference to Annex A of SFX Broadcasting, Inc.'s Definitive Proxy Statement
(File No. 000-22486) filed with the SEC on February 17, 1998)
10.7 Partnership Formation Agreement, dated as of January 22, 1988, by and among MCA Concerts
II, Inc. and Pace Entertainment Group, Inc. (incorporated by reference to Amendment No. 1
to Form S-1 (File No. 333-43287) filed with the SEC on January 22, 1998)
10.8 Lease and Use Agreement, dated as of December 9, 1987, by and between City of Dallas and
Pace Entertainment Group, Inc. (incorporated by reference to Amendment No. 1 to Form S-1
(File No. 333-43287) filed with the SEC on January 22, 1998)
10.9 Agreement, dated as of October 10, 1988, by and between the City of Atlanta and MCA
Concerts, Inc. (incorporated by reference to Amendment No. 1 to Form S-1 (File
No. 333-43287) filed with the SEC on January 22, 1998)
10.10 Amended Indenture of Lease, February 2, 1984, by and between the City of Atlanta and
Filmworks U.S.A., Inc. (incorporated by reference to Amendment No. 1 to Form S-1 (File
No. 333-43287) filed with the SEC on January 22, 1998)
10.11 Amendment to Lease Agreement, dated as of October 10, 1988, between the City of Atlanta,
Georgia and Filmworks U.S.A., Inc. (incorporated by reference to Amendment No. 1 to
Form S-1 (File No. 333-43287) filed with the SEC on January 22, 1998)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
<S> <C>
10.12 Agreement Regarding Sublease, dated as of January 20, 1988, by and between Filmworks
U.S.A., Inc. and MCA Concerts, Inc. (incorporated by reference to Amendment No. 1 to Form
S-1 (File No. 333-43287) filed with the SEC on January 22, 1998)
10.13 First Amendment to Sublease, dated as of January 21, 1988, between Filmworks U.S.A., Inc.
and MCA Concerts, Inc. (incorporated by reference to Amendment No. 1 to Form S-1 (File
No. 333-43287) filed with the SEC on January 22, 1998)
10.14 Second Amendment to Sublease, dated as of April 19, 1988, between Filmworks U.S.A., Inc.
and MCA Concerts, Inc. (incorporated by reference to Amendment No. 1 to Form S-1 (File
No. 333-43287) filed with the SEC on January 22, 1998)
10.15 Third Amendment to Sublease, dated as of September 15, 1988, between Filmworks U.S.A., Inc.
and MCA Concerts, Inc. (incorporated by reference to Amendment No. 1 to Form S-1 (File
No. 333-43287) filed with the SEC on January 22, 1998)
10.16 Memorandum of Agreement, dated as of October 10, 1988, by and between the City of Atlanta
and MCA Concerts, Inc. (incorporated by reference to Amendment No. 1 to Form S-1 (File
No. 333-43287) filed with the SEC on January 22, 1998)
10.17 Assignment of Sublease, dated as of June 15, 1989, by Filmworks U.S.A., Inc. and MCA
Concerts, Inc. (incorporated by reference to Amendment No. 1 to Form S-1 (File
No. 333-43287) filed with the SEC on January 22, 1998)
10.18 Assignment of Sublease, dated as of June 23, 1989, by Filmworks U.S.A., Inc. and MCA
Concerts, Inc. (incorporated by reference to Amendment No. 1 to Form S-1 (File
No. 333-43287) filed with the SEC on January 22, 1998)
10.19 Assignment of Agreement, dated as of June 15, 1989, by the City of Atlanta and MCA Concerts,
Inc. (incorporated by reference to Amendment No. 1 to Form S-1 (File No. 333-43287) filed with
the SEC on January 22, 1998)
10.20 Assignment of Agreement, dated as of June 23, 1989, by the City of Atlanta and MCA Concerts,
Inc. (incorporated by reference to Amendment No. 1 to Form S-1 (File No. 333-43287) filed with
the SEC on January 22, 1998)
10.21 1998 Stock Option and Restricted Stock Plan of the Company (incorporated by reference to
Form S-8 filed with the SEC)
10.22 Credit and Guarantee Agreement, dated as of February 26, 1998, by and among SFX
Entertainment, the Subsidiary Guarantors party thereto, the Lenders party thereto, Goldman
Sachs Partners, L.P., as co-documentation agent, Lehman Commercial Paper, Inc., as
co-documentation agent and the Bank of New York, as administrative agent (incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K (File No. 333-43287) filed with the
SEC on March 10, 1998)
10.23 Increase Supplement to the Credit and Guarantee Agreement, dated as of September 10, 1998,
by and among SFX Entertainment, Inc., the Subsidiary Guarantors party thereto, the Lenders
party thereto, Goldman Sachs Partners, L.P., as co-documentation agent, Lehman Commercial
Paper, Inc., as co-documentation agent and The Bank of New York, as administrative agent
(incorporated by reference to Exhibit 10.1 to Form 8-K filed with the SEC on September 22,
1998)
10.24+ Amendment to the Credit and Guarantee Agreement, dated as of November 20, 1998, by and
among SFX Entertainment, Inc., the Subsidiary Guarantors party thereto, the Lenders party
thereto, Goldman Sachs Partners, L.P., as co-documentation agent, Lehman Commercial Paper,
Inc., as co-documentation agent and The Bank of New York, as administrative agent.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------ -------------------------------------------------------------------------------------------------
<S> <C>
10.25+ Purchase Agreement, dated November 25, 1998, relating to the 91/8% Senior Subordinated
Notes due December 1, 2008 of SFX Entertainment, Inc., by and among SFX Entertainment,
Inc., Morgan Stanley & Co. Incorporated, Lehman Brothers Inc., BancBoston Robertson
Stephens Inc. and BNY Capital Markets, Inc.
10.26 Amendment No. 2 to Agreement and Plan of Merger among SBI Holdings Corporation,
SBI Radio Acquisition Corporation and SFX Broadcasting, Inc., dated March 9, 1998
(incorporated by reference to Annual Report on Form 10-K (File No. 333-43287) filed with the
SEC on March 18, 1998)
10.27 Stock Purchase Agreement, dated as of April 29, 1998, among SFX Sports Group, Inc., SFX
Entertainment, Inc. and David Falk, Curtis Polk and G. Michael Higgins (incorporated by
reference to Amendment No. 1 to Form S-1 (File No. 333-50079) filed with the SEC on May 5,
1998)
10.28 Asset Purchase Agreement, dated April 29, 1998, by and among Blackstone Entertainment
LLC, its members, DLC Acquisition Corp., and SFX Entertainment, Inc. (incorporated by
reference to Amendment No. 1 to Form S-1 (File No. 333-50079) filed with the SEC on May 5,
1998)
10.29 Purchase and Sale Agreement, dated April 22, 1998, by and among Oakdale Concerts, LLC,
Oakdale Development Limited Partnership and Oakdale Theater Concerts, Inc. (incorporated
by reference to Amendment No. 1 to Form S-1 (File No. 333-50079) filed with the SEC on
May 5, 1998)
10.30 Amended and Restated Employment Agreement, dated as of December 12, 1997, by and
between SFX Entertainment, Inc. and Brian E. Becker (incorporated by reference to
Amendment No. 1 to Form S-1 (File No. 333-43287) filed with the SEC on January 22, 1998)
10.31 Employment Agreement between SFX Entertainment, Inc. and David Falk, dated as of
April 29, 1998 (incorporated by reference to Amendment No. 2 to Form S-1 (File
No. 333-50079) filed with the SEC on May 19, 1998)
10.32 Employment Agreement between SFX Entertainment, Inc. and Robert F.X. Sillerman, dated as
of May 28, 1998 (incorporated by reference to Amendment No. 2 to Form S-4 (File
No. 333-50331) filed with the SEC on June 9, 1998)
10.33 Employment Agreement between SFX Entertainment, Inc. and Michael G. Ferrel, dated as of
May 28, 1998 (incorporated by reference to Amendment No. 2 to Form S-4 (File No. 333-50331)
filed with the SEC on June 9, 1998)
10.34 Employment Agreement between SFX Entertainment, Inc. and Thomas P. Benson, dated as of
May 28, 1998 (incorporated by reference to Amendment No. 2 to Form S-4 (File No. 333-50331)
filed with the SEC on June 9, 1998)
10.35 Employment Agreement between SFX Entertainment, Inc. and Howard J. Tytel, dated as of
May 28, 1998 (incorporated by reference to Amendment No. 2 to Form S-4 (File No. 333-50331)
filed with the SEC on June 9, 1998)
10.36 Agreement and Plan of Merger, dated as of August 6, 1998, among SFX Entertainment, Inc.,
MWE Acquisition Corp. and Magicworks Entertainment Incorporated (incorporated by
reference to Exhibit 99(c)(1) to the Company's Schedule 14D-1 filed with the SEC on August 13,
1998)
10.37+ Agreement and Plan of Merger, as amended, among SFX Entertainment, Inc., SFX Acquisition
Corp. and The Marquee Group, Inc. (composite version) (incorporated by reference to
Annex I)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------ -----------------------------------------------------------------------------------------------
<S> <C>
10.38+ Director Deferred Stock Ownership Plan of the Company
21.1+ Subsidiaries of SFX Entertainment, Inc.
23.1+ Consent of Baker & McKenzie (included in Exhibits 5.1 and 8.1)
23.2+ Consent of Ernst & Young LLP
23.3+ Consents of Arthur Andersen LLP
23.4+ Consents of PricewaterhouseCoopers LLP
23.5+ Consent of Grant Thornton
23.6+ Consent of Richard E. Woodhall
23.7+ Consent of David Berdon & Co., LLP
23.8+ Consent of Prudential Securities Incorporated
24.1+ Power of Attorney (included on signature page)
99.1+ Fairness Opinion of Prudential Securities Incorporated (incorporated by reference to Annex II)
99.2+ Proxy Card
</TABLE>
- ----------
+ Filed herewith.
(b) Financial Schedules.
None.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(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 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 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(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.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, 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.
II-6
<PAGE>
(3) 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.
(b) (1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of
a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, 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) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 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 Securities and Exchange
Commission such indemnification is against public policy as expressed in the
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 Act and
will be governed by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this 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 25, 1999.
SFX ENTERTAINMENT, INC.
By: / s / Howard J. Tytel
---------------------------------
Howard J. Tytel
Executive Vice President, General
Counsel and Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated. Each person
whose signature to this Registration Statement appears below hereby constitutes
and appoints Robert F.X. Sillerman or Howard J. Tytel as his true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his
behalf, individually and in the capacities stated below, and to file (i) any
and all amendments and post-effective amendments to this Registration Statement
and (ii) any registration statement relating to the same offering pursuant to
Rule 462(b) under the Securities Act of 1933, which amendment or amendments or
registration statement may make such changes and additions as such
attorney-in-fact may deem necessary or appropriate, and to perform any acts
necessary to be done in order to file such amendment.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---------------------------------- ------------------------------ -----------------
<S> <C> <C>
/ s / Robert F. X. Sillerman Executive Chairman, January 25, 1999
- ------------------------------- Member of the Office of
Robert F.X. Sillerman the Chairman and Director
(principal executive officer)
/ s / Michael G. Ferrel President, Chief Executive January 25, 1999
- ------------------------------- Officer, Member of the
Michael G. Ferrel Office of the Chairman
and Director
/ s / Brian Becker Director, Executive Vice January 25, 1999
- ------------------------------- President and Member of
Brian Becker the Office of the Chairman
/ s / David Falk Member of the Office of the January 25, 1999
- ------------------------------- Chairman and Director
David Falk
/ s / Howard J. Tytel Executive Vice President, January 25, 1999
- ------------------------------- General Counsel, Secretary
Howard J. Tytel and Director
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---------------------------------- ------------------------------- -----------------
<S> <C> <C>
/ s / Thomas P. Benson Chief Financial Officer, Vice January 25, 1999
- ------------------------------- President and Director
Thomas P. Benson (principal financial and
accounting officer)
/ s / Richard A. Liese Director, Senior Vice January 25, 1999
- ------------------------------- President and Associate
Richard A. Liese Counsel
/ s / D. Geoffrey Armstrong Director January 25, 1999
- -------------------------------
D. Geoffrey Armstrong
/ s / James F. O'Grady, Jr. Director January 25, 1999
- -------------------------------
James F. O'Grady, Jr.
/ s / Paul Kramer Director January 25, 1999
- -------------------------------
Paul Kramer
/ s / Edward F. Dugan Director January 25, 1999
- -------------------------------
Edward F. Dugan
</TABLE>
II-9
<PAGE>
EXECUTION COPY
===============================================================================
SFX ENTERTAINMENT, INC.
9-1/8% SENIOR SUBORDINATED NOTES DUE 2008
------------------------------------
INDENTURE
Dated as of November 25, 1998
-------------------------------
-------------------------------
THE CHASE MANHATTAN BANK
-------------------------------
Trustee
===============================================================================
<PAGE>
CROSS-REFERENCE TABLE*
Trust Indenture Act Section Indenture Section
310 (a)(1)...............................................7.10
(a)(2) ..................................................7.10
(a)(3)...................................................N.A.
(a)(4)...................................................N.A.
(a)(5)...................................................7.10
(i)(b)...................................................7.10
(ii)(c)..................................................N.A.
311(a)...................................................7.11
(b)......................................................7.11
(iii)(c).................................................N.A.
312 (a)..................................................2.05
(b)......................................................12.03
(iv)(c)..................................................12.03
313(a)...................................................7.06
(b)(2)...................................................7.07
(v)(c)...................................................7.06; 12.02
(vi)(d)..................................................7.06
314(a)...................................................4.03; 12.02
(c)(1)...................................................12.04
(c)(2)...................................................12.04
(c)(3)...................................................N.A.
(vii)(e).................................................11.05
(f)......................................................NA
315 (a)..................................................7.01
(b)......................................................7.05, 12.02
(A)(c)...................................................7.01
(d)......................................................7.01
(e)......................................................6.11
316 (a)(last sentence)...................................2.09
(a)(1)(A)................................................6.05
(a)(1)(B)................................................6.04
(a)(2)...................................................N.A.
(b)......................................................6.07
(B)(c)...................................................2.12
317 (a)(1)...............................................6.08
(a)(2)...................................................6.09
(b)......................................................2.04
N.A. means not applicable.
*This Cross-Reference Table is not part of the Indenture.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE.............................................................1
Section 1.01. Definitions......................................................................................1
Section 1.02. Other Definitions...............................................................................15
Section 1.03. Incorporation by Reference of Trust Indenture Act...............................................16
Section 1.04. Rules of Construction...........................................................................16
ARTICLE 2. THE NOTES.............................................................................................16
Section 2.01. Form and Dating.................................................................................16
Section 2.02. Execution and Authentication....................................................................18
Section 2.03. Registrar and Paying Agent......................................................................18
Section 2.04. Paying Agent to Hold Money in Trust.............................................................19
Section 2.05. Holder Lists....................................................................................19
Section 2.06. Transfer and Exchange...........................................................................19
Section 2.07. Replacement Notes...............................................................................31
Section 2.08. Outstanding Notes...............................................................................31
Section 2.09. Treasury Notes..................................................................................32
Section 2.10. Temporary Notes.................................................................................32
Section 2.11. Cancellation....................................................................................32
Section 2.12. Defaulted Interest..............................................................................32
ARTICLE 3. REDEMPTION AND PREPAYMENT.............................................................................33
Section 3.01. Notices to Trustee..............................................................................33
Section 3.02. Selection of Notes to Be Redeemed...............................................................33
Section 3.03. Notice of Redemption............................................................................33
Section 3.04. Effect of Notice of Redemption..................................................................34
Section 3.05. Deposit of Redemption Price.....................................................................34
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Section 3.06. Notes Redeemed in Part..........................................................................35
Section 3.07. Optional Redemption.............................................................................35
Section 3.08. Mandatory Redemption............................................................................35
Section 3.09. Offer to Purchase by Application of Excess Proceeds.............................................35
ARTICLE 4. COVENANTS.............................................................................................37
Section 4.01. Payment of Notes................................................................................37
Section 4.02. Maintenance of Office or Agency.................................................................37
Section 4.03. Reports.........................................................................................38
Section 4.04. Compliance Certificate..........................................................................38
Section 4.05. Taxes...........................................................................................39
Section 4.06. Stay, Extension and Usury Laws..................................................................39
Section 4.07. Restricted Payments.............................................................................39
Section 4.08. Dividend and Other Payment Restrictions Affecting Subsidiaries..................................41
Section 4.09. Incurrence of Indebtedness and Issuance of Preferred Stock......................................42
Section 4.10. Asset Sales.....................................................................................44
Section 4.11. Transactions with Affiliates....................................................................45
Section 4.12. Liens...........................................................................................46
Section 4.13. Business activities.............................................................................46
Section 4.14. Corporate Existence.............................................................................46
Section 4.15. Offer to Repurchase Upon Change of Control......................................................46
Section 4.16. No Senior Subordinated Debt.....................................................................47
Section 4.17. Issuances and Sales of Equity Interests in Restricted Subsidiaries..............................47
Section 4.18. Limitation on Sale and Leaseback Transactions...................................................48
Section 4.19. Payments for Consent............................................................................48
Section 4.20. Additional Subsidiary Guarantees................................................................48
ARTICLE 5. SUCCESSORS............................................................................................48
Section 5.01. Merger, Consolidation, or Sale of Assets........................................................48
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Section 5.02. Successor Corporation Substituted...............................................................49
ARTICLE 6. DEFAULTS AND REMEDIES.................................................................................49
Section 6.01. Events of Default...............................................................................49
Section 6.02. Acceleration....................................................................................51
Section 6.03. Other Remedies..................................................................................52
Section 6.04. Waiver of Past Defaults.........................................................................52
Section 6.05. Control by Majority.............................................................................52
Section 6.06. Limitation on Suits.............................................................................52
Section 6.07. Rights of Holders of Notes to Receive Payment...................................................53
Section 6.08. Collection Suit by Trustee......................................................................53
Section 6.09. Trustee May File Proofs of Claim................................................................53
Section 6.10. Priorities......................................................................................54
Section 6.11. Undertaking for Costs...........................................................................54
Section 6.12. No Personal Liability of Directors, Officers, Employees and Stockholders........................54
ARTICLE 7. TRUSTEE...............................................................................................54
Section 7.01. Duties of Trustee...............................................................................54
Section 7.02. Rights of Trustee...............................................................................55
Section 7.03. Individual Rights of Trustee....................................................................56
Section 7.04. Trustee's Disclaimer............................................................................56
Section 7.05. Notice of Defaults..............................................................................56
Section 7.06. Reports by Trustee to Holders of the Notes......................................................56
Section 7.07. Compensation and Indemnity......................................................................57
Section 7.08. Replacement of Trustee..........................................................................57
Section 7.09. Successor Trustee by Merger, etc................................................................58
Section 7.10. Eligibility; Disqualification...................................................................58
Section 7.11. Preferential Collection of Claims Against Company...............................................59
ARTICLE 8. LEGAL DEFEASANCE AND COVENANT DEFEASANCE..............................................................59
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Section 8.01. Option to Effect Legal Defeasance or Covenant Defeasance........................................59
Section 8.02. Legal Defeasance and Discharge..................................................................59
Section 8.03. Covenant Defeasance.............................................................................59
Section 8.04. Conditions to Legal or Covenant Defeasance......................................................60
Section 8.05. Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions...61
Section 8.06. Repayment to Company............................................................................62
Section 8.07. Reinstatement...................................................................................62
ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER......................................................................62
Section 9.01. Without Consent of Holders of Notes.............................................................62
Section 9.02. With Consent of Holders of Notes................................................................63
Section 9.03. Compliance with Trust Indenture Act.............................................................64
Section 9.04. Revocation and Effect of Consents...............................................................64
Section 9.05. Notation on or Exchange of Notes................................................................65
Section 9.06. Trustee to Sign Amendments, etc.................................................................65
ARTICLE 10. SUBORDINATION........................................................................................65
Section 10.01. Agreement to Subordinate.......................................................................65
Section 10.02. Certain Definitions............................................................................65
Section 10.03. Liquidation; Dissolution; Bankruptcy...........................................................66
Section 10.04. Default on Designated Senior Debt..............................................................66
Section 10.05. Acceleration of Securities.....................................................................67
Section 10.06. When Distribution Must Be Paid Over............................................................67
Section 10.07. Notice by Company..............................................................................68
Section 10.08. Subrogation....................................................................................68
Section 10.09. Relative Rights................................................................................68
Section 10.10. Subordination May Not Be Impaired by Company...................................................68
Section 10.11. Distribution or Notice to Representative.......................................................68
Section 10.12. Rights of Trustee and Paying Agent.............................................................69
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Section 10.13. Authorization to Effect Subordination..........................................................69
Section 10.14. Amendments.....................................................................................69
ARTICLE 11. SUBSIDIARY GUARANTEES................................................................................69
Section 11.01. Guarantee......................................................................................69
Section 11.02. Subordination of Subsidiary Guarantee..........................................................70
Section 11.03. Limitation on Guarantor Liability..............................................................70
Section 11.04. Execution and Delivery of Note Guarantee.......................................................71
Section 11.05. Guarantors May Consolidate, etc., on Certain Terms.............................................71
Section 11.06. Releases Following Sale of Assets..............................................................72
ARTICLE 12. MISCELLANEOUS........................................................................................73
Section 12.01. Trust Indenture Act Controls...................................................................73
Section 12.02. Notices........................................................................................73
Section 12.03. Communication by Holders of Notes with Other Holders of Notes..................................74
Section 12.04. Certificate and Opinion as to Conditions Precedent.............................................74
Section 12.05. Statements Required in Certificate or Opinion..................................................74
Section 12.06. Rules by Trustee and Agents....................................................................75
Section 12.07. No Personal Liability of Directors, Officers, Employees and Stockholders.......................75
Section 12.08. Governing Law..................................................................................75
Section 12.09. No Adverse Interpretation of Other Agreements..................................................75
Section 12.10. Successors.....................................................................................75
Section 12.11. Severability...................................................................................75
Section 12.12. Counterpart Originals..........................................................................75
Section 12.13. Table of Contents, Headings, etc...............................................................75
</TABLE>
EXHIBITS
Exhibit A1 FORM OF NOTE
Exhibit A2 FORM OF REGULATION S TEMPORARY GLOBAL NOTE
Exhibit B FORM OF CERTIFICATE OF TRANSFER
v
<PAGE>
Exhibit C FORM OF CERTIFICATE OF EXCHANGE
Exhibit D FORM OF CERTIFICATE FROM ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR
Exhibit E FORM OF SUBSIDIARY GUARANTEE
Exhibit F FORM OF SUPPLEMENTAL INDENTURE
SCHEDULES
Schedule I Schedule of Guarantors
vi
<PAGE>
INDENTURE dated as of November 25, 1998 among SFX
Entertainment, Inc., a Delaware corporation (the "Company"), each of the
entities listed on Schedule I hereto (collectively, the "Guarantors") and The
Chase Manhattan Bank, as trustee (the "Trustee").
The Company, the Guarantors and the Trustee agree as follows
for the benefit of each other and for the equal and ratable benefit of the
Holders of the 9-1/8% Series A Senior Subordinated Notes due 2008 (the "Series
A Notes") and the 9-1/8% Series B Senior Subordinated Notes due 2008 (the
"Series B Notes" and, together with the Series A Notes, the "Notes"):
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. DEFINITIONS.
"144A Global Note" means a global note in the form of Exhibit
A1 hereto bearing the Global Note Legend and the Private Placement Legend and
deposited with or on behalf of, and registered in the name of, the Depositary
or its nominee that will be issued in a denomination equal to the outstanding
principal amount of the Notes sold in reliance on Rule 144A.
"Acquired Debt" means, with respect to any specified Person,
(i) Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
"Acquired Businesses" means each of the businesses to be
acquired by the Company pursuant to the Pending Acquisitions.
"Agent" means any Registrar, Paying Agent or co-registrar.
"Applicable Procedures" means, with respect to any transfer
or exchange of or for beneficial interests in any Global Note, the rules and
procedures of the Depositary, Euroclear and Cedel that apply to such transfer
or exchange.
"Asset Sale" means (i) the sale, lease, conveyance or other
disposition of any assets or rights (including, without limitation, by way of a
sale and leaseback), excluding sales of services and ancillary products in the
ordinary course of business consistent with past practices (provided that the
sale, lease, conveyance or other disposition of all or substantially all of the
assets of the Company and its Restricted Subsidiaries taken as a whole will be
governed by the provisions of Section 4.15 hereof and/or the provisions of
Section 5.01 hereof and not by the provisions of Section 4.10 hereof) and (ii)
the issue or sale by the Company or any of its Subsidiaries of Equity Interests
of any of the Company's Subsidiaries, in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (a) that
have a fair market value in excess of $5.0 million or (b) for net proceeds in
excess of $5.0 million.
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Notwithstanding the foregoing: (i) a transfer of assets by the Company to a
Wholly Owned Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary
to the Company or to another Wholly Owned Restricted Subsidiary, (ii) an
issuance of Equity Interests by a Wholly Owned Restricted Subsidiary to the
Company or to another Wholly Owned Restricted Subsidiary, (iii) the transfer of
obsolete equipment in the ordinary course of business, (iv) the sale and
leaseback of any assets within 90 days of the acquisition of such assets and
(v) a Restricted Payment that is permitted by Section 4.07 hereof will not be
deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback
transaction means, at the time of determination, the present value (discounted
at the rate of interest implicit in such transaction, determined in accordance
with GAAP) of the obligation of the lessee for net rental payments during the
remaining term of the lease included in such sale and leaseback transaction
(including any period for which such lease has been extended or may, at the
option of the lessor, be extended).
"Bankruptcy Law" means Title 11, U.S. Code or any similar
federal or state law for the relief of debtors.
"Board of Directors" means the Board of Directors of the
Company, or any authorized committee of the Board of Directors.
"Broadcasting" means SFX Broadcasting, Inc., a Delaware
corporation.
"Broadcasting Buyer" means SBI Holding Co.
"Broadcasting Merger" means the merger of SBI Radio
Acquisition Corporation with and into SFX Broadcasting, Inc., pursuant to which
Broadcasting became a subsidiary of SBI Holding Co.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any
determination thereof is to be made, the amount of the liability in respect of
a capital lease that would at such time be required to be capitalized on a
balance sheet in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership or limited
liability company, partnership or membership interests (whether general or
limited) and (iv) any other interest or participation that confers on a Person
the right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii)
securities issued or directly and fully guaranteed or insured by the United
States government or any agency or instrumentality thereof having maturities of
not more than six months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less from
the date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any domestic commercial
bank having capital and surplus in excess of $500.0 million and a Thompson Bank
Watch Rating of "B" or better, (iv) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in
clauses (ii) and (iii) above entered into with any financial institution
meeting the qualifications specified in clause (iii) above and (v) commercial
paper having the highest rating obtainable from Moody's Investors Service, Inc.
or Standard & Poor's Corporation and in
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each case maturing within six months after the date of acquisition and (vi)
money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (i) - (v) of this definition.
"Cedel" means Cedel Bank, SA.
"Cellar Door Agreement" means any agreement by the Company to
acquire the Cellar Door music promotion and entertainment business, on terms
substantially similar to the letter of intent dated August 12, 1998, as
amended, and any additional agreements related thereto.
"Change of Control" means the occurrence of any of the
following: (i) the sale, lease, transfer, conveyance or other disposition
(other than the Spin-Off or by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the assets of
the Company and its Subsidiaries taken as a whole to any "person" (as such term
is used in Section 13(d)(3) of the Exchange Act) other than the Principal or a
Related Party of the Principal, (ii) the adoption of a plan relating to the
liquidation or dissolution of the Company, (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than the
Principal and his Related Parties, becomes the "beneficial owner" (as such term
is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a
person shall be deemed to have "beneficial ownership" of all securities that
such person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of Voting Stock of the Company having more
than 35% of the combined voting power of all classes of Voting Stock of the
Company then outstanding or (iv) the first day on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors.
"Company" means SFX Entertainment, Inc., a Delaware
corporation, and any and all successors thereto.
"Compensation Committee" means a committee of at least two
members of the board of directors of the Company, a majority of whom are (i)
independent directors elected by the holders of Class A Common Stock of the
Company and (ii) not interested in the particular transactions being approved.
"Consolidated Cash Flow" means, with respect to any Person
for any period, the Consolidated Net Income of such Person for such period
plus, without duplication, (i) an amount equal to any extraordinary loss plus
any net loss realized in connection with an Asset Sale, to the extent such
losses were deducted in computing such Consolidated Net Income, plus (ii)
provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period, to the extent that such provision for
taxes was deducted in computing such Consolidated Net Income, plus (iii)
consolidated interest expense of such Person and its Restricted Subsidiaries
for such period, whether paid or accrued and whether or not capitalized
(including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges incurred
in respect of letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations), to the extent that any such
expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation expense for such period, to the extent the same was deducted in
computing such Consolidated Net Income, plus (v) all amortization expense and
other non-cash expenses (excluding any such non-cash expense to the extent that
it represents an accrual of or reserve for cash expenses in any future period)
for such period, to the extent the same was deducted in computing such
Consolidated Net Income, plus (vi) unusual and nonrecurring charges paid or
accrued in 1997 or 1998 (including, but not limited to, legal, accounting,
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investment banking, severance, termination, non-compete and consent fees)
relating to the Merger Agreement, the Spin-Off, the Pending Acquisitions and
transactions related thereto, minus (vii) non-cash items increasing such
Consolidated Net Income for such period, minus (viii) except to the extent
already deducted in computing Consolidated Net Income for such period,
preproduction expenses and investments in theatrical productions incurred or
made during such period by the Company or any Restricted Subsidiary as set
forth in the Company's Consolidated Statement of Cash Flows, plus (ix) any cash
return of capital paid to the Company or a Restricted Subsidiary during such
period associated with a preproduction expense or investment in theatrical
productions to the extent the same was deducted pursuant to clause (viii) above
in computing Consolidated Cash Flow for such period or a prior period, in each
case, on a consolidated basis and determined in accordance with GAAP.
"Consolidated Indebtedness" means, with respect to any Person
as of any date of determination, the sum, without duplication, of (i) the total
amount of Indebtedness and Attributable Debt of such Person and its Restricted
Subsidiaries, plus (ii) the total amount of Indebtedness and Attributable Debt
of any other Person, to the extent that such Indebtedness or Attributable Debt
has been guaranteed by the referent Person or by one or more of its Restricted
Subsidiaries or is secured by a Lien on assets of the referent Person or any of
its Restricted Subsidiaries, plus (iii) the aggregate liquidation value of all
Disqualified Stock of such Person and all preferred stock of Restricted
Subsidiaries of such Person, in each case, determined on a consolidated basis
in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person
for any period, the aggregate of the Net Income of such Person and its
Restricted Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided that (i) the Net Income (but not loss) of any
Person that is not a Restricted Subsidiary or that is accounted for by the
equity method of accounting shall be included only to the extent of the amount
of dividends or distributions paid in cash to the referent Person or a
Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary
shall be excluded to the extent that the declaration or payment of dividends or
similar distributions by that Restricted Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Restricted
Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in
a pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) the cumulative effect of a change in
accounting principles shall be excluded and (v) the Net Income (but not loss)
of any Unrestricted Subsidiary shall be excluded, whether or not distributed to
the Company or one of its Restricted Subsidiaries.
"Contemporary Agreement" means the agreement by the Company
to acquire The Contemporary Group, dated as of December 12, 1997, and the
agreements related thereto, each as in effect on the date hereof.
"Continuing Directors" means, as of any date of
determination, any member of the Board of Directors of the Company who (i) was
a member of such Board of Directors on the date hereof or (ii) was nominated
for election or elected to such Board of Directors with the approval of a
majority of the Continuing Directors who were members of such Board at the time
of such nomination or election.
"Corporate Trust Office of the Trustee" shall be at the
address of the Trustee specified in Section 12.02 hereof or such other address
as to which the Trustee may give notice to the Company.
"Credit Facility" or "Credit Facilities" means one or more
debt facilities (including, without limitation, the Senior Credit Facility) or
commercial paper facilities with banks or other institutional
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lenders providing for revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to special
purpose entities formed to borrow from such lenders against such receivables)
or letters of credit, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.
Indebtedness under Credit Facilities outstanding on the date on which Notes are
first issued and authenticated under this Indenture shall be deemed to have
been incurred on such date in reliance on the exception provided by clause (i)
of the definition of Permitted Debt.
"Custodian" means the Trustee, as custodian with respect to
the Notes in global form, or any successor entity thereto.
"Debt to Cash Flow Ratio" means, with respect to any Person
as of any date of determination (the "Calculation Date"), the ratio of (a) the
Consolidated Indebtedness of such Person as of such date to (b) the
Consolidated Cash Flow of such Person for the four most recent full fiscal
quarters ending immediately prior to such date for which internal financial
statements are available, determined on a pro forma basis after giving effect
to all acquisitions and dispositions of assets made by such Person and its
Restricted Subsidiaries from the beginning of such four-quarter period through
and including such date of determination (including any related financing
transactions) as if such acquisitions and dispositions had occurred at the
beginning of such four-quarter period. For purposes of making the computation
referred to above, (i) acquisitions that have been made by such Person or any
of its Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the
Calculation Date shall be deemed to have occurred on the first day of the
four-quarter reference period and Consolidated Cash Flow for such reference
period shall be calculated without giving effect to clause (iii) of the proviso
set forth in the definition of Consolidated Net Income and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of by the
Company or any of its Restricted Subsidiaries prior to the Calculation Date,
shall be excluded.
"Default" means any event that is or with the passage of time
or the giving of notice or both would be an Event of Default.
"Definitive Note" means a certificated Note registered in the
name of the Holder thereof and issued in accordance with Section 2.06 hereof,
in the form of Exhibit A1 hereto except that such Note shall not bear the
Global Note Legend and shall not have the "Schedule of Exchanges of Interests
in the Global Note" attached thereto.
"Delsener/Slater Employment Agreements" means (i) the
employment agreement dated January 2, 1997, among Broadcasting, Delsener/Slater
Enterprises, Inc. and Mitch Slater and (ii) the employment agreement dated
January 2, 1997 among Broadcasting, Delsener/Slater Enterprises, Inc. and Ron
Delsener, in each case as in effect on the date hereof.
"Depositary" means, with respect to the Notes issuable or
issued in whole or in part in global form, the Person specified in Section 2.03
hereof as the Depositary with respect to the Notes, and any and all successors
thereto appointed as depositary hereunder and having become such pursuant to
the applicable provision of this Indenture.
"Disqualified Stock" means any Capital Stock that, by its
terms (or by the terms of any security into which it is convertible or for
which it is exchangeable at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or is redeemable at the option of the
holder thereof, in whole or in part, on or prior to the date that is 91 days
after the date on which the Notes mature, provided, however, that any Capital
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Stock that would constitute Disqualified Stock solely because the holders
thereof have the right to require the Company to repurchase such Capital Stock
upon the occurrence of a Change of Control or an Asset Sale shall not
constitute Disqualified Stock if the terms of such Capital Stock provide that
the Company may not repurchase or redeem any such Capital Stock pursuant to
such provisions unless such repurchase or redemption complies with Section 4.07
hereof.
"Equity Interests" means Capital Stock and all warrants,
options or other rights to acquire Capital Stock (but excluding any debt
security that is convertible into, or exchangeable for, Capital Stock).
"Euroclear" means Morgan Guaranty Trust Company of New York,
Brussels office, as operator of the Euroclear system.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Notes" means the Notes issued in the Exchange Offer
pursuant to Section 2.06(f) hereof.
"Exchange Offer" has the meaning set forth in the
Registration Rights Agreement.
"Exchange Offer Registration Statement" has the meaning set
forth in the Registration Rights Agreement.
"Existing Indebtedness" means Indebtedness in existence on
the date hereof (other than Indebtedness under Credit Facilities), until such
Indebtedness is repaid.
"Existing Notes" means the Company's outstanding 9-1/8%
Senior Subordinated Notes due February 1, 2008.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment
of the accounting profession, which are in effect from time to time.
"Global Notes" means, individually and collectively, each of
the Restricted Global Notes and the Unrestricted Global Notes, in the form of
Exhibits A1 and A2 hereto issued in accordance with Section 2.01, 2.06(b)(iv),
2.06(d)(ii) or 2.06(f) hereof.
"Global Note Legend" means the legend set forth in Section
2.06(g)(ii), which is required to be placed on all Global Notes issued under
this Indenture.
"Government Securities" means direct obligations of, or
obligations guaranteed by, the United States of America, and the payment for
which the United States pledges its full faith and credit.
"guarantee" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, by way of a
pledge of assets or through letters of credit and reimbursement agreements in
respect thereof), of all or any part of any Indebtedness.
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"Guarantor" means each of the Company's current and future
domestic Restricted Subsidiaries that executes a Subsidiary Guarantee in
accordance with the provisions of this Indenture, and its respective successors
and assigns.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Holder" means a Person in whose name a Note is registered.
"IAI Global Note" means the global Note in the form of
Exhibit A-1 hereto bearing the Global Note Legend and the Private Placement
Legend and deposited with or on behalf of and registered in the name of the
Depositary or its nominee that will be issued in a denomination equal to the
outstanding principal amount of the Notes sold to Institutional Accredited
Investors.
"Indebtedness" means, with respect to any Person, without
duplication, (i) any indebtedness of such Person, whether or not contingent, in
respect of borrowed money or evidenced by bonds, notes, debentures or similar
instruments or letters of credit (or reimbursement agreements in respect
thereof) or banker's acceptances or representing Capital Lease Obligations or
the balance deferred and unpaid of the purchase price of any property or
representing any Hedging Obligations, except any such balance that constitutes
an accrued expense or trade payable, if and to the extent any of the foregoing
indebtedness (other than letters of credit and Hedging Obligations) would
appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, (ii) all indebtedness of others secured by a Lien on any
asset of such Person (whether or not such indebtedness is assumed by such
Person) and (iii) to the extent not otherwise included, the guarantee by such
Person of any indebtedness of any other Person. The amount of any Indebtedness
outstanding as of any date shall be (i) the accreted value thereof, in the case
of any Indebtedness issued with original issue discount, and (ii) the principal
amount thereof, together with any interest thereon that is more than 30 days
past due, in the case of any other Indebtedness.
"Indenture" means this Indenture, as amended or supplemented
from time to time.
"Indirect Participant" means a Person who holds a beneficial
interest in a Global Note through a Participant.
"Institutional Accredited Investor" means an institution that
is an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under
the Securities Act, who are not also QIBs.
"Investments" means, with respect to any Person, all
investments by such Person in other Persons (including Affiliates) in the forms
of direct or indirect loans (including guarantees of Indebtedness or other
obligations), advances or capital contributions (excluding commission, travel
and similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities, together with all items that are or would
be classified as investments on a balance sheet prepared in accordance with
GAAP. If the Company or any Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Subsidiary of the
Company such that, after giving effect to any such sale or disposition, such
Person is no longer a Subsidiary of the Company, the Company shall be deemed to
have made an Investment on the date of any such sale or disposition equal to
the fair market value of the Equity Interests of such Subsidiary not sold or
disposed of in an amount determined as provided in the third paragraph of
Section 4.07 hereof.
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"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
on such payment for the intervening period.
"Letter of Transmittal" means the letter of transmittal to be prepared
by the Company and sent to all Holders of the Notes for use by such Holders in
connection with the Exchange Offer.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Liquidated Damages" means all liquidated damages then owing pursuant
to Section 5 of the Registration Rights Agreement.
"Marquee" means The Marquee Group, Inc. a Delaware corporation.
"Marquee Merger Agreement" means the Agreement and Plan of Merger
dated as of July 23, 1998, as amended, providing for the merger of a wholly
owned subsidiary of the Company with and into Marquee pursuant to which Marquee
will become a subsidiary of the Company and all transactions and agreements
specifically contemplated thereby or by instruments referred to therein, each
as in effect on the date hereof.
"Meadows Repurchase" means the transfer by Broadcasting to the Company
of an option to repurchase, and the purchase by the Company, of up to 250,838
shares of Class A Common Stock of Broadcasting for $33.00 per share, pursuant
to an option granted in connection with the Agreement of Merger, dated February
12, 1997, by and among Broadcasting, NOC Acquisition Corp., CAPCO Acquisition
Corp., QN Acquisition Corp., Nederlander of Connecticut, Inc., Connecticut
Amphitheater Development Corporation, QN Corp., Connecticut Performing Arts.
Inc. and Connecticut Performing Arts Partners and the stockholders of
Nederlander of Connecticut, Inc., Connecticut Amphitheater Development
Corporation and QN Corp. listed on the signature pages thereto and the transfer
of such stock to Broadcasting prior to the Broadcasting Merger.
"Merger Agreement" means the Agreement and Plan of Merger dated as of
August 24, 1997, that provides for the Broadcasting Merger and all transactions
and agreements specifically contemplated thereby or by instruments referred to
therein, each as in effect on the date hereof.
"Net Income" means, with respect to any Person, the net income (loss)
of such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary gain (but not loss),
together with any related provision for taxes on such extraordinary gain (but
not loss).
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"Net Proceeds" means the aggregate cash proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness secured by a Lien on the asset or assets that
were the subject of such Asset Sale and any reserve for adjustment in respect
of the sale price of such asset or assets established in accordance with GAAP.
"Non-Guarantor Subsidiaries" means Walnut Creek Amphitheater
Partnership, Coral Sky Amphitheater Partnership, Pace Entertainment Charitable
Foundation and PTG-Florida, Inc./BSMG Joint Venture.
"Non-Recourse Debt" means Indebtedness: (i) as to which neither the
Company nor any of its Restricted Subsidiaries (a) provides credit support of
any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor
or otherwise) or (c) constitutes the lender; (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other than
the Notes being offered hereby) of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of the Company or any of its
Restricted Subsidiaries.
"Non-U.S. Person" means a Person who is not a U.S. Person.
"Notes" has the meaning assigned to it in the preamble to this
Indenture.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Offering" means the offering of the Notes by the Company.
"Officer" means, with respect to any Person, the Chairman of the
Board, the Chief Executive Officer, the President, the Chief Operating Officer,
the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the
Controller, the Secretary or any Vice-President of such Person.
"Officers' Certificate" means a certificate signed on behalf of the
Company by two Officers of the Company, one of whom must be the principal
executive officer, the principal financial officer, the treasurer, the
controller or the principal accounting officer of the Company, that meets the
requirements of Section 12.05 hereof.
"Opinion of Counsel" means an opinion from legal counsel who is
reasonably acceptable to the Trustee, that meets the requirements of Section
12.05 hereof. The counsel may be an employee of or counsel to the Company, any
Subsidiary of the Company or the Trustee.
"Pace Agreement" means the agreement by which the Company acquired
PACE Entertainment Corporation (including the Agreements relating to the Sony
Acquisition and the Blockbuster
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Acquisition to acquire a 100% interest in Pavilion Partners), dated December
12, 1997 and the agreements related thereto, each as in effect on the date
hereof.
"Pace Acquisition Facility" means the agreement by the
Company, pursuant to the Pace Agreement, to provide to PACE Entertainment
Corporation up to an aggregate of $25.0 million to be used to fund certain
acquisitions, as in effect on the date hereof.
"Participant" means, with respect to the Depositary,
Euroclear or Cedel, a Person who has an account with the Depositary, Euroclear
or Cedel, respectively (and, with respect to The Depository Trust Company,
shall include Euroclear and Cedel).
"Participating Broker-Dealer" has the meaning set forth in
the Registration Rights Agreement.
"Pending Acquisitions" means the acquisition by the Company
of (i) Cellar Door, pursuant to the Cellar Door Agreement, and (ii) Marquee,
pursuant to the Marquee Merger Agreement, in each case as in effect on the date
hereof and including the transactions and agreements specifically related
thereto.
"Permitted Business" means the live entertainment business
and any business reasonably similar, complementary, ancillary or related
thereto, including the Pending Acquisitions.
"Permitted Investments" means (i) any Investment in the
Company or in a Guarantor; (ii) any Investment in Cash Equivalents; (iii) any
Investment by the Company or any Restricted Subsidiary of the Company in a
Person engaged in a Permitted Business, if (a) as a result of, or concurrently
with, such Investment such Person becomes a Guarantor or (b) as a result of, or
concurrently with, such Investment such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Guarantor; or (c) the
Company or a Guarantor has entered into a binding agreement to acquire such
Person or all or substantially all of the assets of such Person, which
agreement is in effect on the date of such Investment, and such Person becomes
a Guarantor or such transaction is consummated, in each case within 180 days of
the date of such Investment; (iv) any Restricted Investment made as a result of
the receipt of non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with Section 4.10 hereof; (v) any obligations or shares of
Capital Stock received in connection with or as a result of a bankruptcy,
workout or reorganization of the issuer of such obligations or shares of
Capital Stock; (vi) any Investment received involuntarily; (vii) any
acquisition of assets solely in exchange for the issuance of Equity Interests
(other than Disqualified Stock) of the Company; (viii) any Investment made
under the Pace Acquisition Facility pursuant to the Pace Agreement as in effect
on the date hereof; (ix) Investments owned by any of the Acquired Businesses as
of the date such Acquired Business is acquired; (x) other Investments in
Persons engaged in Permitted Businesses (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause (x)
that are at the time outstanding, not to exceed 5% of Total Tangible Assets;
(xi) the consummation of the Pending Acquisitions; (xii) the Meadows Repurchase
and the Series E Preferred Repurchase; provided that the Company receives
either (x) a cash payment from Broadcasting or Broadcasting Buyer or an
Affiliate thereof at or prior to the date of the Broadcasting Merger at least
equal to the aggregate amount expended by the Company in the Meadows Repurchase
and the Series E Preferred Repurchase less $3.0 million or (y) an increase in
favor of the Company in the Working Capital Adjustment (including the avoidance
of a decrease) contemplated by the Merger Agreement in an amount at least equal
to the aggregate amount expended by the Company in the Meadows Repurchase and
the Series E Preferred Repurchase less $3.0 million or (z) any combination
thereof adding up to an amount at least equal to the aggregate amount expended
by the Company in the Meadows Repurchase and the Series E Preferred Repurchase
less $3.0 million; and (xiii) other Investments
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in any Person (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (xiii) that are at the time
outstanding, not to exceed $4.0 million.
"Permitted Liens" means (i) Liens securing Senior Debt that
was permitted by the terms hereof to be incurred; (ii) Liens in favor of the
Company or any of its Restricted Subsidiaries; (iii) Liens on property of a
Person existing at the time such Person is merged into or consolidated with the
Company or any Restricted Subsidiary of the Company; provided that such Liens
were not incurred in contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with the Company; (iv) Liens on property existing at the time of acquisition
thereof by the Company or any Restricted Subsidiary of the Company, provided
that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (vi) Liens existing on the date
hereof; (vii) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded, provided
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefore; and (viii) Liens incurred
in the ordinary course of business of the Company or any Restricted Subsidiary
of the Company with respect to obligations that do not exceed $2.0 million at
any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness
of the Company or any of its Restricted Subsidiaries or any Disqualified Stock
of the Company issued in exchange for, or the net proceeds of which are used to
extend, refinance, renew, replace, defease or refund other Indebtedness of the
Company or any of its Restricted Subsidiaries; provided that: (i) the principal
amount (or accreted value or liquidation preference, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount of (or
accreted value, if applicable), plus accrued interest on, the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is pari passu with the Notes, such Permitted Refinancing Indebtedness
is pari passu with or subordinated in right of payment to the Notes or is
Disqualified Stock; (iv) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Notes, such Permitted Refinancing Indebtedness is subordinated in right of
payment to the Notes on terms at least as favorable to the Holders of Notes as
those contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded or is Disqualified Stock;
and (v) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary that is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded, or such Disqualified Stock
is issued by the Company, as applicable.
"Person" means any individual, corporation, partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization or government or agency or political subdivision thereof
(including any subdivision or ongoing business of any such entity or
substantially all of the assets of any such entity, subdivision or business).
"Principal" means Robert F.X. Sillerman.
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"Private Placement Legend" means the legend set forth in
Section 2.06(g)(i) to be placed on all Notes issued under this Indenture except
where otherwise permitted by the provisions of this Indenture.
"QIB" means a "qualified institutional buyer" as defined in
Rule 144A.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of November 25, 1998, by and among the Company and the
other parties named on the signature pages thereof, as such agreement may be
amended, modified or supplemented from time to time.
"Regulation S" means Regulation S promulgated under the
Securities Act.
"Regulation S Global Note" means a global Note bearing the
Private Placement Legend and deposited with or on behalf of the Depositary and
registered in the name of the Depositary or its nominee, issued in a
denomination equal to the outstanding principal amount of the Notes initially
sold in reliance on Rule 903 of Regulation S.
"Regulation S Permanent Global Note" means a permanent global
Note in the form of Exhibit A1 hereto bearing the Global Note Legend and the
Private Placement Legend and deposited with or on behalf of and registered in
the name of the Depositary or its nominee, issued in a denomination equal to
the outstanding principal amount of the Regulation S Temporary Global Note upon
expiration of the Restricted Period.
"Regulation S Temporary Global Note" means a temporary global
Note in the form of Exhibit A2 hereto bearing the Private Placement Legend and
deposited with or on behalf of and registered in the name of the Depositary or
its nominee, issued in a denomination equal to the outstanding principal amount
of the Notes initially sold in reliance on Rule 903 of Regulation S.
"Related Party" with respect to the Principal means (i) any
spouse or immediate family member of the Principal or (ii) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of the Principal and/or such other Persons referred
to in the immediately preceding clause (i).
"Responsible Officer," when used with respect to the Trustee,
means any officer within the Corporate Trust Administration of the Trustee (or
any successor group of the Trustee) or any other officer of the Trustee
customarily performing functions similar to those performed by any of the above
designated officers and also means, with respect to a particular corporate
trust matter, any other officer to whom such matter is referred because of his
knowledge of and familiarity with the particular subject.
"Restricted Definitive Note" means a Definitive Note bearing
the Private Placement Legend.
"Restricted Global Note" means a Global Note bearing the
Private Placement Legend.
"Restricted Investment" means an Investment other than a
Permitted Investment.
"Restricted Period" means the 40-day restricted period as
defined in Regulation S.
"Restricted Subsidiary" of a Person means any Subsidiary of
the referent Person that is not an Unrestricted Subsidiary.
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"Rule 144" means Rule 144 promulgated under the Securities
Act.
"Rule 144A" means Rule 144A promulgated under the Securities
Act.
"Rule 903" means Rule 903 promulgated under the Securities
Act.
"Rule 904" means Rule 904 promulgated the Securities Act.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as
amended.
"Senior Credit Facility" collectively means that certain
credit and guarantee agreement to be entered into by and among the Company, the
Guarantors, the lenders party thereto, The Bank of New York, as Administrative
Agent, Lehman Commercial Paper Inc. and Goldman Sachs Credit Partners L.P.,
each as Co-Documentation Agents, and each other Loan Document as defined in
such credit and guarantee agreement, as contemplated by that certain commitment
letter by and among the Company, The Bank of New York, BNY Capital Markets,
Inc., Lehman Commercial Paper Inc. and Goldman Sachs Credit Partners L.P., each
as amended, restated, modified, renewed, refunded, replaced or refinanced in
whole or in part from time to time.
"Series E Preferred Repurchase" means the purchase by the
Company of up to $14.2 million in liquidation preference of 12-5/8% Series E
Cumulative Exchangeable Preferred Stock due October 31, 2006 of Broadcasting
and the dividend or other transfer of such stock to Broadcasting prior to the
Broadcasting Merger.
"Shelf Registration Statement" means the Shelf Registration
Statement as defined in the Registration Rights Agreement.
"Significant Subsidiary" means any Restricted Subsidiary that
would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation
is in effect on the date hereof.
"Spin-Off" means the distribution of the common stock of the
Company pro rata to the holders of SFX Broadcasting, Inc. or other disposition
pursuant to, or as permitted by, the Merger Agreement of all the capital stock
and assets of the Company and its Subsidiaries.
"Spin-Off Transaction" means the Spin-Off, the Merger
Agreement and related transactions described or referred to in the Offering
Memorandum of the Company dated February 5, 1998.
"Stated Maturity" means, with respect to any installment of
interest or principal on any series of Indebtedness, the date on which such
payment of interest or principal was scheduled to be paid in the original
documentation governing such Indebtedness, and shall not include any contingent
obligations to repay, redeem or repurchase any such interest or principal prior
to the date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or
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trustees thereof is at the time owned or controlled, directly or indirectly, by
such Person or one or more of the other Subsidiaries of that Person (or a
combination thereof).
"Subsidiary Guarantee" means the Guarantee by each Guarantor
of the Company's payment obligations under this Indenture and the Notes,
executed pursuant to the provisions of this Indenture.
"TIA" means the Trust Indenture Act of 1939 (15
U.S.C.ss.ss.77aaa-77bbbb) as in effect on the date on which this Indenture is
qualified under the TIA.
"Total Tangible Assets" means, as of any date, (i) the total
consolidated assets of the Company and its Restricted Subsidiaries, as set
forth on the Company's most recently available internal consolidated balance
sheet, minus (ii) the total consolidated intangible assets of the Company and
its Restricted Subsidiaries, as set forth on such consolidated balance sheet.
"Trustee" means the party named as such above until a
successor replaces it in accordance with the applicable provisions of this
Indenture and thereafter means the successor serving hereunder.
"Unrestricted Global Note" means a permanent global Note in
the form of Exhibit A1 attached hereto that bears the Global Note Legend and
that has the "Schedule of Exchanges of Interests in the Global Note" attached
thereto, and that is deposited with or on behalf of and registered in the name
of the Depositary, representing a series of Notes that do not bear the Private
Placement Legend.
"Unrestricted Definitive Note" means one or more Definitive
Notes that do not bear and are not required to bear the Private Placement
Legend.
"Unrestricted Subsidiary" means (i) any Subsidiary that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to
a resolution of the Board of Directors, but only to the extent that such
Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not
party to any agreement, contract, arrangement or understanding with the Company
or any Restricted Subsidiary unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (c) is a Person with respect to
which neither the Company nor any of its Restricted Subsidiaries has any direct
or indirect obligation (1) to subscribe for additional Equity Interests or (2)
to maintain or preserve such Person's financial condition or to cause such
Person to achieve any specified levels of operating results; (d) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has
at least one director on its board of directors that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries and has
at least one executive officer that is not a director or executive officer of
the Company or any of its Restricted Subsidiaries.
"U.S. Person" means a U.S. person as defined in Rule 902(o)
under the Securities Act.
"Voting Stock" of any Person as of any date means the Capital
Stock of such Person that is at the time entitled to vote in the election of
the Board of Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to
any Indebtedness at any date, the number of years obtained by dividing (i) the
sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required payments
of principal,
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including payment at final maturity, in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) that will elapse between such
date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares)
shall at the time be owned by such Person or by one or more Wholly Owned
Restricted Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
"Working Capital Adjustment" shall have the meaning assigned
to such term in the Merger Agreement.
SECTION 1.02. OTHER DEFINITIONS.
Defined in
Term Section
"Affiliate Transaction"..............................4.11
"Asset Sale Offer"...................................4.10
"Authentication Order"...............................2.02
"Change of Control Offer"............................4.15
"Change of Control Payment"..........................4.15
"Change of Control Payment Date".....................4.15
"Covenant Defeasance"................................8.03
"Designated Senior Debt".............................10.02
"DTC"................................................2.03
"Event of Default"...................................6.01
"Excess Proceeds"....................................4.10
"incur"..............................................4.09
"Legal Defeasance"...................................8.02
"Notice of Default"..................................6.01
"Offer Amount".......................................3.09
"Offer Period".......................................3.09
"Paying Agent".......................................2.03
"Payment Blockage Notice"............................10.04
"Payment Default"....................................6.01
"Permitted Debt".....................................4.09
"Permitted Junior Securities"........................10.02
"Purchase Date"......................................3.09
"Registrar"..........................................2.03
"Representative".....................................10.01
"Restricted Payments"................................4.07
"Senior Debt"........................................10.01
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the
following meanings:
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"indenture securities" means the Notes;
"indenture security Holder" means a Holder of a Note;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee; and
"obligor" on the Notes and the Subsidiary Guarantees means
the Company and the Guarantors, respectively, and any successor obligor upon
the Notes and the Subsidiary Guarantees, respectively.
All other terms used in this Indenture that are defined by
the TIA, defined by TIA reference to another statute or defined by SEC rule
under the TIA have the meanings so assigned to them.
SECTION 1.04. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the
plural include the singular;
(5) provisions apply to successive events and
transactions; and
(6) references to sections of or rules under the
Securities Act shall be deemed to include substitute, replacement of
successor sections or rules adopted by the SEC from time to time.
ARTICLE 2.
THE NOTES
SECTION 2.01. FORM AND DATING.
(a) General. The Notes and the Trustee's certificate of
authentication shall be substantially in the form of Exhibit A hereto. The
Notes may have notations, legends or endorsements required by law, stock
exchange rule or usage. Each Note shall be dated the date of its
authentication. The Notes shall be in denominations of $1,000 and integral
multiples thereof.
The terms and provisions contained in the Notes shall
constitute, and are hereby expressly made, a part of this Indenture and the
Company, the Guarantors and the Trustee, by their execution and delivery of
this Indenture, expressly agree to such terms and provisions and to be bound
thereby. However, to the extent any provision of any Note conflicts with the
express provisions of this Indenture, the provisions of this Indenture shall
govern and be controlling.
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(b) Global Notes.
Notes issued in global form shall be substantially in the
form of Exhibits A1 or A2 attached hereto (including the Global Note Legend
thereon and the "Schedule of Exchanges of Interests in the Global Note"
attached thereto). Notes issued in definitive form shall be substantially in
the form of Exhibit A1 attached hereto (but without the Global Note Legend
thereon and without the "Schedule of Exchanges of Interests in the Global Note"
attached thereto). Each Global Note shall represent such of the outstanding
Notes as shall be specified therein and each shall provide that it shall
represent the aggregate principal amount of outstanding Notes from time to time
endorsed thereon and that the aggregate principal amount of outstanding Notes
represented thereby may from time to time be reduced or increased, as
appropriate, to reflect exchanges and redemptions. Any endorsement of a Global
Note to reflect the amount of any increase or decrease in the aggregate
principal amount of outstanding Notes represented thereby shall be made by the
Trustee or the Note Custodian, at the direction of the Trustee, in accordance
with instructions given by the Holder thereof as required by Section 2.06
hereof.
(c) Temporary Global Notes.
Notes offered and sold in reliance on Regulation S shall be
issued initially in the form of the Regulation S Temporary Global Note, which
shall be deposited on behalf of the purchasers of the Notes represented thereby
with the Trustee, at its New York office, as custodian for the Depositary, and
registered in the name of the Depositary or the nominee of the Depositary for
the accounts of designated agents holding on behalf of Euroclear or Cedel Bank,
duly executed by the Company and authenticated by the Trustee as hereinafter
provided. The Restricted Period shall be terminated upon the receipt by the
Trustee of (i) a written certificate from the Depositary, together with copies
of certificates from Euroclear and Cedel Bank certifying that they have
received certification of non-United States beneficial ownership of 100% of the
aggregate principal amount of the Regulation S Temporary Global Note (except to
the extent of any beneficial owners thereof who acquired an interest therein
during the Restricted Period pursuant to another exemption from registration
under the Securities Act and who will take delivery of a beneficial ownership
interest in a 144A Global Note or an IAI Global Note bearing a Private
Placement Legend, all as contemplated by Section 2.06(a)(ii) hereof), and (ii)
an Officers' Certificate from the Company. Following the termination of the
Restricted Period, beneficial interests in the Regulation S Temporary Global
Note shall be exchanged for beneficial interests in Regulation S Permanent
Global Notes pursuant to the Applicable Procedures. Simultaneously with the
authentication of Regulation S Permanent Global Notes, the Trustee shall cancel
the Regulation S Temporary Global Note. The aggregate principal amount of the
Regulation S Temporary Global Note and the Regulation S Permanent Global Notes
may from time to time be increased or decreased by adjustments made on the
records of the Trustee and the Depositary or its nominee, as the case may be,
in connection with transfers of interest as hereinafter provided.
(d) Euroclear and Cedel Procedures Applicable.
The provisions of the "Operating Procedures of the Euroclear
System" and "Terms and Conditions Governing Use of Euroclear" and the "General
Terms and Conditions of Cedel Bank" and "Customer Handbook" of Cedel Bank shall
be applicable to transfers of beneficial interests in the Regulation S
Temporary Global Note and the Regulation S Permanent Global Notes that are held
by Participants through Euroclear or Cedel Bank.
SECTION 2.02. EXECUTION AND AUTHENTICATION.
Two Officers shall sign the Notes for the Company by manual
or facsimile signature.
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If an Officer whose signature is on a Note no longer holds
that office at the time a Note is authenticated, the Note shall nevertheless be
valid.
A Note shall not be valid until authenticated by the manual
signature of the Trustee. The signature shall be conclusive evidence that the
Note has been authenticated under this Indenture.
The Trustee shall, upon a written order of the Company signed
by two Officers (an "Authentication Order"), authenticate Notes for original
issue up to the aggregate principal amount stated in paragraph 4 of the Notes.
The aggregate principal amount of Notes outstanding at any time may not exceed
such amount except as provided in Section 2.07 hereof.
The Trustee may appoint an authenticating agent acceptable to
the Company to authenticate Notes. An authenticating agent may authenticate
Notes whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with Holders or an
Affiliate of the Company.
SECTION 2.03. REGISTRAR AND PAYING AGENT
The Company shall maintain an office or agency where Notes
may be presented for registration of transfer or for exchange ("Registrar") and
an office or agency where Notes may be presented for payment ("Paying Agent").
The Registrar shall keep a register of the Notes and of their transfer and
exchange. The Company may appoint one or more co-registrars and one or more
additional paying agents. The term "Registrar" includes any co-registrar and
the term "Paying Agent" includes any additional paying agent. The Company may
change any Paying Agent or Registrar without notice to any Holder. The Company
shall notify the Trustee in writing of the name and address of any Agent not a
party to this Indenture. If the Company fails to appoint or maintain another
entity as Registrar or Paying Agent, the Trustee shall act as such. The Company
or any of its Subsidiaries may act as Paying Agent or Registrar.
The Company initially appoints The Depository Trust Company
("DTC") to act as Depositary with respect to the Global Notes.
The Company initially appoints the Trustee to act as the
Registrar and Paying Agent and to act as Note Custodian with respect to the
Global Notes.
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SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent other than the
Trustee to agree in writing that the Paying Agent will hold in trust for the
benefit of Holders or the Trustee all money held by the Paying Agent for the
payment of principal, premium or Liquidated Damages, if any, or interest on the
Notes, and will notify the Trustee of any default by the Company in making any
such payment. While any such default continues, the Trustee may require a
Paying Agent to pay all money held by it to the Trustee. The Company at any
time may require a Paying Agent to pay all money held by it to the Trustee.
Upon payment over to the Trustee, the Paying Agent (if other than the Company
or a Subsidiary) shall have no further liability for the money. If the Company
or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate
trust fund for the benefit of the Holders all money held by it as Paying Agent.
Upon any bankruptcy or reorganization proceedings relating to the Company, the
Trustee shall serve as Paying Agent for the Notes.
SECTION 2.05. HOLDER LISTS.
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names and
addresses of all Holders and shall otherwise comply with TIA ss. 312(a). If the
Trustee is not the Registrar, the Company shall furnish to the Trustee at least
seven Business Days before each interest payment date and at such other times
as the Trustee may request in writing, a list in such form and as of such date
as the Trustee may reasonably require of the names and addresses of the Holders
of Notes and the Company shall otherwise comply with TIA ss. 312(a).
SECTION 2.06. TRANSFER AND EXCHANGE.
(a) Transfer and Exchange of Global Notes.
A Global Note may not be transferred as a whole except by the
Depositary to a nominee of the Depositary, by a nominee of the Depositary to
the Depositary or to another nominee of the Depositary, or by the Depositary or
any such nominee to a successor Depositary or a nominee of such successor
Depositary. All Global Notes will be exchanged by the Company for Definitive
Notes if (i) the Company delivers to the Trustee notice from the Depositary
that it is unwilling or unable to continue to act as Depositary or that it is
no longer a clearing agency registered under the Exchange Act and, in either
case, a successor Depositary is not appointed by the Company within 120 days
after the date of such notice from the Depositary or (ii) the Company in its
sole discretion determines that the Global Notes (in whole but not in part)
should be exchanged for Definitive Notes and delivers a written notice to such
effect to the Trustee; provided that in no event shall the Regulation S
Temporary Global Note be exchanged by the Company for Definitive Notes prior to
(x) the expiration of the Restricted Period and (y) the receipt by the
Registrar of any certificates required pursuant to Rule 903(c)(3)(ii)(B) under
the Securities Act. Upon the occurrence of either of the preceding events in
(i) or (ii) above, Definitive Notes shall be issued in such names as the
Depositary shall instruct the Trustee. Global Notes also may be exchanged or
replaced, in whole or in part, as provided in Sections 2.07 and 2.10 hereof.
Every Note authenticated and delivered in exchange for, or in lieu of, a Global
Note or any portion thereof, pursuant to this Section 2.06 or Section 2.07 or
2.10 hereof, shall be authenticated and delivered in the form of, and shall be,
a Global Note. A Global Note may not be exchanged for another Note other than
as provided in this Section 2.06(a), however, beneficial interests in a Global
Note may be transferred and exchanged as provided in Section 2.06(b), (c) or
(f) hereof.
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(b) Transfer and Exchange of Beneficial Interests in the Global Notes.
The transfer and exchange of beneficial interests in the
Global Notes shall be effected through the Depositary, in accordance with the
provisions of this Indenture and the Applicable Procedures. Beneficial
interests in the Restricted Global Notes shall be subject to restrictions on
transfer comparable to those set forth herein to the extent required by the
Securities Act. Transfers of beneficial interests in the Global Notes also
shall require compliance with either subparagraph (i) or (ii) below, as
applicable, as well as one or more of the other following subparagraphs, as
applicable:
(i) Transfer of Beneficial Interests in the Same Global Note.
Beneficial interests in any Restricted Global Note may be transferred to
Persons who take delivery thereof in the form of a beneficial interest in
the same Restricted Global Note in accordance with the transfer
restrictions set forth in the Private Placement Legend; provided, however,
that prior to the expiration of the Restricted Period, transfers of
beneficial interests in the Temporary Regulation S Global Note may not be
made to a U.S. Person or for the account or benefit of a U.S. Person
(other than an Initial Purchaser). Beneficial interests in any
Unrestricted Global Note may be transferred to Persons who take delivery
thereof in the form of a beneficial interest in an Unrestricted Global
Note. No written orders or instructions shall be required to be delivered
to the Registrar to effect the transfers described in this Section
2.06(b)(i).
(ii) All Other Transfers and Exchanges of Beneficial Interests in
Global Notes. In connection with all transfers and exchanges of beneficial
interests that are not subject to Section 2.06(b)(i) above, the transferor
of such beneficial interest must deliver to the Registrar either (A) (1) a
written order from a Participant or an Indirect Participant given to the
Depositary in accordance with the Applicable Procedures directing the
Depositary to credit or cause to be credited a beneficial interest in
another Global Note in an amount equal to the beneficial interest to be
transferred or exchanged and (2) instructions given in accordance with the
Applicable Procedures containing information regarding the Participant
account to be credited with such increase or (B) (1) a written order from
a Participant or an Indirect Participant given to the Depositary in
accordance with the Applicable Procedures directing the Depositary to
cause to be issued a Definitive Note in an amount equal to the beneficial
interest to be transferred or exchanged and (2) instructions given by the
Depositary to the Registrar containing information regarding the Person in
whose name such Definitive Note shall be registered to effect the transfer
or exchange referred to in (1) above; provided that in no event shall
Definitive Notes be issued upon the transfer or exchange of beneficial
interests in the Regulation S Temporary Global Note prior to (x) the
expiration of the Restricted Period and (y) the receipt by the Registrar
of any certificates required pursuant to Rule 903 under the Securities
Act. Upon consummation of an Exchange Offer by the Company in accordance
with Section 2.06(f) hereof, the requirements of this Section 2.06(b)(ii)
shall be deemed to have been satisfied upon receipt by the Registrar of
the instructions contained in the Letter of Transmittal delivered by the
Holder of such beneficial interests in the Restricted Global Notes. Upon
satisfaction of all of the requirements for transfer or exchange of
beneficial interests in Global Notes contained in this Indenture and the
Notes or otherwise applicable under the Securities Act, the Trustee shall
adjust the principal amount of the relevant Global Note(s) pursuant to
Section 2.06(h) hereof.
(iii) Transfer of Beneficial Interests to Another Restricted Global
Note. A beneficial interest in any Restricted Global Note may be
transferred to a Person who takes delivery thereof in the form of a
beneficial interest in another Restricted Global Note if the transfer
complies with the requirements of Section 2.06(b)(ii) above and each of
the Trustee and the Registrar receives the following:
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(A) if the transferee will take delivery in the form of a
beneficial interest in the 144A Global Note, then the transferor
must deliver a certificate in the form of Exhibit B hereto,
including the certifications in item (1) thereof;
(B) if the transferee will take delivery in the form of a
beneficial interest in the Regulation S Temporary Global Note or
the Regulation S Global Note, then the transferor must deliver a
certificate in the form of Exhibit B hereto, including the
certifications in item (2) thereof; and
(C) if the transferee will take delivery in the form of a
beneficial interest in the IAI Global Note, then the transferor
must deliver a certificate in the form of Exhibit B hereto,
including the certifications and certificates and Opinion of
Counsel required by item (3) thereof, if applicable.
(iv) Transfer and Exchange of Beneficial Interests in a Restricted
Global Note for Beneficial Interests in the Unrestricted Global Note. A
beneficial interest in any Restricted Global Note may be exchanged by any
holder thereof for a beneficial interest in an Unrestricted Global Note or
transferred to a Person who takes delivery thereof in the form of a
beneficial interest in an Unrestricted Global Note if the exchange or
transfer complies with the requirements of Section 2.06(b)(ii) above and:
(A) such exchange or transfer is effected pursuant to the
Exchange Offer in accordance with the Registration Rights
Agreement and the holder of the beneficial interest to be
transferred, in the case of an exchange, or the transferee, in
the case of a transfer, certifies in the applicable Letter of
Transmittal or via the Depositary's book-entry system that it is
not (1) a broker-dealer, (2) a Person participating in the
distribution of the Exchange Notes or (3) a Person who is an
affiliate (as defined in Rule 144) of the Company;
(B) such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) such transfer is effected by a Participating
Broker-Dealer pursuant to the Exchange Offer Registration
Statement in accordance with the Registration Rights Agreement;
or
(D) each of the Trustee and the Registrar receives the
following:
(1) if the holder of such beneficial interest in a
Restricted Global Note proposes to exchange such beneficial interest
for a beneficial interest in an Unrestricted Global Note, a
certificate from such holder in the form of Exhibit C hereto,
including the certifications in item (1)(a) thereof; or
(2) if the holder of such beneficial interest in a
Restricted Global Note proposes to transfer such beneficial interest
to a Person who shall take delivery thereof in the form of a
beneficial interest in an Unrestricted Global Note, a certificate from
such holder in the form of Exhibit B hereto, including the
certifications in item (4) thereof;
and, in each such case set forth in this subparagraph (D), if the
Registrar so requests or if the Applicable Procedures so require, an
Opinion of Counsel in form reasonably acceptable to the
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Registrar to the effect that such exchange or transfer is in
compliance with the Securities Act and that the restrictions on
transfer contained herein and in the Private Placement Legend are no
longer required in order to maintain compliance with the Securities
Act.
If any such transfer is effected pursuant to subparagraph (B)
or (D) above at a time when an Unrestricted Global Note has not yet been
issued, the Company shall issue and, upon receipt of an Authentication Order in
accordance with Section 2.02 hereof, the Trustee shall authenticate one or more
Unrestricted Global Notes in an aggregate principal amount equal to the
aggregate principal amount of beneficial interests transferred pursuant to
subparagraph (B) or (D) above.
Beneficial interests in an Unrestricted Global Note cannot be
exchanged for, or transferred to Persons who take delivery thereof in the form
of, a beneficial interest in a Restricted Global Note.
(c) Transfer or Exchange of Beneficial Interests for Definitive Notes.
(i) Beneficial Interests in Restricted Global Notes to Restricted
Definitive Notes. If any holder of a beneficial interest in a Restricted
Global Note proposes to exchange such beneficial interest for a Restricted
Definitive Note or to transfer such beneficial interest to a Person who
takes delivery thereof in the form of a Restricted Definitive Note, then,
upon receipt by each of the Trustee and the Registrar of the following
documentation:
(A) if the holder of such beneficial interest in a Restricted
Global Note proposes to exchange such beneficial interest for a
Restricted Definitive Note, a certificate from such holder in the
form of Exhibit C hereto, including the certifications in item
(2)(a) thereof;
(B) if such beneficial interest is being transferred to a QIB
in accordance with Rule 144A under the Securities Act, a
certificate to the effect set forth in Exhibit B hereto,
including the certifications in item (1) thereof;
(C) if such beneficial interest is being transferred to a
Non-U.S. Person in an offshore transaction in accordance with
Rule 903 or Rule 904 under the Securities Act, a certificate to
the effect set forth in Exhibit B hereto, including the
certifications in item (2) thereof;
(D) if such beneficial interest is being transferred pursuant
to an exemption from the registration requirements of the
Securities Act in accordance with Rule 144 under the Securities
Act, a certificate to the effect set forth in Exhibit B hereto,
including the certifications in item (3)(a) thereof;
(E) if any such beneficial interest is being transferred to
an Institutional Accredited Investor in reliance on an exemption
from the registration requirements of the Securities Act other
than those listed in paragraphs (B) through (D) above, a
certificate to the effect set forth in Exhibit B hereto,
including the certifications, certificates and Opinion of Counsel
required by item (3) thereof, if applicable;
(F) if such beneficial interest is being transferred to the
Company or any of its Subsidiaries, a certificate to the effect
set forth in Exhibit B hereto, including the certifications in
item (3)(b) thereof; or
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(G) if such beneficial interest is being transferred pursuant
to an effective registration statement under the Securities Act,
a certificate to the effect set forth in Exhibit B hereto,
including the certifications in item (3)(c) thereof,
the Trustee shall cause the aggregate principal amount of the
applicable Global Note to be reduced accordingly pursuant to Section
2.06(h) hereof, and the Company shall execute and the Trustee, upon
receipt of an Authentication Order in accordance with Section 2.02
hereof, shall authenticate and deliver to the Person designated in the
instructions a Definitive Note in the appropriate principal amount.
Any Definitive Note issued in exchange for a beneficial interest in a
Restricted Global Note pursuant to this Section 2.06(c) shall be
registered in such name or names and in such authorized denomination
or denominations as the holder of such beneficial interest shall
instruct the Registrar through instructions from the Depositary and
the Participant or Indirect Participant. The Trustee shall deliver
such Definitive Notes to the Persons in whose names such Notes are so
registered. Any Definitive Note issued in exchange for a beneficial
interest in a Restricted Global Note pursuant to this Section
2.06(c)(i) shall bear the Private Placement Legend and shall be
subject to all restrictions on transfer contained therein.
(ii) Notwithstanding Sections 2.06(c)(i)(A) and (C) hereof, a
beneficial interest in the Regulation S Temporary Global Note may not be
exchanged for a Definitive Note or transferred to a Person who takes
delivery thereof in the form of a Definitive Note prior to (x) the
expiration of the Restricted Period and (y) the receipt by the Registrar
of any certificates required pursuant to Rule 903(c)(3)(ii)(B) under the
Securities Act, except in the case of a transfer pursuant to an exemption
from the registration requirements of the Securities Act other than Rule
903 or Rule 904.
(iii) Beneficial Interests in Restricted Global Notes to Unrestricted
Definitive Notes. A holder of a beneficial interest in a Restricted Global
Note may exchange such beneficial interest for an Unrestricted Definitive
Note or may transfer such beneficial interest to a Person who takes
delivery thereof in the form of an Unrestricted Definitive Note only if:
(A) such exchange or transfer is effected pursuant to the
Exchange Offer in accordance with the Registration Rights
Agreement and the holder of such beneficial interest, in the case
of an exchange, or the transferee, in the case of a transfer,
certifies in the applicable Letter of Transmittal that it is not
(1) a broker-dealer, (2) a Person participating in the
distribution of the Exchange Notes or (3) a Person who is an
affiliate (as defined in Rule 144) of the Company;
(B) such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) such transfer is effected by a Participating
Broker-Dealer pursuant to the Exchange Offer Registration
Statement in accordance with the Registration Rights Agreement;
or
(D) the Trustee and the Registrar receives the following:
(1) if the holder of such beneficial interest in a
Restricted Global Note proposes to exchange such beneficial interest
for a Definitive Note that does not bear the Private Placement Legend,
a certificate from such holder in the form of Exhibit C hereto,
including the certifications in item (1)(b) thereof; or
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(2) if the holder of such beneficial interest in a
Restricted Global Note proposes to transfer such beneficial interest
to a Person who shall take delivery thereof in the form of a
Definitive Note that does not bear the Private Placement Legend, a
certificate from such holder in the form of Exhibit B hereto,
including the certifications in item (4) thereof;
and, in each such case set forth in this subparagraph (D), if the
Registrar so requests or if the Applicable Procedures so require, an
Opinion of Counsel in form reasonably acceptable to the Registrar to
the effect that such exchange or transfer is in compliance with the
Securities Act and that the restrictions on transfer contained herein
and in the Private Placement Legend are no longer required in order to
maintain compliance with the Securities Act.
(iv) Beneficial Interests in Unrestricted Global Notes to Unrestricted
Definitive Notes. If any holder of a beneficial interest in an
Unrestricted Global Note proposes to exchange such beneficial interest for
a Definitive Note or to transfer such beneficial interest to a Person who
takes delivery thereof in the form of a Definitive Note, then, upon
satisfaction of the conditions set forth in Section 2.06(b)(ii) hereof,
the Trustee shall cause the aggregate principal amount of the applicable
Global Note to be reduced accordingly pursuant to Section 2.06(h) hereof,
and the Company shall execute and the Trustee shall, upon receipt of an
Authentication Order in accordance with Section 2.02 hereof, authenticate
and deliver to the Person designated in the instructions a Definitive Note
in the appropriate principal amount. Any Definitive Note issued in
exchange for a beneficial interest pursuant to this Section 2.06(c)(iii)
shall be registered in such name or names and in such authorized
denomination or denominations as the holder of such beneficial interest
shall instruct the Registrar through instructions from the Depositary and
the Participant or Indirect Participant. The Trustee shall deliver such
Definitive Notes to the Persons in whose names such Notes are so
registered. Any Definitive Note issued in exchange for a beneficial
interest pursuant to this Section 2.06(c)(iii) shall not bear the Private
Placement Legend.
(d) Transfer and Exchange of Definitive Notes for Beneficial Interests.
(i) Restricted Definitive Notes to Beneficial Interests in Restricted
Global Notes. If any Holder of a Restricted Definitive Note proposes to
exchange such Note for a beneficial interest in a Restricted Global Note
or to transfer such Restricted Definitive Notes to a Person who takes
delivery thereof in the form of a beneficial interest in a Restricted
Global Note, then, upon receipt by each of the Trustee and the Registrar
of the following documentation:
(A) if the Holder of such Restricted Definitive Note proposes
to exchange such Note for a beneficial interest in a Restricted
Global Note, a certificate from such Holder in the form of
Exhibit C hereto, including the certifications in item (2)(b)
thereof;
(B) if such Restricted Definitive Note is being transferred
to a QIB in accordance with Rule 144A under the Securities Act, a
certificate to the effect set forth in Exhibit B hereto,
including the certifications in item (1) thereof;
(C) if such Restricted Definitive Note is being transferred
to a Non-U.S. Person in an offshore transaction in accordance
with Rule 903 or Rule 904 under the Securities Act, a certificate
to the effect set forth in Exhibit B hereto, including the
certifications in item (2) thereof;
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(D) if such Restricted Definitive Note is being transferred
pursuant to an exemption from the registration requirements of
the Securities Act in accordance with Rule 144 under the
Securities Act, a certificate to the effect set forth in Exhibit
B hereto, including the certifications in item (3)(a) thereof;
(E) if any such Restricted Definitive Note is being
transferred to an Institutional Accredited Investor in reliance
on an exemption from the registration requirements of the
Securities Act other than those listed in paragraphs (B) through
(D) above, a certificate to the effect set forth in Exhibit B
hereto, including the certifications, certificates and Opinion of
Counsel required by item (3) thereof, if applicable;
(F) if such Restricted Definitive Note is being transferred
to the Company or any of its Subsidiaries, a certificate to the
effect set forth in Exhibit B hereto, including the
certifications in item (3)(b) thereof; or
(G) if such Restricted Definitive Note is being transferred
pursuant to an effective registration statement under the
Securities Act, a certificate to the effect set forth in Exhibit
B hereto, including the certifications in item (3)(c) thereof,
the Trustee shall cancel the Restricted Definitive Note, increase or
cause to be increased the aggregate principal amount of, in the case
of clause (A) above, the appropriate Restricted Global Note, in the
case of clause (B) above, the 144A Global Note, in the case of clause
(C) above, the Regulation S Global Note, and in all other cases, the
IAI Global Note.
(ii) Restricted Definitive Notes to Beneficial Interests in
Unrestricted Global Notes. A Holder of a Restricted Definitive Note may
exchange such Note for a beneficial interest in an Unrestricted Global
Note or transfer such Restricted Definitive Note to a Person who takes
delivery thereof in the form of a beneficial interest in an Unrestricted
Global Note only if:
(A) such exchange or transfer is effected pursuant to the
Exchange Offer in accordance with the Registration Rights
Agreement and the Holder, in the case of an exchange, or the
transferee, in the case of a transfer, certifies in the
applicable Letter of Transmittal that it is not (1) a
broker-dealer, (2) a Person participating in the distribution of
the Exchange Notes or (3) a Person who is an affiliate (as
defined in Rule 144) of the Company;
(B) such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) such transfer is effected by a Participating
Broker-Dealer pursuant to the Exchange Offer Registration
Statement in accordance with the Registration Rights Agreement;
or
(D) each of the Trustee and the Registrar receives the
following:
(1) if the Holder of such Definitive Notes proposes to
exchange such Notes for a beneficial interest in the Unrestricted
Global Note, a certificate from such Holder in the form of Exhibit C
hereto, including the certifications in item (1)(c) thereof; or
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(2) if the Holder of such Definitive Notes proposes to transfer
such Notes to a Person who shall take delivery thereof in the form of
a beneficial interest in the Unrestricted Global Note, a certificate
from such Holder in the form of Exhibit B hereto, including the
certifications in item (4) thereof;
and, in each such case set forth in this subparagraph (D), if the
Registrar so requests or if the Applicable Procedures so require, an
Opinion of Counsel in form reasonably acceptable to the Registrar to
the effect that such exchange or transfer is in compliance with the
Securities Act and that the restrictions on transfer contained herein
and in the Private Placement Legend are no longer required in order
to maintain compliance with the Securities Act.
Upon satisfaction of the conditions of any of the subparagraphs in
this Section 2.06(d)(ii), the Trustee shall cancel the Definitive
Notes and increase or cause to be increased the aggregate principal
amount of the Unrestricted Global Note.
(iii) Unrestricted Definitive Notes to Beneficial Interests in
Unrestricted Global Notes. A Holder of an Unrestricted Definitive Note may
exchange such Note for a beneficial interest in an Unrestricted Global
Note or transfer such Definitive Notes to a Person who takes delivery
thereof in the form of a beneficial interest in an Unrestricted Global
Note at any time. Upon receipt of a request for such an exchange or
transfer, the Trustee shall cancel the applicable Unrestricted Definitive
Note and increase or cause to be increased the aggregate principal amount
of one of the Unrestricted Global Notes.
If any such exchange or transfer from a Definitive Note to a
beneficial interest is effected pursuant to subparagraphs (ii)(B), (ii)(D) or
(iii) above at a time when an Unrestricted Global Note has not yet been issued,
the Company shall issue and, upon receipt of an Authentication Order in
accordance with Section 2.02 hereof, the Trustee shall authenticate one or more
Unrestricted Global Notes in an aggregate principal amount equal to the
principal amount of Definitive Notes so transferred.
(e) Transfer and Exchange of Definitive Notes for Definitive Notes.
Upon request by a Holder of Definitive Notes and such Holder's
compliance with the provisions of this Section 2.06(e), the Registrar shall
register the transfer or exchange of Definitive Notes. Prior to such
registration of transfer or exchange, the requesting Holder shall present or
surrender to the Registrar the Definitive Notes duly endorsed or accompanied by
a written instruction of transfer in form satisfactory to the Registrar duly
executed by such Holder or by his attorney, duly authorized in writing. In
addition, the requesting Holder shall provide any additional certifications,
documents and information, as applicable, required pursuant to the following
provisions of this Section 2.06(e).
(i) Restricted Definitive Notes to Restricted Definitive Notes.
Any Restricted Definitive Note may be transferred to and registered
in the name of Persons who take delivery thereof in the form of a
Restricted Definitive Note if the Registrar receives the following:
(A) if the transfer will be made pursuant to Rule 144A
under the Securities Act, then the transferor must deliver a
certificate in the form of Exhibit B hereto, including the
certifications in item (1) thereof;
(B) if the transfer will be made pursuant to Rule 903 or
Rule 904, then the transferor must deliver a certificate in the
form of Exhibit B hereto, including the certifications in item
(2) thereof; and
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(C) if the transfer will be made pursuant to any other
exemption from the registration requirements of the Securities
Act, then the transferor must deliver a certificate in the form
of Exhibit B hereto, including the certifications, certificates
and Opinion of Counsel required by item (3) thereof, if
applicable.
(ii) Restricted Definitive Notes to Unrestricted Definitive Notes. Any
Restricted Definitive Note may be exchanged by the Holder thereof for an
Unrestricted Definitive Note or transferred to a Person or Persons who
take delivery thereof in the form of an Unrestricted Definitive Note if:
(A) such exchange or transfer is effected pursuant to the
Exchange Offer in accordance with the Registration Rights
Agreement and the Holder, in the case of an exchange, or the
transferee, in the case of a transfer, certifies in the
applicable Letter of Transmittal that it is not (1) a
broker-dealer, (2) a Person participating in the distribution of
the Exchange Notes or (3) a Person who is an affiliate (as
defined in Rule 144) of the Company;
(B) any such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) any such transfer is effected by a Participating
Broker-Dealer pursuant to the Exchange Offer Registration
Statement in accordance with the Registration Rights Agreement;
or
(D) each of the Trustee and the Registrar receives the
following:
(1) if the Holder of such Restricted Definitive Notes
proposes to exchange such Notes for an Unrestricted Definitive Note, a
certificate from such Holder in the form of Exhibit C hereto,
including the certifications in item (1)(d) thereof; or
(2) if the Holder of such Restricted Definitive Notes
proposes to transfer such Notes to a Person who shall take delivery
thereof in the form of an Unrestricted Definitive Note, a certificate
from such Holder in the form of Exhibit B hereto, including the
certifications in item (4) thereof;
and, in each such case set forth in this subparagraph (D), if the
Registrar so requests, an Opinion of Counsel in form reasonably
acceptable to the Company to the effect that such exchange or transfer
is in compliance with the Securities Act and that the restrictions on
transfer contained herein and in the Private Placement Legend are no
longer required in order to maintain compliance with the Securities
Act.
(iii) Unrestricted Definitive Notes to Unrestricted Definitive Notes.
A Holder of Unrestricted Definitive Notes may transfer such Notes to a
Person who takes delivery thereof in the form of an Unrestricted
Definitive Note. Upon receipt of a request to register such a transfer,
the Registrar shall register the Unrestricted Definitive Notes pursuant to
the instructions from the Holder thereof.
(f) Exchange Offer.
Upon the occurrence of the Exchange Offer in accordance with
the Registration Rights Agreement, the Company shall issue and, upon receipt of
an Authentication Order in accordance with Section 2.02, the Trustee shall
authenticate (i) one or more Unrestricted Global Notes in an aggregate
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principal amount equal to the principal amount of the beneficial interests in
the Restricted Global Notes tendered for acceptance by Persons that certify in
the applicable Letters of Transmittal that (x) they are not broker-dealers, (y)
they are not participating in a distribution of the Exchange Notes and (z) they
are not affiliates (as defined in Rule 144) of the Company, and accepted for
exchange in the Exchange Offer and (ii) Definitive Notes in an aggregate
principal amount equal to the principal amount of the Restricted Definitive
Notes accepted for exchange in the Exchange Offer. Concurrently with the
issuance of such Notes, the Trustee shall cause the aggregate principal amount
of the applicable Restricted Global Notes to be reduced accordingly, and the
Company shall execute and the Trustee shall, upon receipt of an Authentication
Order in accordance with Section 2.02, authenticate and deliver to the Persons
designated by the Holders of Definitive Notes so accepted Definitive Notes in
the appropriate principal amount.
(g) Legends.
The following legends shall appear on the face of all Global
Notes and Definitive Notes issued under this Indenture unless specifically
stated otherwise in the applicable provisions of this Indenture.
(i) Private Placement Legend.
(A) Except as permitted by subparagraph (B) below, each
Global Note and each Definitive Note (and all Notes issued in
exchange therefor or substitution thereof) shall bear the legend
in substantially the following form:
"THE NOTE (OR ITS PREDECESSOR) EVIDENCED HEREBY HAS NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY
NOT BE OFFERED OR SOLD EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE.
BY ITS ACQUISITION HEREOF, THE HOLDER: REPRESENTS THAT (1) IT IS (A) A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) OR (B) NOT A U.S. PERSON AND IS ACQUIRING THE NOTE
EVIDENCED HEREBY IN AN OFFSHORE TRANSACTION; (2) AGREES THAT IT WILL
NOT RESELL OR OTHERWISE TRANSFER THE NOTE EVIDENCED HEREBY EXCEPT TO
(A) THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) A QUALIFIED
INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES
ACT, (C) AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH
TRANSFER, FURNISHES TO THE CHASE MANHATTAN BANK, AS TRUSTEE (OR A
SUCCESSOR TRUSTEE, AS APPLICABLE), A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON
TRANSFER OF THE NOTE EVIDENCED HEREBY (THE FORM OF WHICH LETTER CAN BE
OBTAINED FROM SUCH TRUSTEE OR A SUCCESSOR TRUSTEE, AS APPLICABLE), (D)
OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE
SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION
PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR IN
ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT, AND, IN EACH CASE, IN ACCORDANCE
WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OR ANY OTHER
APPLICABLE JURISDICTION; AND (3) AGREES THAT IT WILL DELIVER TO EACH
PERSON TO WHOM THE NOTE EVIDENCED HEREBY IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IF THE PROPOSED
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TRANSFER IS PURSUANT TO CLAUSE (C), (D) OR (E) ABOVE, THE HOLDER MUST,
PRIOR TO SUCH TRANSFER, FURNISH TO THE CHASE MANHATTAN BANK, AS
TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), SUCH CERTIFICATIONS,
LEGAL OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE TO
CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION
FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS
"OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE
MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT."
(B) Notwithstanding the foregoing, any Global Note or
Definitive Note issued pursuant to subparagraphs (b)(iv),
(c)(ii), (c)(iii), (d)(ii), (d)(iii), (e)(ii), (e)(iii) or (f) to
this Section 2.06 (and all Notes issued in exchange therefor or
substitution thereof) shall not bear the Private Placement
Legend.
(ii)Global Note Legend. Each Global Note shall bear a legend in
substantially the following form:
"THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE
INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE
BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO
ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY
MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.07
OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT
NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (III) THIS
GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT
TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE
TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT
OF THE COMPANY."
(iii)Regulation S Temporary Global Note Legend. The Regulation S
Temporary Global Note shall bear a legend in substantially the
following form:
"THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND
THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED
NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER
THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY
GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON."
(h) Cancellation and/or Adjustment of Global Notes.
At such time as all beneficial interests in a particular
Global Note have been exchanged for Definitive Notes or a particular Global
Note has been redeemed, repurchased or canceled in whole and not in part, each
such Global Note shall be returned to or retained and canceled by the Trustee
in accordance with Section 2.11 hereof. At any time prior to such cancellation,
if any beneficial interest in a Global Note is exchanged for or transferred to
a Person who will take delivery thereof in the form of a beneficial interest in
another Global Note or for Definitive Notes, the principal amount of Notes
represented by such Global Note shall be reduced accordingly and an endorsement
shall be made on such Global Note by the Trustee or by the Depositary to
reflect such reduction; and if the beneficial interest is
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being exchanged for or transferred to a Person who will take delivery thereof
in the form of a beneficial interest in another Global Note, such other Global
Note shall be increased accordingly and an endorsement shall be made on such
Global Note by the Trustee or by the Depositary to reflect such increase.
(i) General Provisions Relating to Transfers and Exchanges.
(i) To permit registrations of transfers and exchanges, the Company
shall execute and the Trustee shall authenticate Global Notes and
Definitive Notes upon the Company's order or at the Registrar's request.
(ii) No service charge shall be made to a holder of a beneficial
interest in a Global Note or to a Holder of a Definitive Note for any
registration of transfer or exchange, but the Company may require payment
of a sum sufficient to cover any transfer tax or similar governmental
charge payable in connection therewith (other than any such transfer taxes
or similar governmental charge payable upon exchange or transfer pursuant
to Sections 2.10, 3.06, 3.09, 4.10, 4.15 and 9.05 hereof).
(iii) The Registrar shall not be required to register the transfer of
or exchange any Note selected for redemption in whole or in part, except
the unredeemed portion of any Note being redeemed in part.
(iv) All Global Notes and Definitive Notes issued upon any
registration of transfer or exchange of Global Notes or Definitive Notes
shall be the valid obligations of the Company, evidencing the same debt,
and entitled to the same benefits under this Indenture, as the Global
Notes or Definitive Notes surrendered upon such registration of transfer
or exchange.
(v) The Company shall not be required (A) to issue, to register the
transfer of or to exchange any Notes during a period beginning at the
opening of business 15 days before the day of any selection of Notes for
redemption under Section 3.02 hereof and ending at the close of business
on the day of selection, (B) to register the transfer of or to exchange
any Note so selected for redemption in whole or in part, except the
unredeemed portion of any Note being redeemed in part or (C) to register
the transfer of or to exchange a Note between a record date and the next
succeeding Interest Payment Date.
(vi) Prior to due presentment for the registration of a transfer of
any Note, the Trustee, any Agent and the Company may deem and treat the
Person in whose name any Note is registered as the absolute owner of such
Note for the purpose of receiving payment of principal of and interest on
such Notes and for all other purposes, and none of the Trustee, any Agent
or the Company shall be affected by notice to the contrary.
(vii) The Trustee shall authenticate Global Notes and Definitive Notes
in accordance with the provisions of Section 2.02 hereof.
(viii) All certifications, certificates and Opinions of Counsel
required to be submitted to the Registrar pursuant to this Section 2.06 to
effect a registration of transfer or exchange may be submitted by
facsimile.
SECTION 2.07. REPLACEMENT NOTES
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If any mutilated Note is surrendered to the Trustee or the
Company and the Trustee receives evidence to its satisfaction of the
destruction, loss or theft of any Note, the Company shall issue and the
Trustee, upon receipt of an Authentication Order, shall authenticate a
replacement Note if the Trustee's requirements are met. If required by the
Trustee or the Company, an indemnity bond must be supplied by the Holder that
is sufficient in the judgment of the Trustee and the Company to protect the
Company, the Trustee, any Agent and any authenticating agent from any loss that
any of them may suffer if a Note is replaced. The Company may charge for its
expenses in replacing a Note.
Every replacement Note is an additional obligation of the
Company and shall be entitled to all of the benefits of this Indenture equally
and proportionately with all other Notes duly issued hereunder.
SECTION 2.08. OUTSTANDING NOTES.
The Notes outstanding at any time are all the Notes
authenticated by the Trustee except for those canceled by it, those delivered
to it for cancellation, those reductions in the interest in a Global Note
effected by the Trustee in accordance with the provisions hereof, and those
described in this Section as not outstanding. Except as set forth in Section
2.09 hereof, a Note does not cease to be outstanding because the Company or an
Affiliate of the Company holds the Note; however, Notes held by the Company or
a Subsidiary of the Company shall not be deemed to be outstanding for purposes
of Section 3.07(b) hereof.
If a Note is replaced pursuant to Section 2.07 hereof, it
ceases to be outstanding unless the Trustee receives proof satisfactory to it
that the replaced Note is held by a bona fide purchaser.
If the principal amount of any Note is considered paid under
Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to
accrue.
If the Paying Agent (other than the Company, a Subsidiary or
an Affiliate of any thereof) holds, on a redemption date or maturity date,
money sufficient to pay Notes payable on that date, then on and after that date
such Notes shall be deemed to be no longer outstanding and shall cease to
accrue interest.
SECTION 2.09. TREASURY NOTES.
In determining whether the Holders of the required principal
amount of Notes have concurred in any direction, waiver or consent, Notes owned
by the Company, or by any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company,
shall be considered as though not outstanding, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, waiver or consent, only Notes that the Trustee knows are so owned
shall be so disregarded. The Company agrees to notify the Trustee of the
existence of any Notes owned by the Company, any Guarantor, or any Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Company or any Guarantor.
SECTION 2.10. TEMPORARY NOTES
Until certificates representing Notes are ready for delivery,
the Company may prepare and the Trustee, upon receipt of an Authentication
Order, shall authenticate temporary Notes. Temporary Notes shall be
substantially in the form of certificated Notes but may have variations that
the Company considers appropriate for temporary Notes and as shall be
reasonably acceptable to the Trustee.
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Without unreasonable delay, the Company shall prepare and the Trustee shall
authenticate definitive Notes in exchange for temporary Notes.
Holders of temporary Notes shall be entitled to all of the
benefits of this Indenture.
SECTION 2.11. CANCELLATION.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment.
The Trustee and no one else shall cancel all Notes surrendered for registration
of transfer, exchange, payment, replacement or cancellation and shall destroy
canceled Notes (subject to the record retention requirement of the Exchange
Act). Certification of the destruction of all canceled Notes shall be delivered
to the Company. The Company may not issue new Notes to replace Notes that it
has paid or that have been delivered to the Trustee for cancellation.
SECTION 2.12. DEFAULTED INTEREST.
If the Company defaults in a payment of interest on the
Notes, it shall pay the defaulted interest in any lawful manner plus, to the
extent lawful, interest payable on the defaulted interest, to the Persons who
are Holders on a subsequent special record date, in each case at the rate
provided in the Notes and in Section 4.01 hereof. The Company shall notify the
Trustee in writing of the amount of defaulted interest proposed to be paid on
each Note and the date of the proposed payment. The Company shall fix or cause
to be fixed each such special record date and payment date, provided that no
such special record date shall be less than 10 days prior to the related
payment date for such defaulted interest. At least 15 days before the special
record date, the Company (or, upon the written request of the Company, the
Trustee in the name and at the expense of the Company) shall mail or cause to
be mailed to Holders a notice that states the special record date, the related
payment date and the amount of such interest to be paid.
ARTICLE 3.
REDEMPTION AND PREPAYMENT
SECTION 3.01. NOTICES TO TRUSTEE.
If the Company elects to redeem Notes pursuant to the
optional redemption provisions of Section 3.07 hereof, it shall furnish to the
Trustee, at least 45 days but not more than 60 days before a redemption date,
an Officers' Certificate setting forth (i) the clause of this Indenture
pursuant to which the redemption shall occur, (ii) the redemption date, (iii)
the principal amount of Notes to be redeemed, (iv) the redemption price, and
(v) the CUSIP numbers of the Notes to be redeemed.
If the Company is required to make an offer to purchase Notes
pursuant to the provisions of Section 3.09 or 4.15 hereof, it shall furnish to
the Trustee an Officers' Certificate setting forth (i) the Section of this
Indenture pursuant to which the purchase shall occur, (ii) the purchase date,
(iii) the principal amount of Notes to be purchased, (iv) the purchase price
and (v) a statement to the effect that (a) the Company or one of its
Subsidiaries has effected an Asset Sale and the conditions set forth in
Sections 3.09 and 4.10 have been satisfied or (b) a Change of Control has
occurred and the conditions set forth in Section 4.15 have been satisfied, as
applicable.
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED
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If less than all of the Notes are to be redeemed or purchased
in an offer to purchase at any time, the Trustee shall select the Notes to be
redeemed or purchased among the Holders of the Notes in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed or, if the Notes are not so listed, on a pro rata basis,
by lot or in accordance with any other method the Trustee considers fair and
appropriate. In the event of partial redemption by lot, the particular Notes to
be redeemed shall be selected, unless otherwise provided herein, not less than
30 nor more than 60 days prior to the redemption date by the Trustee from the
outstanding Notes not previously called for redemption.
The Trustee shall promptly notify the Company in writing of
the Notes selected for redemption and, in the case of any Note selected for
partial redemption, the principal amount thereof to be redeemed. Notes and
portions of Notes selected shall be in amounts of $1,000 or whole multiples of
$1,000; except that if all of the Notes of a Holder are to be redeemed, the
entire outstanding amount of Notes held by such Holder, even if not a multiple
of $1,000, shall be redeemed. Except as provided in the preceding sentence,
provisions of this Indenture that apply to Notes called for redemption also
apply to portions of Notes called for redemption.
SECTION 3.03. NOTICE OF REDEMPTION
Subject to the provisions of Section 3.09 hereof, at least 30
days but not more than 60 days before a redemption date, the Company shall mail
or cause to be mailed, by first class mail, a notice of redemption to each
Holder whose Notes are to be redeemed at its registered address.
The notice shall identify the Notes to be redeemed, including
the CUSIP numbers, and shall state:
(a) the redemption date;
(b) the redemption price;
(c) if any Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the redemption
date upon surrender of such Note, a new Note or Notes in principal amount equal
to the unredeemed portion shall be issued upon cancellation of the original
Note;
(d) the name and address of the Paying Agent;
(e) that Notes called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
(f) that, unless the Company defaults in making such redemption
payment, interest on Notes called for redemption ceases to accrue on and after
the redemption date;
(g) the paragraph of the Notes and/or Section of this Indenture
pursuant to which the Notes called for redemption are being redeemed; and
(h) that no representation is made as to the correctness or accuracy
of the CUSIP number, if any, listed in such notice or printed on the Notes.
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At the Company's request, the Trustee shall give the notice
of redemption in the Company's name and at its expense; provided, however, that
the Company shall have delivered to the Trustee, at least 45 days prior to the
redemption date, an Officers' Certificate requesting that the Trustee give such
notice and setting forth the information to be stated in such notice as
provided in the preceding paragraph.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION
Once notice of redemption is mailed in accordance with
Section 3.03 hereof, Notes called for redemption become irrevocably due and
payable on the redemption date at the redemption price. A notice of redemption
may not be conditional.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE
One Business Day prior to the redemption date, the Company
shall deposit with the Trustee or with the Paying Agent money sufficient to pay
the redemption price of and accrued interest on all Notes to be redeemed on
that date. The Trustee or the Paying Agent shall promptly return to the Company
any money deposited with the Trustee or the Paying Agent by the Company in
excess of the amounts necessary to pay the redemption price of, and accrued
interest on, all Notes to be redeemed.
If the Company complies with the provisions of the preceding
paragraph, on and after the redemption date, interest shall cease to accrue on
the Notes or the portions of Notes called for redemption. If a Note is redeemed
on or after an interest record date but on or prior to the related interest
payment date, then any accrued and unpaid interest shall be paid to the Person
in whose name such Note was registered at the close of business on such record
date. If any Note called for redemption shall not be so paid upon surrender for
redemption because of the failure of the Company to comply with the preceding
paragraph, interest shall be paid on the unpaid principal, from the redemption
date until such principal is paid, and to the extent lawful on any interest not
paid on such unpaid principal, in each case at the rate provided in the Notes
and in Section 4.01 hereof.
SECTION 3.06. NOTES REDEEMED IN PART.
Upon surrender of a Note that is redeemed in part, the
Company shall issue and, upon the Company's written request, the Trustee shall
authenticate for the Holder at the expense of the Company a new Note equal in
principal amount to the unredeemed portion of the Note surrendered.
SECTION 3.07. OPTIONAL REDEMPTION.
(a) Except as set forth in clause (b) of this Section 3.07, the
Company shall not have the option to redeem the Notes pursuant to this Section
3.07 prior to December 1, 2003. Thereafter, the Company shall have the option
to redeem the Notes, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on December 1 of the years
indicated below:
YEAR PERCENTAGE
2003......................................104.563%
2004......................................103.042%
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2005......................................101.521%
2006 and thereafter.......................100.000%
(b) Notwithstanding the foregoing, prior to December 1, 2001, the
Company may, on any one or more occasions, redeem up to 35% of the aggregate
principal amount of Notes originally issued in the Offering at a redemption
price of 109.125% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the redemption date, with
the net cash proceeds of an offering of common equity of the Company (other
than Disqualified Stock); provided that (i) at least 65% of the aggregate
principal amount of the Notes originally issued in the Offering remain
outstanding immediately after the occurrence of each such redemption (excluding
Notes held by the Company and its Subsidiaries) and (ii) each such redemption
shall occur within 75 days after the date of the closing of any such offering
of common equity of the Company.
(c) Any redemption pursuant to this Section 3.07 shall be made
pursuant to the provisions of Section 3.01 through 3.06 hereof.
SECTION 3.08 MANDATORY REDEMPTION.
The Company shall not be required to make mandatory
redemption payments with respect to the Notes, except as set forth in Section
4.15.
SECTION 3.09 OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS.
In the event that, pursuant to Section 4.10 hereof, the
Company shall be required to commence an Asset Sale Offer, it shall follow the
procedures specified below.
The Asset Sale Offer shall remain open for a period of 20
Business Days following its commencement and no longer, except to the extent
that a longer period is required by applicable law (the "Offer Period"). No
later than five Business Days after the termination of the Offer Period (the
"Purchase Date"), the Company shall purchase the principal amount of Notes
required to be purchased pursuant to Section 4.10 hereof (the "Offer Amount")
or, if less than the Offer Amount has been tendered, all Notes tendered in
response to the Asset Sale Offer. Payment for any Notes so purchased shall be
made in the same manner as interest payments are made.
If the Purchase Date is on or after an interest record date
and on or before the related interest payment date, any accrued and unpaid
interest shall be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest shall be
payable to Holders who tender Notes pursuant to the Asset Sale Offer.
Upon the commencement of an Asset Sale Offer, the Company
shall send, by first class mail, a notice to the Trustee and each of the
Holders. The notice shall contain all instructions and materials necessary to
enable such Holders to tender Notes pursuant to the Asset Sale Offer. The Asset
Sale Offer shall be made to all Holders. The notice, which shall govern the
terms of the Asset Sale Offer, shall state:
(a) that the Asset Sale Offer is being made pursuant to this Section
3.09 and Section 4.10 hereof and the length of time the Asset Sale Offer
shall remain open;
(b) the Offer Amount, the purchase price and the Purchase Date;
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(c) that any Note not tendered or accepted for payment shall continue
to accrete or accrue interest;
(d) that, unless the Company defaults in making such payment, any
Note accepted for payment pursuant to the Asset Sale Offer shall cease to
accrete or accrue interest after the Purchase Date;
(e) that Holders electing to have a Note purchased pursuant to an
Asset Sale Offer may only elect to have all of such Note purchased and may
not elect to have only a portion of such Note purchased;
(f) that Holders electing to have a Note purchased pursuant to any
Asset Sale Offer shall be required to surrender the Note, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Note
completed, or transfer by book-entry transfer, to the Company, a
depositary, if appointed by the Company, or a Paying Agent at the address
specified in the notice at least three days before the Purchase Date;
(g) that Holders shall be entitled to withdraw their election if the
Company, the depositary or the Paying Agent, as the case may be, receives,
not later than the expiration of the Offer Period, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of the Note the Holder delivered for purchase and a
statement that such Holder is withdrawing his election to have such Note
purchased;
(h) that, if the aggregate principal amount of Notes surrendered by
Holders exceeds the Offer Amount, the Company shall select the Notes to be
purchased on a pro rata basis (with such adjustments as may be deemed
appropriate by the Company so that only Notes in denominations of $1,000,
or integral multiples thereof, shall be purchased); and
(i) that Holders whose Notes were purchased only in part shall be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered (or transferred by book-entry transfer).
On or before the Purchase Date, the Company shall, to the
extent lawful, accept for payment, on a pro rata basis to the extent necessary,
the Offer Amount of Notes or portions thereof tendered pursuant to the Asset
Sale Offer, or if less than the Offer Amount has been tendered, all Notes
tendered, and shall deliver to the Trustee an Officers' Certificate stating
that such Notes or portions thereof were accepted for payment by the Company in
accordance with the terms of this Section 3.09. The Company, the Depositary or
the Paying Agent, as the case may be, shall promptly (but in any case not later
than five days after the Purchase Date) mail or deliver to each tendering
Holder an amount equal to the purchase price of the Notes tendered by such
Holder and accepted by the Company for purchase, and the Company shall promptly
issue a new Note, and the Trustee, upon written request from the Company shall
authenticate and mail or deliver such new Note to such Holder, in a principal
amount equal to any unpurchased portion of the Note surrendered. Any Note not
so accepted shall be promptly mailed or delivered by the Company to the Holder
thereof. The Company shall publicly announce the results of the Asset Sale
Offer on the Purchase Date.
Other than as specifically provided in this Section 3.09, any
purchase pursuant to this Section 3.09 shall be made pursuant to the provisions
of Sections 3.01 through 3.06 hereof.
ARTICLE 4.
COVENANTS
SECTION 4.01 PAYMENT OF NOTES.
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The Company or a Guarantor shall pay or cause to be paid the
principal of, premium, if any, and interest and Liquidated Damages, if any, on
the Notes on the dates and in the manner provided in the Notes. Principal,
premium, if any, and interest and Liquidated Damages, if any, shall be
considered paid on the date due if the Paying Agent, if other than the Company
or a Subsidiary thereof, holds as of 10:00 a.m. Eastern Time on the due date
money deposited by the Company in immediately available funds and designated
for and sufficient to pay all principal, premium, if any, and interest and
Liquidated Damages, if any, then due. The Company shall pay all Liquidated
Damages, if any, in the same manner on the dates and in the amounts set forth
in the Registration Rights Agreement.
The Company or a Guarantor shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
principal at the rate equal to 1% per annum in excess of the then applicable
interest rate on the Notes to the extent lawful; it shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law)
on overdue installments of interest and Liquidated Damages (without regard to
any applicable grace period) at the same rate to the extent lawful.
SECTION 4.02 MAINTENANCE OF OFFICE OR AGENCY.
The Company shall maintain in the Borough of Manhattan, the
City of New York, an office or agency (which may be an office of the Trustee or
an affiliate of the Trustee, Registrar or co-registrar) where Notes may be
surrendered for registration of transfer or for exchange and where notices and
demands to or upon the Company in respect of the Notes and this Indenture may
be served. The Company shall give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee.
The Company may also from time to time designate one or more
other offices or agencies where the Notes may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, the City of New York for such purposes. The Company shall
give prompt written notice to the Trustee of any such designation or rescission
and of any change in the location of any such other office or agency.
The Company hereby designates the Corporate Trust Office of
the Trustee as one such office or agency of the Company in accordance with
Section 2.03.
SECTION 4.03 REPORTS.
(a) Whether or not required by the rules and regulations of the
SEC, so long as any Notes are outstanding, the Company shall furnish to the
Trustee and the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the SEC on
Forms 10-Q and 10-K if the Company were required to file such forms, including
a "Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations of
the Company and its consolidated Subsidiaries (showing in reasonable detail,
either on the face of the financial statements or in the footnotes thereto and
in Management's Discussion and Analysis of Financial Condition and Results of
Operations, the financial condition and results of operations of the Company
and its Restricted Subsidiaries separate from the financial information and
results of operations of the Unrestricted Subsidiaries of the Company) and,
with respect to the annual information
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only, a report thereon by the Company's certified independent accountants and
(ii) all current reports that would be required to be filed with the SEC on
Form 8-K if the Company were required to file such reports, in each case,
within the time periods specified in the SEC's rules and regulations. In
addition, following consummation of the Exchange Offer, whether or not required
by the rules and regulations of the SEC, the Company shall file a copy of all
such information and reports with the SEC for public availability within the
time periods specified in the SEC's rules and regulations (unless the SEC will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request. The Company shall at all times
comply with TIA ss. 314(a).
SECTION 4.04 COMPLIANCE CERTIFICATE.
(a) The Company and each Guarantor (to the extent that such
Guarantor is so required under the TIA) shall deliver to the Trustee, within 90
days after the end of each fiscal year, an Officers' Certificate stating that a
review of the activities of the Company and its Subsidiaries during the
preceding fiscal year has been made under the supervision of the signing
Officers with a view to determining whether the Company has kept, observed,
performed and fulfilled its obligations under this Indenture, and further
stating, as to each such Officer signing such certificate, that to the best of
his or her knowledge the Company has kept, observed, performed and fulfilled
each and every covenant contained in this Indenture and is not in default in
the performance or observance of any of the terms, provisions and conditions of
this Indenture (or, if a Default or Event of Default shall have occurred,
describing all such Defaults or Events of Default of which he or she may have
knowledge and what action the Company is taking or proposes to take with
respect thereto) and that to the best of his or her knowledge no event has
occurred and remains in existence by reason of which payments on account of the
principal of or interest, if any, on the Notes is prohibited or if such event
has occurred, a description of the event and what action the Company is taking
or proposes to take with respect thereto.
(b) So long as not contrary to the then current recommendations
of the American Institute of Certified Public Accountants, the year-end
financial statements delivered pursuant to Section 4.03(a) above shall be
accompanied by a written statement of the Company's independent public
accountants (who shall be a firm of established national reputation) that in
making the examination necessary for certification of such financial
statements, nothing has come to their attention that would lead them to believe
that the Company has violated any provisions of Article 4 or Article 5 hereof
or, if any such violation has occurred, specifying the nature and period of
existence thereof, it being understood that such accountants shall not be
liable directly or indirectly to any Person for any failure to obtain knowledge
of any such violation.
(c) The Company shall, so long as any of the Notes are
outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware
of any Default or Event of Default, an Officers' Certificate specifying such
Default or Event of Default and what action the Company is taking or proposes
to take with respect thereto.
SECTION 4.05 TAXES.
The Company shall pay, and shall cause each of its
Subsidiaries to pay, prior to delinquency, all material taxes, assessments, and
governmental levies except such as are contested in good faith and by
appropriate proceedings or where the failure to effect such payment is not
adverse in any material respect to the Holders of the Notes.
SECTION 4.06 STAY, EXTENSION AND USURY LAWS.
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The Company and each of the Guarantors covenants (to the
extent that it may lawfully do so) that it shall not at any time insist upon,
plead, or in any manner whatsoever claim or take the benefit or advantage of,
any stay, extension or usury law wherever enacted, now or at any time hereafter
in force, that may affect the covenants or the performance of this Indenture;
and the Company and each of the Guarantors (to the extent that it may lawfully
do so) hereby expressly waives all benefit or advantage of any such law, and
covenants that it shall not, by resort to any such law, hinder, delay or impede
the execution of any power herein granted to the Trustee, but shall suffer and
permit the execution of every such power as though no such law has been
enacted.
SECTION 4.07 RESTRICTED PAYMENTS.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiary's Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation
involving the Company or any Restricted Subsidiary) or to any direct or
indirect holders of the Company's Equity Interests in their capacity as such
(other than dividends or distributions (a) payable in Equity Interests (other
than Disqualified Stock) of the Company or (b) to the Company or any Wholly
Owned Restricted Subsidiary of the Company); (ii) purchase, redeem or otherwise
acquire or retire for value (including, without limitation, in connection with
any merger or consolidation involving the Company) any Equity Interests of the
Company or any of its Restricted Subsidiaries or any direct or indirect parent
of the Company (other than any such Equity Interests owned by the Company or
any Restricted Subsidiary of the Company or Permitted Investments); (iii) make
any payment on or with respect to, or purchase, redeem, defease or otherwise
acquire or retire for value any Indebtedness of the Company or any Restricted
Subsidiary that is subordinated to the Notes or any guarantee of the Notes,
except a payment of interest or principal at Stated Maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Debt to Cash Flow Ratio test set forth in the first paragraph of Section 4.09
hereof, and
(c) such Restricted Payment, together with the aggregate amount
of all other Restricted Payments made by the Company and its Restricted
Subsidiaries after February 11, 1998 (excluding Restricted Payments permitted
by clauses (ii), (iii) and (vi) of the next succeeding paragraph), is less than
the sum, without duplication, of (i) 50% of the Consolidated Net Income of the
Company for the period (taken as one accounting period) from the beginning of
the first fiscal quarter commencing after February 11, 1998 to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit), plus (ii) 100% of the aggregate net cash proceeds received by the
Company as a contribution to its common equity capital or from the issue or
sale since February 11, 1998 of Equity Interests of the Company (other than
Disqualified Stock) or from the issue or sale of Disqualified Stock or debt
securities of the Company that have been converted into such Equity Interests
(other than Equity Interests (or Disqualified Stock or convertible debt
securities) sold to a Subsidiary of the Company and other than Disqualified
Stock or convertible debt securities that have been
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converted into Disqualified Stock), plus (iii) 50% of any dividends received by
the Company or a Wholly Owned Restricted Subsidiary after February 11, 1998
from an Unrestricted Subsidiary of the Company, to the extent that such
dividends were not otherwise included in Consolidated Net Income of the Company
for such period, plus (iv) to the extent that any Restricted Investment that
was made after February 11, 1998 is sold for cash or otherwise liquidated or
repaid for cash, the lesser of (A) the cash return of capital with respect to
such Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment.
The foregoing provisions will not prohibit (i) the payment of
any dividend within 60 days after the date of declaration thereof, if at the
date of declaration such payment would have complied with the provisions of
this Indenture; (ii) the redemption, repurchase, retirement, defeasance or
other acquisition of any Equity Interests of Company or subordinated
Indebtedness of the Company or any Guarantor in exchange for, or out of the net
cash proceeds of the substantially concurrent sale (other than to a Subsidiary
of the Company) of, other Equity Interests of the Company (other than any
Disqualified Stock); provided that the amount of any such net cash proceeds
that are utilized for any such redemption, repurchase, retirement, defeasance
or other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph; and, provided further, that no Default or Event of Default shall
have occurred and be continuing immediately after such transaction; (iii) the
defeasance, redemption, repurchase or other acquisition of subordinated
Indebtedness with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness; provided that no Default or Event of Default shall
have occurred and be continuing immediately after such transaction; (iv) the
payment of any dividend by a Restricted Subsidiary of the Company to the
holders of Equity Interests on a pro rata basis; (v) the repurchase, redemption
or other acquisition or retirement for value of any Equity Interests of the
Company or any Restricted Subsidiary of the Company held by any member of the
Company's (or any of its Restricted Subsidiaries') management or board of
directors pursuant to any management equity subscription agreement, stock
option agreement or other similar agreement; provided that the aggregate price
paid for all such repurchased, redeemed, acquired or retired Equity Interests
shall not exceed $250,000 in any twelve-month period and no Default or Event of
Default shall have occurred and be continuing immediately after such
transaction; and (vi) the repurchase, redemption or other acquisition or
retirement for value or payment made in respect of any Equity Interests of the
Company or any Restricted Subsidiary of the Company pursuant to any of the
agreements relating to the Pending Acquisitions, each as in effect on the date
hereof; provided that no Default or Event of Default shall have occurred and be
continuing immediately after such transaction.
The amount of all Restricted Payments (other than cash) shall
be the fair market value on the date of the Restricted Payment of the asset(s)
or securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined in
good faith by the Board of Directors whose resolution with respect thereto
shall be delivered to the Trustee. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this Section 4.07 were
computed.
The Board of Directors may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a Default. For purposes of making such determination, the aggregate fair market
value of all outstanding Investments by the Company and its Restricted
Subsidiaries in the Subsidiary so designated will be deemed to be a Restricted
Payment at the time of such designation and will reduce the amount available
for Restricted Payments under the first paragraph of this covenant. Such
designation will only be permitted if such Restricted Payment would be
permitted at such time and if such Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
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Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions. If, at
any time, any Unrestricted Subsidiary would fail to meet the definition of an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of this Indenture and any Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under Section 4.09 hereof, the Company shall be in
default). The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such
Indebtedness is permitted under Section 4.09 hereof, calculated on a pro forma
basis as if such designation had occurred at the beginning of the four-quarter
reference period and (ii) no Default or Event of Default would be in existence
immediately following such designation.
SECTION 4.08 DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a)(i) pay dividends or make any other
distributions to the Company or any of its Restricted Subsidiaries (A) on its
Capital Stock or (B) with respect to any other interest or participation in, or
measured by, its profits or (ii) pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries, (b) make loans or advances to the Company
or any of its Restricted Subsidiaries or (c) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reasons of (i) Existing
Indebtedness as in effect on the date hereof, (ii) the Senior Credit Facility
and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, and any other
agreement governing or relating to Senior Debt, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings and other agreements are no more restrictive with
respect to such dividend and other payment restrictions than those contained in
the Senior Credit Facility, (iii) this Indenture as in effect on the date
hereof, the Notes and the Subsidiary Guarantees, (iv) applicable law, (v) any
instrument governing Indebtedness or Capital Stock of a Person acquired by the
Company or any of its Restricted Subsidiaries as in effect at the time of such
acquisition (except to the extent such Indebtedness was incurred in connection
with or in anticipation of such acquisition), which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, so acquired,
provided that, in the case of Indebtedness, such Indebtedness was permitted by
the terms of this Indenture to be incurred, (vi) by reason of customary
non-assignment provisions in leases entered into in the ordinary course of
business and consistent with past practices, (vii) purchase money obligations
for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (c) above on the property so
acquired, (viii) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced, (ix) secured Indebtedness
otherwise permitted to be incurred pursuant to the provisions of Section 4.12
hereof that limits the right of the debtor to dispose of the assets securing
such Indebtedness, (x) provisions with respect to the disposition or
distribution of assets or property in joint venture agreements and other
similar agreements entered into in the ordinary course of business and (xi)
restrictions on cash or other deposits or net worth imposed by customers under
contracts entered into in the ordinary course of business.
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SECTION 4.09 INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK.
The Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) or issue any shares of Disqualified Stock and will not permit
any of its Subsidiaries to issue any shares of preferred stock; provided,
however, that, so long as no Default or Event of Default has occurred and is
continuing, the Company may incur Indebtedness (including Acquired Debt) or
issue shares of Disqualified Stock and the Guarantors may issue shares of
preferred stock if, in each case, the Company's Debt to Cash Flow Ratio at the
time of incurrence of such Indebtedness or the issuance of such Disqualified
Stock or preferred stock, as the case may be, after giving pro forma effect to
such incurrence or issuance as of such date and to the use of the proceeds
therefrom as if the same had occurred at the beginning of the most recently
ended four full fiscal quarter period of the Company for which internal
financial statements are available, would have been no greater than (a) 7.0 to
1.0, if such incurrence or issuance is prior to December 31, 1999 or (b) 6.5 to
1.0 thereafter.
The provisions of the first paragraph of this covenant will
not apply to the incurrence of any of the following (collectively, "Permitted
Debt"):
(i) the incurrence by the Company (and the guarantee thereof by
Guarantors) of Indebtedness and Letters of Credit under one or more Credit
Facilities in an aggregate principal amount at any time outstanding not to
exceed $400.0 million (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of the Company
and the Guarantors thereunder), less the aggregate amount of all
repayments, optional or mandatory, of the principal of any term
Indebtedness under a Credit Facility that have been made since the date
hereof and less the aggregate amount of all commitment reductions of any
revolving Indebtedness under a Credit Facility pursuant to clause (i) of
the third paragraph of Section 4.10 hereof;
(ii) the incurrence by the Company and the guarantee thereof by the
Guarantors of Indebtedness represented by the Notes and the Subsidiary
Guarantees;
(iii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness;
(iv) the incurrence by the Company or its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of the
Company or such Restricted Subsidiary, in an aggregate amount not to
exceed $5.0 million at any time outstanding, including all Permitted
Refinancing Debt incurred pursuant to clause (v) below to refund, replace
or refinance any Indebtedness pursuant to this clause (iv);
(v) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace
Indebtedness (other than intercompany Indebtedness) that was permitted by
this Indenture to be incurred by the first paragraph of this Section 4.09,
or by clauses (ii), (iii), (iv), (v), (vii) or (x) of this paragraph;
(vi) the incurrence of Indebtedness between or among the Company and
any of its Restricted Subsidiaries; provided, however, that (a) if the
Company is the obligor on such Indebtedness, such Indebtedness is
expressly subordinated to the prior payment in full of all Obligations
with respect to the
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Notes and (b) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than the
Company or a Restricted Subsidiary, and any sale or other transfer of any
such Indebtedness to a Person that is not either the Company or a
Restricted Subsidiary, shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be;
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of this Indenture to be
outstanding;
(viii) the guarantee by the Company or any of the Guarantors of
Indebtedness that was permitted to be incurred by another provision of
this Section 4.09;
(ix) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (ix);
(x) the issuance of preferred stock by the Company pursuant to the
Contemporary Agreement, as in effect on the date of this Indenture; and
(xi) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
at any time outstanding, including all Permitted Refinancing Indebtedness
incurred pursuant to clause (v) above to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (xi), not to exceed $10.0
million.
For purposes of determining compliance with this covenant, in
the event that an item of Indebtedness meets the criteria of more than one of
the categories of Permitted Debt described in clauses (i) through (xi) above or
is entitled to be incurred pursuant to the first paragraph of this covenant,
the Company shall, in its sole discretion, classify such item of Indebtedness
in any manner that complies with this Section 4.09 and such item of
Indebtedness will be treated as having been incurred pursuant to only one of
such clauses or pursuant to the first paragraph hereof. Accrual of interest,
the accretion of accreted value, the payment of interest on any Indebtedness in
the form of additional Indebtedness with the same terms and the payment of
dividends on Disqualified Stock in the form of additional shares of the same
class of Disqualified Stock will not be deemed to be an incurrence of
Indebtedness or an issuance of Disqualified Stock for purposes of this
covenant.
SECTION 4.10 ASSET SALES.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company or
such Restricted Subsidiary, as the case may be, receives consideration at the
time of such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of cash or
Cash Equivalents; provided that the amount of (a) any liabilities (as shown on
the Company's or such Restricted Subsidiary's most recent balance sheet) of the
Company or such Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes or any guarantee
thereof) that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases the Company or such Restricted
Subsidiary from further liability, (b) any securities, notes or other
obligations received by
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the Company or such Restricted Subsidiary from such transferee that are
immediately converted by the Company or such Restricted Subsidiary into cash
(to the extent of the cash received) and (c) escrowed cash that the Company
reasonably believes will be released from escrow within 365 days from the date
of consummation of such Asset Sale, in each case shall be deemed to be cash for
purposes of this provision.
Notwithstanding the immediately preceding paragraph, the
Company and its Restricted Subsidiaries will be permitted to consummate an
Asset Sale without complying with such paragraph if (i) the Company or the
applicable Restricted Subsidiary, as the case may be, receives consideration at
the time of such Asset Sale at least equal to the fair market value of the
assets or other property sold, issued or otherwise disposed of (as evidenced by
a resolution of the Company's Board of Directors set forth in an Officers'
Certificate delivered to the Trustee) and (ii) at least 75% of the
consideration for such Asset Sale constitutes a controlling interest in a
Permitted Business, long-term assets used or useful in a Permitted Business
and/or cash or Cash Equivalents; provided that any cash or Cash Equivalents
received by the Company or any of its Restricted Subsidiaries in connection
with any Asset Sale permitted to be consummated under this paragraph shall
constitute Net Proceeds subject to the provisions of the next succeeding
paragraph.
Within 365 days of the receipt of any Net Proceeds from an
Asset Sale, the Company may apply such Net Proceeds, at its option, (i) to
repay Senior Debt under a Credit Facility (and to correspondingly reduce
commitments with respect thereto in the case of revolving borrowings) or (ii)
to the acquisition of a controlling interest in a Permitted Business, the
making of a capital expenditure or the acquisition of other long-term assets,
in each case, used or useful in a Permitted Business. Pending the final
application of any such Net Proceeds, the Company may temporarily reduce Senior
Debt or otherwise invest such Net Proceeds in any manner that is not prohibited
by this Indenture. Any Net Proceeds from Asset Sales that are not applied or
invested as provided in the first sentence of this paragraph shall be deemed to
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $10.0 million, the Company shall be required to make an offer to all
Holders of Notes and all holders of other pari passu Indebtedness containing
provisions similar to those set forth in this Indenture with respect to offers
to purchase or redeem such other pari passu Indebtedness with the proceeds of
sales of assets (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes and such other pari passu Indebtedness that may be purchased
out of the Excess Proceeds at an offer price in cash in an amount equal to 100%
of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of purchase, in accordance with
the procedures set forth in this Indenture and in such other pari passu
Indebtedness. To the extent that the aggregate amount of Notes and such other
pari passu Indebtedness tendered pursuant to an Asset Sale Offer is less than
the Excess Proceeds, the Company may use any remaining Excess Proceeds for any
purpose not otherwise prohibited by this Indenture. If the aggregate principal
amount of Notes and such other pari passu Indebtedness surrendered by Holders
thereof exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes and such other pari passu Indebtedness to be purchased on a pro rata
basis. Upon completion of an Asset Sale Offer, the amount of Excess Proceeds
shall be reset at zero.
SECTION 4.11 TRANSACTIONS WITH AFFILIATES.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or such Restricted Subsidiary than those that would have been
obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the
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Trustee (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $1.0
million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of
the members of the Board of Directors that are disinterested as to such
Affiliate Transaction and (b) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $5.0 million, an opinion as to the fairness to the Company of such
Affiliate Transaction from a financial point of view issued by an accounting,
appraisal or investment banking firm of national standing; provided that (1)
any employment agreement entered into by, and any compensation paid by, the
Company or any of its Restricted Subsidiaries, in each case, approved by the
Compensation Committee, (2) transactions between or among the Company and/or
its Restricted Subsidiaries, (3) fees and compensation paid to members of the
Board of Directors of the Company and of its Restricted Subsidiaries in their
capacity as such, to the extent such fees and compensation are reasonable,
customary and consistent with past practices and the issuance of shares of the
Company to the Directors who were holders of options or stock appreciation
rights in Broadcasting as of the Spin-Off record date, whether or not vested,
(4) fees and compensation paid to, and indemnity provided on behalf of,
officers, directors or employees of the Company or any of its Restricted
Subsidiaries, as determined by the Board of Directors of the Company or of any
such Restricted Subsidiary, to the extent such fees and compensation are
reasonable, customary and consistent with past practices, (5) the transactions
specifically contemplated by the Merger Agreement, the agreements relating to
the Pending Acquisitions or by instruments referred to in any such agreements,
in each case, as the same are in effect on the date hereof, (6) the Spin-Off
Transactions, (7) the transactions specifically contemplated by the
Delsener/Slater Employment Agreements, in each case as in effect on the date
hereof, (8) the Meadows Repurchase and the Series E Preferred Repurchase;
provided that the Company receives either (x) a cash payment from Broadcasting
or Broadcasting Buyer or an Affiliate thereof at or prior to the date of the
Broadcasting Merger at least equal to the aggregate amount expended by the
Company in the Meadows Repurchase and the Series E Preferred Repurchase less
$3.0 million or (y) an increase in favor of the Company in the Working Capital
Adjustment (including the avoidance of a decrease) contemplated by the Merger
Agreement in an amount at least equal to the aggregate amount expended by the
Company in the Meadows Repurchase and the Series E Preferred Repurchase less
$3.0 million or (z) any combination thereof adding up to an amount at least
equal to the aggregate amount expended by the Company in the Meadows Repurchase
and the Series E Preferred Repurchase less $3.0 million; and (9) any Restricted
Payment that is permitted by the provisions of Section 4.07 hereof, in each
case, shall not be deemed to be Affiliate Transactions.
SECTION 4.12 LIENS.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly create, incur, assume or
suffer to exist any Lien securing Indebtedness or trade payables on any asset
now owned or hereafter acquired, or any income or profits therefrom or assign
or convey any right to receive income therefrom, except Permitted Liens.
SECTION 4.13 BUSINESS ACTIVITIES.
The Company shall not, and shall not permit any Restricted
Subsidiary to, engage in any business other than Permitted Businesses, except
to such extent as would not be material to the Company and its Restricted
Subsidiaries taken as a whole.
SECTION 4.14 CORPORATE EXISTENCE.
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Subject to Article 5 hereof, the Company shall do or cause to
be done all things necessary to preserve and keep in full force and effect (i)
its corporate existence, and the corporate, partnership or other existence of
each of its Subsidiaries, in accordance with the respective organizational
documents (as the same may be amended from time to time) of the Company or any
such Subsidiary and (ii) the rights (charter and statutory), licenses and
franchises of the Company and its Subsidiaries; provided, however, that the
Company shall not be required to preserve any such right, license or franchise,
or the corporate, partnership or other existence of any of its Subsidiaries, if
the Board of Directors shall determine that the preservation thereof is no
longer desirable in the conduct of the business of the Company and its
Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any
material respect to the Holders of the Notes.
SECTION 4.15 OFFER TO REPURCHASE UPON CHANGE OF CONTROL.
(a) Upon the occurrence of a Change of Control, the Company shall
be obligated to make an offer (a "Change of Control Offer") to each Holder of
Notes to repurchase all or any part (equal to $1,000 or an integral multiple
thereof) of such Holder's Notes at an offer price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase (the "Change of Control
Payment"). Within ten days following a Change of Control, the Company will mail
a notice to the Trustee and each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by this
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
(b) On the Change of Control Payment Date, the Company will, to
the extent lawful, (i) accept for payment all Notes or portions thereof
properly tendered pursuant to the Change of Control Offer, (ii) deposit with
the Paying Agent an amount equal to the Change of Control Payment in respect of
all Notes or portions thereof so tendered and (iii) deliver or cause to be
delivered to the Trustee the Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of Notes or portions thereof
being purchased by the Company. The Paying Agent will promptly mail to each
Holder of Notes so tendered the Change of Control Payment for such Notes, and
the Trustee will promptly authenticate and mail (or cause to be transferred by
book entry) to each Holder a new Note equal in principal amount to any
unpurchased portion of the Notes surrendered, if any; provided that each such
new Note will be in a principal amount of $1,000 or an integral multiple
thereof. Prior to complying with the provisions of this Section 4.15, but in
any event within 90 days following a Change of Control, the Company will either
repay all outstanding Senior Debt or obtain the requisite consents, if any,
under all agreements governing outstanding Senior Debt to permit the repurchase
of Notes required by this Section 4.15. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of this Indenture are applicable.
(c) Notwithstanding anything to the contrary in this Section
4.15, the Company shall not be required to make a Change of Control Offer upon
a Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in this Section 4.15 and Section 3.09 hereof and purchases all Notes
validly tendered and not withdrawn under such Change of Control Offer.
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SECTION 4.16 NO SENIOR SUBORDINATED DEBT.
Notwithstanding the provisions of Section 4.09 hereof, (i)
the Company shall not directly or indirectly incur any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Notes and (ii) no Guarantor shall incur any
Indebtedness that is subordinated or junior in right of payment to any
Guarantees of Senior Debt and senior in any respect in right of payment to the
Subsidiary Guarantees.
SECTION 4.17 ISSUANCES AND SALES OF EQUITY INTERESTS IN RESTRICTED
SUBSIDIARIES.
The Company (i) shall not, and shall not permit any
Restricted Subsidiary of the Company to, transfer, convey, sell, lease or
otherwise dispose of any Equity Interests in any Restricted Subsidiary of the
Company to any Person (other than the Company or a Restricted Subsidiary of the
Company), unless (a) such transfer, conveyance, sale, lease or other
disposition is of all the Equity Interests in such Restricted Subsidiary and
(b) the cash Net Proceeds, if any, from such transfer, conveyance, sale, lease
or other disposition are applied in accordance with Section 4.10 hereof, and
(ii) will not permit any Restricted Subsidiary of the Company to issue any of
its Equity Interests (other than, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to the
Company or a Restricted Subsidiary of the Company except as permitted pursuant
to Section 4.09 hereof.
SECTION 4.18 LIMITATION ON SALE AND LEASEBACK TRANSACTIONS.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, enter into any sale and leaseback transaction;
provided that the Company and the Guarantors may enter into a sale and
leaseback transaction if (i) the Company or such Guarantor could have (a)
incurred Indebtedness in an amount equal to the Attributable Debt relating to
such sale and leaseback transaction pursuant to the Debt to Cash Flow Ratio
test set forth in the first paragraph of Section 4.09 hereof and (b) incurred a
Lien to secure such Indebtedness pursuant to Section 4.12 hereof, (ii) the
gross cash proceeds of such sale and leaseback transaction are at least equal
to the fair market value (as determined in good faith by the Board of Directors
and set forth in an Officers' Certificate delivered to the Trustee) of the
property that is the subject of such sale and leaseback transaction and (iii)
the transfer of assets in such sale and leaseback transaction is permitted by,
and the proceeds of such transaction are applied in compliance with Section
4.10 hereof.
SECTION 4.19 PAYMENTS FOR CONSENT.
Neither the Company nor any of its Subsidiaries shall,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or
provisions of this Indenture or the Notes unless such consideration is offered
to be paid or is paid to all Holders of the Notes that consent, waive or agree
to amend in the time frame set forth in the solicitation documents relating to
such consent, waiver or agreement.
SECTION 4.20 ADDITIONAL SUBSIDIARY GUARANTEES.
If the Company or any of its Restricted Subsidiaries shall
acquire or create another domestic Restricted Subsidiary after the date of this
Indenture (other than the Non-Guarantor Subsidiaries), or any domestic
Unrestricted Subsidiary shall become a Restricted Subsidiary of the Company,
then such Subsidiary shall become a Guarantor by executing a Supplemental
Indenture in the form attached hereto as Exhibit F and deliver an Opinion of
Counsel to the Trustee to the effect that such Supplemental Indenture has been
duly authorized, executed and delivered by such Subsidiary and
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constitutes a valid and binding obligation of such Subsidiary, enforceable
against such Subsidiary in accordance with its terms (subject to customary
exceptions).
ARTICLE 5.
SUCCESSORS
SECTION 5.01 MERGER, CONSOLIDATION, OR SALE OF ASSETS.
The Company shall not consolidate or merge with or into
(whether or not the Company is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Notes, the Indenture and the Registration
Rights Agreement pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a merger of
the Company with or into a Wholly Owned Restricted Subsidiary of the Company,
the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made will, both immediately prior to and immediately after giving pro forma
effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt to Cash Flow Ratio test set forth
in Section 4.09 hereof.
SECTION 5.02 SUCCESSOR CORPORATION SUBSTITUTED.
Upon any consolidation or merger, or any sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the assets of the Company in accordance with Section 5.01 hereof, the successor
corporation formed by such consolidation or into or with which the Company is
merged or to which such sale, assignment, transfer, lease, conveyance or other
disposition is made shall succeed to, and be substituted for (so that from and
after the date of such consolidation, merger, sale, lease, conveyance or other
disposition, the provisions of this Indenture referring to the "Company" shall
refer instead to the successor corporation and not to the Company), and may
exercise every right and power of the Company under this Indenture with the
same effect as if such successor Person had been named as the Company herein;
provided, however, that the predecessor Company shall not be relieved from the
obligation to pay the principal of and interest on the Notes except in the case
of a sale of all of the Company's assets that meets the requirements of Section
5.01 hereof.
ARTICLE 6.
DEFAULTS AND REMEDIES
SECTION 6.01 EVENTS OF DEFAULT.
An "Event of Default" occurs if:
(a) the Company defaults for 30 days in the payment when due of
interest on, or Liquidated Damages, if any, with respect to, the Notes, whether
or not such payment is prohibited by the provisions of Article 10 hereof;
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(b) the Company defaults in payment when due of the principal of
or premium, if any, on the Notes, whether or not such payment is prohibited by
the provisions of Article 10 hereof;
(c) the Company or any Restricted Subsidiary fails to comply
with any of the provisions of Section 4.15 or 5.01 hereof;
(d) the Company or any Restricted Subsidiary fails for 30 days
after written notice by the Trustee or the Holders of at least 25% in principal
amount of the then outstanding Notes to comply with the provisions of Section
3.09, 4.07, 4.09 or 4.10 hereof (such notice must specify the Default, demand
that it be remedied and state that the notice is a "Notice of Default");
(e) the Company or any Restricted Subsidiary fails for 60 days
after written notice by the Trustee or the Holders of at least 25% in principal
amount of the then outstanding Notes to comply with any of its other agreements
in this Indenture or the Notes (such notice must specify the Default, demand
that it be remedied and state that the notice is a "Notice of Default");
(f) the Company or any Restricted Subsidiary defaults under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted Subsidiaries), whether such
Indebtedness or guarantee now exists or is created after the date hereof, which
default (a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace period
provided in such Indebtedness on the date of such default (a "Payment Default")
or (b) results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $10.0 million or more;
(g) the Company or any of its Restricted Subsidiaries fails to pay
final judgments aggregating in excess of $10.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days;
(h) except as permitted by this Indenture, any Subsidiary
Guarantee shall be held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect or any
Guarantor, or any Person acting on behalf of any Guarantor, shall deny or
disaffirm its obligations under its Subsidiary Guarantee;
(i) the Company or any of the Company's Restricted Subsidiaries
that constitutes a Significant Subsidiary or any group of Restricted
Subsidiaries of the Company that, taken together, would constitute a
Significant Subsidiary pursuant to or within the meaning of Bankruptcy Law:
(i) commences a voluntary case,
(ii) consents to the entry of an order for relief against it in an
involuntary case,
(iii) consents to the appointment of a custodian of it or for all or
substantially all of its property,
(iv) makes a general assignment for the benefit of its creditors, or
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(v) generally is not paying its debts as they become due; or
(j) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(i) is for relief against the Company or any of its Significant
Subsidiaries or any group of Subsidiaries that, taken as a whole, would
constitute a Significant Subsidiary in an involuntary case;
(ii) appoints a custodian of the Company or any of its Significant
Subsidiaries or any group of Subsidiaries that, taken as a whole, would
constitute a Significant Subsidiary or for all or substantially all of the
property of the Company or any of its Significant Subsidiaries or any
group of Subsidiaries that, taken as a whole, would constitute a
Significant Subsidiary; or
(iii) orders the liquidation of the Company or any of its Significant
Subsidiaries or any group of Subsidiaries that, taken as a whole, would
constitute a Significant Subsidiary;
and the order or decree remains unstayed and in effect for 60
consecutive days.
SECTION 6.02 ACCELERATION.
If any Event of Default (other than an Event of Default
specified in clause (i) or (j) of Section 6.01 hereof with respect to the
Company, any Significant Subsidiary or any group of Significant Subsidiaries
that, taken as a whole, would constitute a Significant Subsidiary) occurs and
is continuing, the Trustee or the Holders of at least 25% in principal amount
of the then outstanding Notes may declare all the Notes to be due and payable
immediately. Notwithstanding the foregoing, if an Event of Default specified in
clause (i) or (j) of Section 6.01 hereof occurs with respect to the Company,
any Restricted Subsidiary of the Company that constitutes a Significant
Subsidiary or any group of Restricted Subsidiaries of the Company that, taken
together, would constitute a Significant Subsidiary, all outstanding Notes will
become due and payable without further action or notice. Holders of the Notes
may not enforce this Indenture or the Notes except as provided in this
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Notes notice
of any continuing Default or Event of Default (except a Default or Event of
Default relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
If an Event of Default occurs on or after December 1, 2003 by
reason of any willful action (or inaction) taken (or not taken) by or on behalf
of the Company with the intention of avoiding payment of the premium that the
Company would have had to pay if the Company then had elected to redeem the
Notes pursuant to Section 3.07 hereof, then, upon acceleration of the Notes, an
equivalent premium shall also become and be immediately due and payable, to the
extent permitted by law, anything in this Indenture or in the Notes to the
contrary notwithstanding. If an Event of Default occurs prior to December 1,
2003 by reason of any willful action (or inaction) taken (or not taken) by or
on behalf of the Company with the intention of avoiding the prohibition on
redemption of the Notes prior to such date, then, upon acceleration of the
Notes, an additional premium shall also become and be immediately due and
payable in an amount, for each of the years beginning on December 1 of the
years set forth below, as set forth below (expressed as a percentage of the
aggregate principal amount to the date of payment that would otherwise be due
but for the provisions of this sentence):
YEAR PERCENTAGE
1998............................................112.167%
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1999............................................110.646%
2000............................................109.125%
2001............................................107.604%
2002............................................106.083%
The Holders of a majority in aggregate principal amount of
the Notes then outstanding by notice to the Trustee may on behalf of the
Holders of all of the Notes waive any existing Default or Event of Default and
its consequences under this Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a
statement regarding compliance with this Indenture, and the Company is required
upon becoming aware of any Default or Event of Default, to deliver to the
Trustee a statement specifying such Default or Event of Default.
SECTION 6.03 OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee
may pursue any available remedy to collect the payment of principal, premium,
if any, and interest on the Notes or to enforce the performance of any
provision of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Notes or does not produce any of them in the proceeding. A
delay or omission by the Trustee or any Holder of a Note in exercising any
right or remedy accruing upon an Event of Default shall not impair the right or
remedy or constitute a waiver of or acquiescence in the Event of Default. All
remedies are cumulative to the extent permitted by law.
SECTION 6.04 WAIVER OF PAST DEFAULTS.
Holders of not less than a majority in aggregate principal
amount of the then outstanding Notes by notice to the Trustee may on behalf of
the Holders of all of the Notes waive an existing Default or Event of Default
and its consequences hereunder, except a continuing Default or Event of Default
in the payment of the principal of, premium and Liquidated Damages, if any, or
interest on, the Notes (including in connection with an offer to purchase)
(provided, however, that the Holders of a majority in aggregate principal
amount of the then outstanding Notes may rescind an acceleration and its
consequences, including any related payment default that resulted from such
acceleration). Upon any such waiver, such Default shall cease to exist, and any
Event of Default arising therefrom shall be deemed to have been cured for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or impair any right consequent thereon.
SECTION 6.05 CONTROL BY MAJORITY.
Holders of a majority in principal amount of the then
outstanding Notes may direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee or exercising any
trust or power conferred on it. However, the Trustee may refuse to follow any
direction that conflicts with law or this Indenture that the Trustee determines
may be unduly prejudicial to the rights of other Holders of Notes or that may
involve the Trustee in personal liability.
SECTION 6.06 LIMITATION ON SUITS.
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A Holder of a Note may pursue a remedy with respect to this
Indenture or the Notes only if:
(a) the Holder of a Note gives to the Trustee written notice of a
continuing Event of Default;
(b) the Holders of at least 25% in principal amount of the then
outstanding Notes make a written request to the Trustee to pursue the remedy;
(c) such Holder of a Note or Holders of Notes offer and, if
requested, provide to the Trustee indemnity satisfactory to the Trustee against
any loss, liability or expense;
(d) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer and, if requested, the provision of
indemnity; and
(e) during such 60-day period the Holders of a majority in
principal amount of the then outstanding Notes do not give the Trustee a
direction inconsistent with the request.
A Holder of a Note may not use this Indenture to prejudice
the rights of another Holder of a Note or to obtain a preference or priority
over another Holder of a Note.
SECTION 6.07 RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the
right of any Holder of a Note to receive payment of principal, premium and
Liquidated Damages, if any, and interest on the Note, on or after the
respective due dates expressed in the Note (including in connection with an
offer to purchase), or to bring suit for the enforcement of any such payment on
or after such respective dates, shall not be impaired or affected without the
consent of such Holder.
SECTION 6.08 COLLECTION SUIT BY TRUSTEE.
If an Event of Default specified in Section 6.01(a) or (b)
occurs and is continuing, the Trustee is authorized to recover judgment in its
own name and as trustee of an express trust against the Company for the whole
amount of principal of, premium and Liquidated Damages, if any, and interest
remaining unpaid on the Notes and interest on overdue principal and, to the
extent lawful, interest and such further amount as shall be sufficient to cover
the costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel.
SECTION 6.09 TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee is authorized to file such proofs of claim and
other papers or documents as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel)
and the Holders of the Notes allowed in any judicial proceedings relative to
the Company (or any other obligor upon the Notes), its creditors or its
property and shall be entitled and empowered to collect, receive and distribute
any money or other property payable or deliverable on any such claims and any
custodian in any such judicial proceeding is hereby authorized by each Holder
to make such payments to the Trustee, and in the event that the Trustee shall
consent to the making of such payments directly to the Holders, to pay to the
Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any
other amounts due the Trustee under Section 7.07 hereof. To the extent that the
payment of any such compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the
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Trustee under Section 7.07 hereof out of the estate in any such proceeding,
shall be denied for any reason, payment of the same shall be secured by a Lien
on, and shall be paid out of, any and all distributions, dividends, money,
securities and other properties that the Holders may be entitled to receive in
such proceeding whether in liquidation or under any plan of reorganization or
arrangement or otherwise. Nothing herein contained shall be deemed to authorize
the Trustee to authorize or consent to or accept or adopt on behalf of any
Holder any plan of reorganization, arrangement, adjustment or composition
affecting the Notes or the rights of any Holder, or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding.
SECTION 6.10 PRIORITIES.
If the Trustee collects any money pursuant to this Article,
it shall pay out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts
due under Section 7.07 hereof, including payment of all compensation, expense
and liabilities incurred, and all advances made, by the Trustee and the costs
and expenses of collection;
Second: to Holders of Notes for amounts due and unpaid on the
Notes for principal, premium and Liquidated Damages, if any, and interest,
ratably, without preference or priority of any kind, according to the amounts
due and payable on the Notes for principal, premium and Liquidated Damages, if
any and interest, respectively; and
Third: to the Company or to such party as a court of
competent jurisdiction shall direct.
The Trustee may fix a record date and payment date for any
payment to Holders of Notes pursuant to this Section 6.10.
SECTION 6.11 UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under
this Indenture or in any suit against the Trustee for any action taken or
omitted by it as a Trustee, a court in its discretion may require the filing by
any party litigant in the suit of an undertaking to pay the costs of the suit,
and the court in its discretion may assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant. This Section does not apply to a suit by the Trustee, a suit by a
Holder of a Note pursuant to Section 6.07 hereof, or a suit by Holders of more
than 10% in principal amount of the then outstanding Notes.
SECTION 6.12. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS
No director, officer, employee or stockholder of the Company
or any Guarantor, as such, shall have any liability for any obligations of the
Company or any Guarantor under the Notes, the Subsidiary Guarantees, the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive
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liabilities under the federal securities laws and it is the view of the SEC
that such a waiver is against public policy.
ARTICLE 7.
TRUSTEE
SECTION 7.01 DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in its exercise, as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs.
(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be determined solely by the
express provisions of this Indenture and the TIA and the Trustee need
perform only those duties that are specifically set forth in this
Indenture and no others, and no implied covenants or obligations shall be
read into this Indenture or the TIA against the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness
of the opinions expressed therein, upon certificates or opinions furnished
to the Trustee and conforming to the requirements of this Indenture.
However, the Trustee shall examine the certificates and opinions to
determine whether or not they conform to the requirements of this
Indenture.
(c) The Trustee may not be relieved from liabilities for its own
gross negligent action, its own gross negligent failure to act, or its own
willful misconduct, except that:
(i) this paragraph does not limit the effect of paragraph (b) of
this Section;
(ii) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless it is proved that the Trustee
was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05 hereof.
(d) Whether or not therein expressly so provided, every provision
of this Indenture that in any way relates to the Trustee is subject to
paragraphs (a), (b), and (c) of this Section.
(e) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or incur any liability. The Trustee shall be under
no obligation to exercise any of its rights and powers under this Indenture at
the request of any Holders, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability
or expense that might be incurred by it in compliance with such request or
direction.
(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.
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SECTION 7.02 RIGHTS OF TRUSTEE.
(a) The Trustee may conclusively rely upon any document believed
by it to be genuine and to have been signed or presented by the proper Person.
The Trustee need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel or both. The Trustee
shall not be liable for any action it takes or omits to take in good faith in
reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may
consult with counsel and the written advice of such counsel or any Opinion of
Counsel shall be full and complete authorization and protection from liability
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in reliance thereon.
(c) The Trustee may act through its attorneys and agents and shall
not be responsible for the misconduct or negligence of any agent appointed with
due care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith that it believes to be authorized or within the
rights or powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture, any
demand, request, direction or notice from the Company or any Guarantor shall be
sufficient if signed by an Officer of the Company or Guarantor issuing such
demand, request, direction or notice.
(f) The Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture at the request or direction
of any of the Holders unless such Holders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that might be incurred by it in compliance with such request or direction.
SECTION 7.03 INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may
become the owner or pledgee of Notes and may otherwise deal with the Company or
any Affiliate of the Company with the same rights it would have if it were not
Trustee. However, in the event that the Trustee acquires any conflicting
interest it must eliminate such conflict within 90 days, apply to the SEC for
permission to continue as trustee or resign. Any Agent may do the same with
like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11
hereof.
SECTION 7.04 TRUSTEE'S DISCLAIMER.
The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture or the Notes,
it shall not be accountable for the Company's use of the proceeds from the
Notes or any money paid to the Company or upon the Company's direction under
any provision of this Indenture, it shall not be responsible for the use or
application of any money received by any Paying Agent other than the Trustee,
and it shall not be responsible for any statement or recital herein or any
statement in the Notes or any other document in connection with the sale of the
Notes or pursuant to this Indenture other than its certificate of
authentication.
SECTION 7.05 NOTICE OF DEFAULTS.
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If a Default or Event of Default occurs and is continuing and
if it is known to the Trustee, the Trustee shall mail to Holders of Notes a
notice of the Default or Event of Default within 90 days after it occurs.
Except in the case of a Default or Event of Default in payment of principal of,
premium, if any, or interest on any Note, the Trustee may withhold the notice
if and so long as a committee of its Responsible Officers in good faith
determines that withholding the notice is in the interests of the Holders of
the Notes.
SECTION 7.06 REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES.
Within 60 days after each May 15 beginning with the May 15
following the date of this Indenture, and for so long as Notes remain
outstanding, the Trustee shall mail to the Holders of the Notes a brief report
dated as of such reporting date that complies with TIA ss. 313(a) (but if no
event described in TIA ss. 313(a) has occurred within the twelve months
preceding the reporting date, no report need be transmitted). The Trustee also
shall comply with TIA ss. 313(b)(2). The Trustee shall also transmit by mail
all reports as required by TIA ss. 313(c).
A copy of each report at the time of its mailing to the
Holders of Notes shall be mailed to the Company and filed with the SEC and each
stock exchange on which the Notes are listed in accordance with TIA ss. 313(d).
The Company shall promptly notify the Trustee when the Notes are listed on any
stock exchange.
SECTION 7.07 COMPENSATION AND INDEMNITY.
The Company and the Guarantors shall pay to the Trustee from
time to time reasonable compensation for its acceptance of this Indenture and
the rendering by it of the services required hereunder. The Trustee's
compensation shall not be limited by any law on compensation of a trustee of an
express trust. The Company and the Guarantors shall reimburse the Trustee
promptly upon request for all reasonable disbursements, advances and expenses
incurred or made by it in addition to the compensation for its services. Such
expenses shall include the reasonable compensation, disbursements and expenses
of the Trustee's agents and counsel.
The Company and the Guarantors shall indemnify the Trustee
against any and all losses, liabilities or expenses incurred by it arising out
of or in connection with the acceptance or administration of its duties under
this Indenture (including, but not limited to, its duties under Section 9.06
hereof), including the costs and expenses of enforcing this Indenture against
the Company and the Guarantors (including this Section 7.07) and defending
itself against any claim (whether asserted by the Company and the Guarantors or
any Holder or any other person) or liability in connection with the exercise or
performance of any of its powers or duties hereunder, except to the extent any
such loss, liability or expense may be attributable to its gross negligence or
bad faith. The Trustee shall notify the Company and the Guarantors promptly of
any claim for which it may seek indemnity.
The obligations of the Company and the Guarantors under this
Section 7.07 shall survive the satisfaction and discharge of this Indenture.
To secure the Company's and the Guarantors' payment
obligations in this Section, the Trustee shall have a Lien prior to the Notes
on all money or property held or collected by the Trustee, except that held in
trust to pay principal and interest on particular Notes. Such Lien shall
survive the satisfaction and discharge of this Indenture. Compensation,
reimbursement and indemnification of the Trustee under this Section 7.07 is not
subordinated to Senior Debt of the Company.
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When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 6.01(i) or (j) hereof occurs, the
expenses and the compensation for the services (including the fees and expenses
of its agents and counsel) are intended to constitute expenses of
administration under any Bankruptcy Law.
The Trustee shall comply with the provisions of TIA ss.
313(b)(2) to the extent applicable.
SECTION 7.08 REPLACEMENT OF TRUSTEE.
A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section.
The Trustee may resign in writing at any time and be
discharged from the trust hereby created by so notifying the Company. The
Holders of Notes of a majority in principal amount of the then outstanding
Notes may remove the Trustee by so notifying the Trustee and the Company in
writing. The Company may remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent or an order
for relief is entered with respect to the Trustee under any Bankruptcy Law;
(c) a custodian or public officer takes charge of the Trustee or
its property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists
in the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office,
the Holders of a majority in principal amount of the then outstanding Notes may
appoint a successor Trustee to replace the successor Trustee appointed by the
Company.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company, or the Holders of Notes of at least 10% in principal amount of the
then outstanding Notes may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee, after written request by any Holder of a Note
who has been a Holder of a Note for at least six months, fails to comply with
Section 7.10, such Holder of a Note may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders of the Notes. The retiring Trustee shall promptly
transfer all property held by it as Trustee to the successor Trustee, provided
all sums owing to the Trustee hereunder have been paid and subject to the Lien
provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee
pursuant to this Section 7.08, the Company's obligations under Section 7.07
hereof shall continue for the benefit of the retiring Trustee.
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SECTION 7.09 SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the successor corporation without any further act shall be the
successor Trustee.
SECTION 7.10 ELIGIBILITY; DISQUALIFICATION.
There shall at all times be a Trustee hereunder that is a
corporation organized and doing business under the laws of the United States of
America or of any state thereof that is authorized under such laws to exercise
corporate trustee power, that is subject to supervision or examination by
federal or state authorities and that has a combined capital and surplus of at
least $50.0 million as set forth in its most recent published annual report of
condition.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA ss. 310(a)(1), (2) and (5). The Trustee is subject to TIA
ss. 310(b).
SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee is subject to TIA ss. 311(a), excluding any
creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or
been removed shall be subject to TIA ss. 311(a) to the extent indicated
therein.
ARTICLE 8.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.01 OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE.
The Company may, at the option of its Board of Directors
evidenced by a resolution set forth in an Officers' Certificate, at any time,
elect to have either Section 8.02 or 8.03 hereof be applied to all outstanding
Notes upon compliance with the conditions set forth below in this Article 8.
SECTION 8.02 LEGAL DEFEASANCE AND DISCHARGE.
Upon the Company's exercise under Section 8.01 hereof of the
option applicable to this Section 8.02, the Company shall, subject to the
satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to
have been discharged from its obligations with respect to all outstanding Notes
and to have each Guarantor's obligation discharged with respect to its
Subsidiary Guarantee on the date the conditions set forth below are satisfied
(hereinafter, "Legal Defeasance"). For this purpose, Legal Defeasance means
that the Company shall be deemed to have paid and discharged the entire
Indebtedness represented by the outstanding Notes, which shall thereafter be
deemed to be "outstanding" only for the purposes of Section 8.05 hereof and the
other Sections of this Indenture referred to in (a) and (b) below, and to have
satisfied all its other obligations under such Notes and this Indenture (and
the Trustee, on demand of and at the expense of the Company, shall execute
proper instruments acknowledging the same), except for the following provisions
which shall survive until otherwise terminated or discharged hereunder: (a) the
rights of Holders of outstanding Notes to receive solely from the trust fund
described in Section 8.04 hereof, and as more fully set forth in such Section,
payments in respect of the principal of and premium, interest and Liquidated
Damages, if any, on such Notes when such payments are due, (b) the Company's
obligations with respect to such Notes under Article 2 and Section 4.02 hereof,
(c) the rights, powers, trusts, duties and immunities of the Trustee hereunder
and the Company's obligations in connection therewith and (d) this Article 8.
Subject to compliance with this Article 8, the Company may
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exercise its option under this Section 8.02 notwithstanding the prior exercise
of its option under Section 8.03 hereof.
SECTION 8.03 COVENANT DEFEASANCE.
Upon the Company's exercise under Section 8.01 hereof of the
option applicable to this Section 8.03, the Company and each Guarantor shall,
subject to the satisfaction of the conditions set forth in Section 8.04 hereof,
be released from their obligations under the covenants contained in Sections
4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.15, 4.16, 4.17, 4.18, 4.19, 4.20,
5.01 and 11.01 hereof with respect to the outstanding Notes on and after the
date the conditions set forth in Section 8.04 are satisfied (hereinafter,
"Covenant Defeasance"), and the Notes shall thereafter be deemed not
"outstanding" for the purposes of any direction, waiver, consent or declaration
or act of Holders (and the consequences of any thereof) in connection with such
covenants, but shall continue to be deemed "outstanding" for all other purposes
hereunder (it being understood that such Notes shall not be deemed outstanding
for accounting purposes). For this purpose, Covenant Defeasance means that,
with respect to the outstanding Notes, the Company and each Guarantor may omit
to comply with and shall have no liability in respect of any term, condition or
limitation set forth in any such covenant, whether directly or indirectly, by
reason of any reference elsewhere herein to any such covenant or by reason of
any reference in any such covenant to any other provision herein or in any
other document and such omission to comply shall not constitute a Default or an
Event of Default under Section 6.01 hereof, but, except as specified above, the
remainder of this Indenture and such Notes shall be unaffected thereby. In
addition, upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.03 hereof, subject to the satisfaction of the
conditions set forth in Section 8.04 hereof, Sections 6.01(d) through 6.01(f)
hereof shall not constitute Events of Default.
SECTION 8.04 CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.
The following shall be the conditions to the application of
either Section 8.02 or 8.03 hereof to the outstanding Notes:
In order to exercise either Legal Defeasance or Covenant Defeasance:
(a) the Company must irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders, cash in United States dollars,
non-callable Government Securities, or a combination thereof, in such amounts
as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium and Liquidated
Damages, if any, and interest on the outstanding Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be, and
the Company must specify whether the Notes are being defeased to maturity or to
a particular redemption date;
(b) in the case of an election under Section 8.02 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of this Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such Opinion of Counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not occurred;
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(c) in the case of an election under Section 8.03 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(d) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the incurrence of Indebtedness all or a portion of the
proceeds of which will be used to defease the Notes pursuant to this Article 8
concurrently with such incurrence) or insofar as Sections 6.01(i) or 6.01(j)
hereof is concerned, at any time in the period ending on the 91st day after the
date of deposit (or greater period of time in which any such deposit of trust
funds may remain subject to bankruptcy or insolvency laws insofar as those
apply to the deposit by the Company);
(e) such Legal Defeasance or Covenant Defeasance shall not result
in a breach or violation of, or constitute a default under, any material
agreement or instrument (other than this Indenture) to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(f) the Company shall have delivered to the Trustee an Opinion of
Counsel (which may be subject to customary exceptions) to the effect that (A)
on the 91st day following the deposit (or greater period of time in which any
such deposit of trust funds may remain subject to bankruptcy or insolvency laws
insofar as those apply to the deposit by the Company), the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally and (B)
the trust funds will not be subject to the rights of holders of Indebtedness
other than the Notes;
(g) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others; and
(h) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
SECTION 8.05 DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST;
OTHER MISCELLANEOUS PROVISIONS.
Subject to Section 8.06 hereof, all money and non-callable
Government Securities (including the proceeds thereof) deposited with the
Trustee (or other qualifying trustee, collectively for purposes of this Section
8.05, the "Trustee") pursuant to Section 8.04 hereof in respect of the
outstanding Notes shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Notes and this Indenture, to the
payment, either directly or through any Paying Agent (including the Company
acting as Paying Agent) as the Trustee may determine, to the Holders of such
Notes of all sums due and to become due thereon in respect of principal,
premium, if any, and interest, but such money need not be segregated from other
funds except to the extent required by law.
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The Company and the Guarantors shall pay and indemnify the
Trustee against any tax, fee or other charge imposed on or assessed against the
cash or non-callable Government Securities deposited pursuant to Section 8.04
hereof or the principal and interest received in respect thereof other than any
such tax, fee or other charge which by law is for the account of the Holders of
the outstanding Notes.
Anything in this Article 8 to the contrary notwithstanding,
the Trustee shall deliver or pay to the Company from time to time upon the
request of the Company any money or non-callable Government Securities held by
it as provided in Section 8.04 hereof which, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee (which may be the opinion
delivered under Section 8.04(a) hereof), are in excess of the amount thereof
that would then be required to be deposited to effect an equivalent Legal
Defeasance or Covenant Defeasance.
SECTION 8.06 REPAYMENT TO COMPANY.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of,
premium, if any, or interest on any Note and remaining unclaimed for two years
after such principal, and premium, if any, or interest has become due and
payable shall be paid to the Company on its request or (if then held by the
Company) shall be discharged from such trust; and the Holder of such Note shall
thereafter, as a secured creditor, look only to the Company for payment
thereof, and all liability of the Trustee or such Paying Agent with respect to
such trust money, and all liability of the Company as trustee thereof, shall
thereupon cease; provided, however, that the Trustee or such Paying Agent,
before being required to make any such repayment, may at the expense of the
Company cause to be published once, in the New York Times and The Wall Street
Journal (national edition), notice that such money remains unclaimed and that,
after a date specified therein, which shall not be less than 30 days from the
date of such notification or publication, any unclaimed balance of such money
then remaining will be repaid to the Company.
SECTION 8.07 REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any United
States dollars or non-callable Government Securities in accordance with Section
8.02 or 8.03 hereof, as the case may be, by reason of any order or judgment of
any court or governmental authority enjoining, restraining or otherwise
prohibiting such application, then the Company's obligations under this
Indenture and the Notes shall be revived and reinstated as though no deposit
had occurred pursuant to Section 8.02 or 8.03 hereof until such time as the
Trustee or Paying Agent is permitted to apply all such money in accordance with
Section 8.02 or 8.03 hereof, as the case may be; provided, however, that, if
the Company makes any payment of principal of, premium, if any, or interest on
any Note following the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of such Notes to receive such payment
from the money held by the Trustee or Paying Agent.
ARTICLE 9.
AMENDMENT, SUPPLEMENT AND WAIVER
SECTION 9.01 WITHOUT CONSENT OF HOLDERS OF NOTES.
Notwithstanding Section 9.02 of this Indenture, the Company,
a Guarantor (with respect to a Subsidiary Guarantee or this Indenture to which
it is a party) and the Trustee may amend or supplement this Indenture, the
Subsidiary Guarantee or the Notes without the consent of any Holder of a Note:
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(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Notes in addition to or in
place of certificated Notes or to alter the provisions of Article 2 hereof
(including the related definitions) in a manner that does not materially
adversely affect any Holder;
(c) to provide for the assumption of the Company's or a
Guarantor's obligations to the Holders of the Notes by a successor to the
Company or a Guarantor pursuant to Article 5 or Article 11 hereof;
(d) to make any change that would provide any additional rights
or benefits to the Holders of the Notes or that does not adversely affect the
legal rights hereunder of any Holder of the Notes;
(e) to comply with requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the TIA;
Upon the request of the Company accompanied by a resolution
of its Board of Directors authorizing the execution of any such amended or
supplemental Indenture, and upon receipt by the Trustee of the documents
described in Section 7.02 hereof, the Trustee shall join with the Company and
the Guarantors in the execution of any amended or supplemental Indenture
authorized or permitted by the terms of this Indenture and to make any further
appropriate agreements and stipulations that may be therein contained, but the
Trustee shall not be obligated to enter into such amended or supplemental
Indenture that affects its own rights, duties or immunities under this
Indenture or otherwise.
SECTION 9.02 WITH CONSENT OF HOLDERS OF NOTES.
Except as provided below in this Section 9.02, the Company
and the Trustee may amend or supplement this Indenture (including Section 3.09,
4.10 and 4.15 hereof) , the Subsidiary Guarantees and the Notes may be amended
or supplemented with the consent of the Holders of at least a majority in
principal amount of the Notes then outstanding voting as a single class
(including consents obtained in connection with a tender offer or exchange
offer for, or purchase of, the Notes), and, subject to Sections 6.04 and 6.07
hereof, any existing Default or Event of Default (other than a Default or Event
of Default in the payment of the principal of, premium, if any, or interest on
the Notes, except a payment default resulting from an acceleration that has
been rescinded) or compliance with any provision of this Indenture, the
Subsidiary Guarantees or the Notes may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding Notes voting
as a single class (including consents obtained in connection with a tender
offer or exchange offer for, or purchase of, the Notes). Section 2.08 hereof
shall determine which Notes are considered to be "outstanding" for purposes of
this Section 9.02.
Upon the request of the Company accompanied by a resolution
of its Board of Directors authorizing the execution of any such amended or
supplemental Indenture, and upon the filing with the Trustee of evidence
satisfactory to the Trustee of the consent of the Holders of Notes as
aforesaid, and upon receipt by the Trustee of the documents described in
Section 7.02 hereof, the Trustee shall join with the Company in the execution
of such amended or supplemental Indenture unless such amended or supplemental
Indenture directly affects the Trustee's own rights, duties or immunities under
this Indenture or otherwise, in which case the Trustee may in its discretion,
but shall not be obligated to, enter into such amended or supplemental
Indenture.
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It shall not be necessary for the consent of the Holders of
Notes under this Section 9.02 to approve the particular form of any proposed
amendment or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section
becomes effective, the Company shall mail to the Holders of Notes affected
thereby a notice briefly describing the amendment, supplement or waiver. Any
failure of the Company to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such amended or
supplemental Indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the
Holders of a majority in aggregate principal amount of the Notes then
outstanding voting as a single class may waive compliance in a particular
instance by the Company with any provision of this Indenture or the Notes.
However, without the consent of each Holder affected, an amendment or waiver
under this Section 9.02 may not (with respect to any Notes held by a
non-consenting Holder):
(a) reduce the principal amount of Notes whose Holders must
consent to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any
Note or alter or waive any of the provisions with respect to the redemption of
the Notes except as provided above with respect to Sections 3.09, 4.10 and 4.15
hereof;
(c) reduce the rate of or change the time for payment of interest
on any Note;
(d) waive a Default or Event of Default in the payment of
principal of or premium, interest or Liquidated Damages, if any, on the Notes
(except a rescission of acceleration of the Notes by the Holders of at least a
majority in aggregate principal amount of the then outstanding Notes and a
waiver of the payment default that resulted from such acceleration);
(e) make any Note payable in money other than that stated in the
Notes;
(f) make any change in the provisions of this Indenture relating
to waivers of past Defaults or the rights of Holders of Notes to receive
payments of principal of or premium, interest or Liquidated Damages, if any, on
the Notes;
(g) waive a redemption payment with respect to any Note (other
than a payment required by one of the covenants described in Sections 4.10 and
4.15).
(h) release any Guarantor from its Subsidiary Guarantee; or
(i) make any change in Section 6.04 or 6.07 hereof or in the
foregoing amendment and waiver provisions.
In addition, any amendment to the provisions of Article 10 of
this Indenture (which relate to subordination) will require the consent of the
Holders of at least 75% in aggregate principal amount of the Notes then
outstanding if such amendment would adversely affect the rights of Holders of
Notes.
SECTION 9.03 COMPLIANCE WITH TRUST INDENTURE ACT.
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Every amendment or supplement to this Indenture or the Notes
shall be set forth in a amended or supplemental Indenture that complies with
the TIA as then in effect.
SECTION 9.04 REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, supplement or waiver becomes effective, a
consent to it by a Holder of a Note is a continuing consent by the Holder of a
Note and every subsequent Holder of a Note or portion of a Note that evidences
the same debt as the consenting Holder's Note, even if notation of the consent
is not made on any Note. However, any such Holder of a Note or subsequent
Holder of a Note may revoke the consent as to its Note if the Trustee receives
written notice of revocation before the date the waiver, supplement or
amendment becomes effective. An amendment, supplement or waiver becomes
effective in accordance with its terms and thereafter binds every Holder.
SECTION 9.05 NOTATION ON OR EXCHANGE OF NOTES.
The Trustee may place an appropriate notation about an
amendment, supplement or waiver on any Note thereafter authenticated. The
Company in exchange for all Notes may issue and the Trustee shall, upon receipt
of an Authentication Order, authenticate new Notes that reflect the amendment,
supplement or waiver.
Failure to make the appropriate notation or issue a new Note
shall not affect the validity and effect of such amendment, supplement or
waiver.
SECTION 9.06 TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee shall sign any amended or supplemental Indenture
authorized pursuant to this Article 9 if the amendment or supplement does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
The Company may not sign an amendment or supplemental Indenture until the Board
of Directors approves it. In executing any amended or supplemental indenture,
the Trustee shall be entitled to receive and (subject to Section 7.01 hereof)
shall be fully protected in relying upon, in addition to the documents required
by Section 12.04 hereof, an Officers' Certificate and an Opinion of Counsel
stating that (i) the execution of such amended or supplemental indenture is
authorized or permitted by this Indenture, (ii) such amended or supplemental
indenture complies with this Indenture and, (iii) in the event that such
amendment or supplemental indenture is being executed pursuant to Section 5.01
or 11.01 hereof, the surviving Person assumes the Obligations of this Indenture
and the Notes.
ARTICLE 10.
SUBORDINATION
SECTION 10.01 AGREEMENT TO SUBORDINATE.
The Company and the Guarantors agree, and each Holder by
accepting a Note agrees, that the Indebtedness evidenced by the Notes is
subordinated in right of payment, to the extent and in the manner provided in
this Article 10, to the prior payment in full in cash or Cash Equivalents of
all Senior Debt (whether outstanding on the date hereof or hereafter created,
incurred, assumed or guaranteed), and that the subordination is for the benefit
of the holders of Senior Debt.
SECTION 10.02 CERTAIN DEFINITIONS.
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"Designated Senior Debt" means (i) any Indebtedness
outstanding under the Senior Credit Facility and (ii) any other Senior Debt or
Guarantor Senior Debt permitted under this Indenture the principal amount of
which is $25.0 million or more and that has been designated by the Company as
"Designated Senior Debt."
"Permitted Junior Securities" means Equity Interests in the
Company or debt securities of the Company or the relevant Guarantor that are
subordinated to all Senior Debt (and any debt securities issued in exchange for
Senior Debt) or Guarantor Senior Debt (and any debt securities issued in
exchange for Guarantor Senior Debt), as applicable, to substantially the same
extent as, or to a greater extent than, the Notes are subordinated to Senior
Debt or the Subsidiary Guarantees are subordinated to Guarantor Senior Debt, as
applicable, pursuant to this Indenture.
"Representative" means the indenture trustee or other
trustee, agent or representative for any Senior Debt.
"Senior Debt" means (i) all Indebtedness outstanding under
Credit Facilities and all Hedging Obligations with respect thereto, (ii) any
other Indebtedness of the Company or any Guarantor permitted to be incurred
under the terms of this Indenture (other than the Existing Notes), unless the
instrument under which such Indebtedness is incurred expressly provides that it
is on a parity with or subordinated in right of payment to the Notes or the
Subsidiary Guarantees and (iii) all Obligations of the Company or any Guarantor
with respect to the foregoing. Notwithstanding anything to the contrary in the
foregoing, Senior Debt will not include (a) any liability for federal, state,
local or other taxes owed or owing by the Company, (b) any Indebtedness of the
Company or any Guarantor to any of its Subsidiaries or other Affiliates, (c)
any trade payables or (d) any Indebtedness that is incurred in violation of
this Indenture; provided that Indebtedness under Credit Facilities will not
cease to be Senior Debt if borrowed based upon a written certificate from a
purported officer of the Company to the effect that such Indebtedness was
permitted by this Indenture to be incurred. In no event shall the Existing
Notes be Senior Debt. The Notes will be pari passu with the Existing Notes.
A distribution may consist of cash, securities or other
property, by set-off or otherwise.
SECTION 10.03 LIQUIDATION; DISSOLUTION; BANKRUPTCY.
Upon any distribution to creditors of the Company in a
liquidation or dissolution of the Company or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Company or its
property, in an assignment for the benefit of creditors or any marshaling of
the Company's assets and liabilities:
(1) holders of Senior Debt shall be entitled to receive
payment in full in cash or Cash Equivalents of all Obligations due in respect
of such Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Debt) before Holders
of the Notes shall be entitled to receive any payment with respect to the Notes
(except that Holders may receive (i) Permitted Junior Securities and (ii)
payments and other distributions made from any defeasance trust created
pursuant to Section 8.01 hereof); and
(2) until all Obligations with respect to Senior Debt (as
provided in subsection (1) above) are paid in full in cash or Cash Equivalents,
any distribution to which the Holders of Notes would be entitled but for this
Article 10 shall be made to holders of Senior Debt (except that Holders of
Notes may receive (i) Permitted Junior Securities and (ii) payments and other
distributions made from any defeasance trust created pursuant to Section 8.01
hereof), as their interests may appear.
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SECTION 10.04 DEFAULT ON DESIGNATED SENIOR DEBT.
The Company may not make any payment or distribution to the
Trustee or any Holder in respect of Obligations with respect to the Notes and
may not acquire from the Trustee or any Holder any Notes for cash or property
(other than (i) Permitted Junior Securities and (ii) payments and other
distributions made from any defeasance trust created pursuant to Section 8.01
hereof) until all principal and other Obligations with respect to the Senior
Debt have been paid in full if:
(i) a default in the payment of any principal or other Obligations
with respect to Designated Senior Debt occurs and is continuing beyond any
applicable grace period in the agreement, indenture or other document
governing such Designated Senior Debt; or
(ii) a default, other than a payment default, on Designated Senior
Debt occurs and is continuing that then permits holders of the Designated
Senior Debt to accelerate its maturity and the Trustee receives a notice
of the default (a "Payment Blockage Notice") from a Person who may give it
pursuant to Section 10.12 hereof. If the Trustee receives any such Payment
Blockage Notice, no subsequent Payment Blockage Notice shall be effective
for purposes of this Section unless and until (i) at least 360 days shall
have elapsed since the effectiveness of the immediately prior Payment
Blockage Notice and (ii) all scheduled payments of principal, premium, if
any, and interest on the Securities that have come due have been paid in
full in cash. No nonpayment default that existed or was continuing on the
date of delivery of any Payment Blockage Notice to the Trustee shall be,
or be made, the basis for a subsequent Payment Blockage Notice.
The Company may and shall resume payments on and
distributions in respect of the Notes and may acquire them upon the earlier of:
(1) the date upon which the default is cured or waived, or
(2) in the case of a default referred to in Section 10.04(ii)
hereof, 179 days after notice is received if the maturity of such Designated
Senior Debt has not been accelerated,
if this Article 10 otherwise permits the payment, distribution or acquisition
at the time of such payment or acquisition.
SECTION 10.05 ACCELERATION OF SECURITIES.
If payment of the Securities is accelerated because of an
Event of Default, the Company shall promptly notify holders of Senior Debt of
the acceleration.
SECTION 10.06 WHEN DISTRIBUTION MUST BE PAID OVER.
In the event that the Trustee or any Holder receives any
payment of any Obligations with respect to the Notes at a time when the Trustee
or such Holder, as applicable, has actual knowledge that such payment is
prohibited by Section 10.04 hereof, such payment shall be held by the Trustee
or such Holder, in trust for the benefit of, and shall be paid forthwith over
and delivered, upon written request, to, the holders of Senior Debt as their
interests may appear or their Representative under the indenture or other
agreement (if any) pursuant to which Senior Debt may have been issued, as their
respective interests may appear, for application to the payment of all
Obligations with respect to Senior Debt remaining unpaid to the extent
necessary to pay such Obligations in full in accordance with their terms, after
giving effect to any concurrent payment or distribution to or for the holders
of Senior Debt.
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With respect to the holders of Senior Debt, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article 10, and no implied covenants or
obligations with respect to the holders of Senior Debt shall be read into this
Indenture against the Trustee. The Trustee shall not be deemed to owe any
fiduciary duty to the holders of Senior Debt, and shall not be liable to any
such holders if the Trustee shall pay over or distribute to or on behalf of
Holders or the Company or any other Person money or assets to which any holders
of Senior Debt shall be entitled by virtue of this Article 10, except if such
payment is made as a result of the willful misconduct or gross negligence of
the Trustee.
SECTION 10.07 NOTICE BY COMPANY.
The Company shall promptly notify the Trustee and the Paying
Agent of any facts known to the Company that would cause a payment of any
Obligations with respect to the Notes to violate this Article 10, but failure
to give such notice shall not affect the subordination of the Notes to the
Senior Debt as provided in this Article 10.
SECTION 10.08 SUBROGATION.
After all Senior Debt is paid in full and until the Notes are
paid in full, Holders of Notes shall be subrogated (equally and ratably with
all other Indebtedness pari passu with the Notes) to the rights of holders of
Senior Debt to receive distributions applicable to Senior Debt to the extent
that distributions otherwise payable to the Holders of Notes have been applied
to the payment of Senior Debt. A distribution made under this Article 10 to
holders of Senior Debt that otherwise would have been made to Holders of Notes
is not, as between the Company and Holders, a payment by the Company on the
Notes.
SECTION 10.09 RELATIVE RIGHTS.
This Article 10 defines the relative rights of Holders of
Notes and holders of Senior Debt. Nothing in this Indenture shall:
(1) impair, as between the Company and Holders of Notes,
the obligation of the Company, which is absolute and unconditional, to
pay principal of and interest on the Notes in accordance with their
terms;
(2) affect the relative rights of Holders of Notes and
creditors of the Company other than their rights in relation to holders of
Senior Debt; or
(3) prevent the Trustee or any Holder of Notes from
exercising its available remedies upon a Default or Event of Default, subject
to the rights of holders and owners of Senior Debt to receive distributions and
payments otherwise payable to Holders of Notes.
If the Company fails because of this Article 10 to pay
principal of or interest on a Note on the due date, the failure is still a
Default or Event of Default.
SECTION 10.10 SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY.
No right of any holder of Senior Debt to enforce the
subordination of the Indebtedness evidenced by the Notes shall be impaired by
any act or failure to act by the Company or any Holder or by the failure of the
Company or any Holder to comply with this Indenture.
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SECTION 10.11 DISTRIBUTION OR NOTICE TO REPRESENTATIVE.
Whenever a distribution is to be made or a notice given to
holders of Senior Debt, the distribution may be made and the notice given to
their Representative.
Upon any payment or distribution of assets of the Company
referred to in this Article 10, the Trustee and the Holders of Notes shall be
entitled to rely upon any order or decree made by any court of competent
jurisdiction or upon any certificate of such Representative or of the
liquidating trustee or agent or other Person making any distribution to the
Trustee or to the Holders of Notes for the purpose of ascertaining the Persons
entitled to participate in such distribution, the holders of the Senior Debt
and other Indebtedness of the Company, the amount thereof or payable thereon,
the amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article 10.
SECTION 10.12 RIGHTS OF TRUSTEE AND PAYING AGENT.
Notwithstanding the provisions of this Article 10 or any
other provision of this Indenture, the Trustee shall not be charged with
knowledge of the existence of any facts that would prohibit the making of any
payment or distribution by the Trustee, and the Trustee and the Paying Agent
may continue to make payments on the Notes, unless the Trustee shall have
received at its Corporate Trust Office at least five Business Days prior to the
date of such payment written notice of facts that would cause the payment of
any Obligations with respect to the Notes to violate this Article 10. Only the
Company or a Representative may give the notice. Nothing in this Article 10
shall impair the claims of, or payments to, the Trustee under or pursuant to
Section 7.07 hereof.
The Trustee in its individual or any other capacity may hold
Senior Debt with the same rights it would have if it were not Trustee. Any
Agent may do the same with like rights.
SECTION 10.13 AUTHORIZATION TO EFFECT SUBORDINATION.
Each Holder of Notes, by the Holder's acceptance thereof,
authorizes and directs the Trustee on such Holder's behalf to take such action
as may be necessary or appropriate to effectuate the subordination as provided
in this Article 10, and appoints the Trustee to act as such Holder's
attorney-in-fact for any and all such purposes. If the Trustee does not file a
proper proof of claim or proof of debt in the form required in any proceeding
referred to in Section 6.09 hereof at least 30 days before the expiration of
the time to file such claim, the Credit Agents are hereby authorized to file an
appropriate claim for and on behalf of the Holders of the Notes.
SECTION 10.14 AMENDMENTS.
The provisions of this Article 10 shall not be amended or
modified without the written consent of the holders of all Senior Debt.
ARTICLE 11.
SUBSIDIARY GUARANTEES
SECTION 11.01 GUARANTEE.
Subject to this Article 11, each of the Guarantors hereby,
jointly and severally, unconditionally guarantees to each Holder of a Note
authenticated and delivered by the Trustee and to the Trustee and its
successors and assigns, irrespective of the validity and enforceability of this
Indenture, the Notes or the obligations of the Company hereunder or thereunder,
that: (a) the principal of
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and interest on the Notes will be promptly paid in full when due, whether at
maturity, by acceleration, redemption or otherwise, and interest on the overdue
principal of and interest on the Notes, if any, if lawful, and all other
obligations of the Company to the Holders or the Trustee hereunder or
thereunder will be promptly paid in full or performed, all in accordance with
the terms hereof and thereof; and (b) in case of any extension of time of
payment or renewal of any Notes or any of such other obligations, that same
will be promptly paid in full when due or performed in accordance with the
terms of the extension or renewal, whether at stated maturity, by acceleration
or otherwise. Failing payment when due of any amount so guaranteed or any
performance so guaranteed for whatever reason, the Guarantors shall be jointly
and severally obligated to pay the same immediately. Each Guarantor agrees that
this is a guarantee of payment and not a guarantee of collection.
The Guarantors hereby agree that their obligations hereunder
shall be unconditional, irrespective of the validity, regularity or
enforceability of the Notes or this Indenture, the absence of any action to
enforce the same, any waiver or consent by any Holder of the Notes with respect
to any provisions hereof or thereof, the recovery of any judgment against the
Company, any action to enforce the same or any other circumstance which might
otherwise constitute a legal or equitable discharge or defense of a guarantor.
Each Guarantor hereby waives diligence, presentment, demand of payment, filing
of claims with a court in the event of insolvency or bankruptcy of the Company,
any right to require a proceeding first against the Company, protest, notice
and all demands whatsoever and covenant that this Note Guarantee shall not be
discharged except by complete performance of the obligations contained in the
Notes and this Indenture.
If any Holder or the Trustee is required by any court or
otherwise to return to the Company, the Guarantors or any custodian, trustee,
liquidator or other similar official acting in relation to either the Company
or the Guarantors, any amount paid by either to the Trustee or such Holder,
this Note Guarantee, to the extent theretofore discharged, shall be reinstated
in full force and effect.
Each Guarantor agrees that it shall not be entitled to any
right of subrogation in relation to the Holders in respect of any obligations
guaranteed hereby until payment in full of all obligations guaranteed hereby.
Each Guarantor further agrees that, as between the Guarantors, on the one hand,
and the Holders and the Trustee, on the other hand, (x) the maturity of the
obligations guaranteed hereby may be accelerated as provided in Article 6
hereof for the purposes of this Subsidiary Guarantee, notwithstanding any stay,
injunction or other prohibition preventing such acceleration in respect of the
obligations guaranteed hereby, and (y) in the event of any declaration of
acceleration of such obligations as provided in Article 6 hereof, such
obligations (whether or not due and payable) shall forthwith become due and
payable by the Guarantors for the purpose of this Subsidiary Guarantee. The
Guarantors shall have the right to seek contribution from any non-paying
Guarantor so long as the exercise of such right does not impair the rights of
the Holders under the Guarantee.
SECTION 11.02 SUBORDINATION OF SUBSIDIARY GUARANTEE.
The Obligations of each Guarantor under its Subsidiary
Guarantee pursuant to this Article 11 shall be junior and subordinated to the
Senior Debt of such Guarantor on the same basis as the Notes are junior and
subordinated to Senior Debt of the Company. For the purposes of the foregoing
sentence, the Trustee and the Holders shall have the right to receive and/or
retain payments by any of the Guarantors only at such times as they may receive
and/or retain payments in respect of the Notes pursuant to this Indenture,
including Article 10 hereof.
SECTION 11.03 LIMITATION ON GUARANTOR LIABILITY.
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Each Guarantor, and by its acceptance of Notes, each Holder,
hereby confirms that it is the intention of all such parties that the
Subsidiary Guarantee of such Guarantor not constitute a fraudulent transfer or
conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance
Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to
the extent applicable to any Subsidiary Guarantee. To effectuate the foregoing
intention, the Trustee, the Holders and the Guarantors hereby irrevocably agree
that the obligations of such Guarantor under its Subsidiary Guarantee and this
Article 11 shall be limited to the maximum amount as will, after giving effect
to such maximum amount and all other contingent and fixed liabilities of such
Guarantor that are relevant under such laws, and after giving effect to any
collections from, rights to receive contribution from or payments made by or on
behalf of any other Guarantor in respect of the obligations of such other
Guarantor under this Article 11, result in the obligations of such Guarantor
under its Subsidiary Guarantee not constituting a fraudulent transfer or
conveyance.
SECTION 11.04 EXECUTION AND DELIVERY OF NOTE GUARANTEE.
To evidence its Subsidiary Guarantee set forth in Section
11.01, each Guarantor hereby agrees that a notation of such Subsidiary
Guarantee substantially in the form included in Exhibit E shall be endorsed by
an Officer of such Guarantor on each Note authenticated and delivered by the
Trustee and that this Indenture shall be executed on behalf of such Guarantor
by its President or one of its Vice Presidents.
Each Guarantor hereby agrees that its Subsidiary Guarantee
set forth in Section 11.01 shall remain in full force and effect
notwithstanding any failure to endorse on each Subsidiary a notation of such
Subsidiary Guarantee.
If an Officer whose signature is on this Indenture or on the
Subsidiary Guarantee no longer holds that office at the time the Trustee
authenticates the Note on which a Subsidiary Guarantee is endorsed, the
Subsidiary Guarantee shall be valid nevertheless.
The delivery of any Note by the Trustee, after the
authentication thereof hereunder, shall constitute due delivery of the
Subsidiary Guarantee set forth in this Indenture on behalf of the Guarantors.
In the event that the Company creates or acquires any new
domestic Restricted Subsidiaries subsequent to the date of this Indenture, if
required by Section 4.20 hereof, the Company shall cause such domestic
Restricted Subsidiaries to execute supplemental indentures to this Indenture in
the form included in Exhibit F and Subsidiary Guarantees in the form included
in Exhibit E in accordance with Section 4.20 hereof and this Article 11, to the
extent applicable.
SECTION 11.05 GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS.
No Guarantor may consolidate with or merge with or into
(whether or not such Guarantor is the surviving Person) another corporation,
Person or entity whether or not affiliated with such Guarantor unless:
(a) subject to the provisions of Section 11.06 hereof, the Person
formed by or surviving any such consolidation or merger (if other than a
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Notes, the Indenture and the Registration Rights Agreement;
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(b) immediately after giving effect to such transaction, no
Default or Event of Default exists; and
(c) the Company would be permitted by virtue of the Company's pro
forma Debt to Cash Flow Ratio, immediately after giving effect to such
transaction, to incur at least $1.00 of additional Indebtedness pursuant to the
Debt to Cash Flow Ratio test set forth in Section 4.09 hereof.
In case of any such consolidation, merger, sale or conveyance
and upon the assumption by the successor Person, by supplemental indenture,
executed and delivered to the Trustee and satisfactory in form to the Trustee,
of the Subsidiary Guarantee endorsed upon the Notes and the due and punctual
performance of all of the covenants and conditions of this Indenture to be
performed by the Guarantor, such successor Person shall succeed to and be
substituted for the Guarantor with the same effect as if it had been named
herein as a Guarantor. Such successor Person thereupon may cause to be signed
any or all of the Subsidiary Guarantees to be endorsed upon all of the Notes
issuable hereunder which theretofore shall not have been signed by the Company
and delivered to the Trustee. All the Subsidiary Guarantees so issued shall in
all respects have the same legal rank and benefit under this Indenture as the
Subsidiary Guarantees theretofore and thereafter issued in accordance with the
terms of this Indenture as though all of such Subsidiary Guarantees had been
issued at the date of the execution hereof.
Except as set forth in Articles 4 and 5 hereof, and
notwithstanding clauses (a) and (b) above, nothing contained in this Indenture
or in any of the Notes shall prevent any consolidation or merger of a Guarantor
with or into the Company or another Guarantor, or shall prevent any sale or
conveyance of the property of a Guarantor as an entirety or substantially as an
entirety to the Company or another Guarantor.
SECTION 11.06 RELEASES FOLLOWING SALE OF ASSETS.
In the event of a sale or other disposition of all of the
assets of any Guarantor, by way of merger, consolidation or otherwise, or a
sale or other disposition of all of the capital stock of any Guarantor, then
such Guarantor (in the event of a sale or other disposition, by way of merger,
consolidation or otherwise, of all of the capital stock of such Guarantor) or
the corporation acquiring the property (in the event of a sale or other
disposition of all or substantially all of the assets of such Guarantor) will
be released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of this Indenture, including without
limitation Section 4.10 hereof. Upon delivery by the Company to the Trustee of
an Officers' Certificate and an Opinion of Counsel to the effect that such sale
or other disposition was made by the Company in accordance with the applicable
provisions of this Indenture, including without limitation Section 4.10 hereof,
the Trustee shall execute any documents reasonably required in order to
evidence the release of any Guarantor from its obligations under its Subsidiary
Guarantee.
Any Guarantor not released from its obligations under its
Subsidiary Guarantee shall remain liable for the full amount of principal of
and interest on the Notes and for the other obligations of any Guarantor under
this Indenture as provided in this Article 11.
ARTICLE 12.
MISCELLANEOUS
SECTION 12.01 TRUST INDENTURE ACT CONTROLS.
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If any provision of this Indenture limits, qualifies or
conflicts with the duties imposed by a provision of the TIA or another
provision that would be required or deemed under the TIA to be part of and
govern this Indenture if this Indenture were subject thereto, the latter
provision shall control. If any provision of this Indenture modifies or
excludes any provision of the TIA that may be so modified or excluded, the
later provision shall be deemed to apply to this Indenture as so modified or to
be excluded, as the case may be.
SECTION 12.02 NOTICES.
Any notice or communication by the Company, any Guarantor or
the Trustee to the others is duly given if in writing and delivered in Person
or mailed by first class mail, telecopier or overnight air courier guaranteeing
next day delivery, to the others' address:
If to the Company and/or any Guarantor:
SFX Entertainment, Inc.
650 Madison Avenue
New York, New York 10022
Telecopier No.: (212) 753-3188
Attention: Howard J. Tytel, Esq.
With a copy to:
Baker & McKenzie
805 Third Avenue
New York, New York 10022
Telecopier No. (212) 751-5700
Attention: Howard Berkower, Esq.
If to the Trustee:
The Chase Manhattan Bank
450 West 33rd Street
15th Floor
New York, New York 10001
Telecopier No.: (212) 946-8158
Attention: Ms. Francine Springer, Corporate Trust Department
The Company, any Guarantor or the Trustee, by notice to the
others may designate additional or different addresses for subsequent notices
or communications.
All notices and communications (other than those sent to
Holders) shall be deemed to have been duly given: at the time delivered by
hand, if personally delivered; five Business Days after being deposited in the
mail, postage prepaid, if mailed; when answered back, if telexed; when receipt
acknowledged, if telecopied; and the next Business Day after timely delivery to
the courier, if sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by
first class mail or by overnight air courier guaranteeing next day delivery to
its address shown on the register kept by the Registrar. Any notice or
communication shall also be so mailed to any Person described in TIA ss.
313(c),
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to the extent required by the TIA. Failure to mail a notice or communication to
a Holder or any defect in it shall not affect its sufficiency with respect to
other Holders.
If a notice or communication is mailed in the manner provided
above within the time prescribed, it is duly given, whether or not the
addressee receives it.
If the Company mails a notice or communication to Holders, it
shall mail a copy to the Trustee and each Agent at the same time.
SECTION 12.03 COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES.
Holders may communicate pursuant to TIA ss. 312(b) with other
Holders with respect to their rights under this Indenture or the Notes. The
Company, the Trustee, the Registrar and anyone else shall have the protection
of TIA ss. 312(c).
SECTION 12.04 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company to the Trustee
to take any action under this Indenture, the Company shall furnish to the
Trustee:
(a) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth in
Section 12.05 hereof) stating that, in the opinion of the signers, all
conditions precedent and covenants, if any, provided for in this Indenture
relating to the proposed action have been satisfied; and
(b) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth in
Section 12.05 hereof) stating that, in the opinion of such counsel, all such
conditions precedent and covenants have been satisfied.
SECTION 12.05 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA ss. 314(a)(4)) shall comply with the provisions of TIA
ss. 314(e) and shall include:
(a) a statement that the Person making such certificate or
opinion has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he or she
has made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition has
been satisfied; and
(d) a statement as to whether or not, in the opinion of such
Person, such condition or covenant has been satisfied.
SECTION 12.06 RULES BY TRUSTEE AND AGENTS.
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The Trustee may make reasonable rules for action by or at a
meeting of Holders. The Registrar or Paying Agent may make reasonable rules and
set reasonable requirements for its functions.
SECTION 12.07 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS.
No past, present or future director, officer, employee,
incorporator or stockholder of the Company or any Guarantor, as such, shall
have any liability for any obligations of the Company or such Guarantor under
the Notes, the Subsidiary Guarantees, this Indenture or for any claim based on,
in respect of, or by reason of, such obligations or their creation. Each Holder
by accepting a Note waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the Notes.
SECTION 12.08 GOVERNING LAW.
THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE
USED TO CONSTRUE THIS INDENTURE, THE NOTES AND THE NOTE GUARANTEES WITHOUT
GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT
THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
SECTION 12.09 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret any other
indenture, loan or debt agreement of the Company or its Subsidiaries or of any
other Person. Any such indenture, loan or debt agreement may not be used to
interpret this Indenture.
SECTION 12.10 SUCCESSORS.
All agreements of the Company in this Indenture and the Notes
shall bind its successors. All agreements of the Trustee in this Indenture
shall bind its successors.
SECTION 12.11 SEVERABILITY.
In case any provision in this Indenture or in the Notes shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
SECTION 12.12 COUNTERPART ORIGINALS.
The parties may sign any number of copies of this Indenture.
Each signed copy shall be an original, but all of them together represent the
same agreement.
SECTION 12.13 TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table and Headings of
the Articles and Sections of this Indenture have been inserted for convenience
of reference only, are not to be considered a part of this Indenture and shall
in no way modify or restrict any of the terms or provisions hereof.
[Signatures on following page]
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SIGNATURES
Dated as of November 25, 1998
SFX ENTERTAINMENT, INC.
BGP ACQUISITION, L.L.C.
By: SFX ENTERTAINMENT, INC.,
as managing member
SFX NETWORK GROUP, L.L.C.
By: SFX ENTERTAINMENT, INC.,
as managing member
WESTBURY MUSIC FAIR, L.L.C.
By: SFX ENTERTAINMENT, INC.,
as managing member
By: /s/ Howard J. Tytel
------------------------------------
Name: Howard J. Tytel
Title: General Counsel, Executive Vice
President And Secretary
AKG, INC.
AMERICAN ARTISTS, INC.
AMERICAN ARTISTS LIMITED, INC.
AMPHITHEATER ENTERTAINMENT PARTNERSHIP
By: SM/PACE, INC.,
as general partner
ANT THEATRICAL PRODUCTIONS, INC.
ARDEE FESTIVALS N.J. INC.
Indenture signature page - 1
<PAGE>
ARDEE PRODUCTIONS, LTD.
ATLANTA CONCERTS, INC.
AUDREY & JANE, INC.
AVALON ACQUISITION CORP.
BEACH CONCERTS, INC.
BG PRESENTS, INC.
BILL GRAHAM ENTERPRISES, INC.
BILL GRAHAM MANAGEMENT, INC.
BILL GRAHAM PRESENTS, INC.
BOSTON PLAYHOUSE REALTY, INC.
BOYLSTON STREET THEATRE CORP.
BROADWAY CONCERTS, INC.
BROADWAY SERIES ASSOCIATES, INC.
BROADWAY SERIES MANAGEMENT GROUP, INC.
CAMARILLO AMPHITHEATER MANAGING
PARTNERS, INC.
Indenture signature page - 2
<PAGE>
CHEVA TOURING COMPANY
By: MAGICWORKS ENTERTAINMENT
INCORPORATED,
as a majority holder
CONCERTS, INC.
CONNECTICUT AMPHITHEATER DEVELOPMENT
CORPORATION
CONNECTICUT CONCERTS INCORPORATED
CONNECTICUT PERFORMING ARTS, INC.
CONN TICKETING COMPANY
By: NORTHEAST TICKETING COMPANY and
SOUTHEAST TICKETING COMPANY,
as general partners
CONTEMPORARY GROUP ACQUISITION CORP.
CONTEMPORARY GROUP, INC.
CONTEMPORARY MARKETING, INC.
CONTEMPORARY PRODUCTIONS INCORPORATED
CONTEMPORARY SPORTS INCORPORATED
COOLEY AND CONLON MANAGEMENT CO.
DEER CREEK AMPHITHEATER CONCERTS, INC.
DEER CREEK AMPHITHEATER CONCERTS, L.P.
Indenture signature page - 3
<PAGE>
By: DEER CREEK AMPHITHEATER
CONCERTS, INC.,
as general partner
DELSENER/SLATER ENTERPRISES, LTD.
DICESARE-ENGLER, INC.
DICESARE-ENGLER PROMOTIONS, INC.
DLC CORP.
DUMB DEAL, INC.
EAGLE EYE ENTERTAINMENT INC.
EAGLE EYE ENTERTAINMENT USA INC.
EMI ACQUISITION SUB, INC.
ENTERTAINMENT PERFORMING ARTS, INC.
EVENT MERCHANDISING INC.
EXIT 116 REVISITED, INC.
FALK ASSOCIATES MANAGEMENT ENTERPRISES,
INC.
FESTIVAL PRODUCTIONS, INC.
FILLMORE CORPORATION
Indenture signature page - 4
<PAGE>
FILLMORE FINGERS, INC.
GERSHWINS' FASCINATING RHYTHM
By: MAGICWORKS ENTERTAINMENT
INCORPORATED,
as a majority holder
GSAC PARTNERS
By: SM/PACE INC.,
as the parent corporation of the
general partner
HIGH COTTON, INC.
IN HOUSE TICKETS, INC.
IRVINE MEADOWS AMPHITHEATER
By: AVALON ACQUISITION CORP.,
as general partner
JEFKO TOURING COMPANY
By: MAGICWORKS ENTERTAINMENT
INCORPORATED,
as a majority holder
MAGICWORKS CONCERTS, INC.
MAGICWORKS ENTERTAINMENT INCORPORATED
MAGICWORKS ENTERTAINMENT
INTERNATIONAL, INC.
MAGICWORKS EXHIBITIONS, INC.
MAGICWORKS EXHIBITIONS JOINT VENTURE
Indenture signature page - 5
<PAGE>
By: MAGICWORKS ENTERTAINMENT
INCORPORATED,
as a majority holder
MAGICWORKS FASHION MANAGEMENT, INC.
MAGICWORKS MERCHANDISING, INC.
MAGICWORKS SPORTS MANAGEMENT, INC.
MAGICWORKS THEATRICALS, INC.
MAGICWORKS TRANSPORTATION, INC.
MAGICWORKS WEST, INC.
MELODY TENT AND AMPHITHEATER, INC.
MURAT CENTER CONCERTS, INC.
MURAT CENTER CONCERTS, L.P.
By: MURAT CENTER CONCERTS, INC.,
as general partner
NEW AVALON, INC.
NOC, INC.
NORTHEAST TICKETING COMPANY
OAKDALE THEATER CONCERTS, INC.
OLD PCI, INC.
Indenture signature page - 6
<PAGE>
PACE AEP ACQUISITION, INC.
PACE AMPHITHEATER MANAGEMENT, INC.
PACE AMPHITHEATERS, INC.
PACE BAYOU PLACE, INC.
PACE COMMUNICATIONS, INC.
PACE CONCERTS, LTD.
By: PACE CONCERTS GP, INC.,
as general partner
PACE CONCERTS GP, INC.
PACE ENTERTAINMENT CORPORATION
PACE ENTERTAINMENT GROUP, LTD.
By: PACE ENTERTAINMENT GP CORP.,
as general partner
PACE ENTERTAINMENT GP CORP.
PACE MILTON KEYNES, INC.
PACE MOTOR SPORTS, INC.
PACE MUSIC GROUP, INC.
PACE PRODUCTIONS, INC.
PACE THEATRICAL GROUP, INC.
Indenture signature page - 7
<PAGE>
PACE TOURING, INC.
PACE U.K. HOLDING CORPORATION
PAVILION PARTNERS
By: SM/PACE, INC.,
as managing partner
PEC, INC.
PERFORMING ARTS MANAGEMENT OF NORTH
MIAMI, INC.
POLARIS AMPHITHEATER CONCERTS, INC.
PTG-FLORIDA, INC.
QN CORP.
RUGRATS AMERICAN TOUR, LTD.
By: PACE VARIETY ENTERTAINMENT, INC.,
as general partner
SFX ACQUISITION CORP.
SFX BROADCASTING OF THE MIDWEST, INC.
SFX CONCERTS, INC.
SFX DELAWARE, INC.
SFX RADIO NETWORK, INC.
SFX SPORTS GROUP, INC.
Indenture signature page - 8
<PAGE>
SFX TOURING, INC.
SHELLI MEADOWS, INC.
SHORELINE AMPHITHEATRE, LTD.
SHORELINE AMPHITHEATRE PARTNERS
By: SHORELINE AMPHITHEATRE, LTD.,
as general partner
SM/PACE, INC.
SOUTHEAST TICKETING COMPANY
SOUTHERN PROMOTIONS, INC.
STEP ENTERTAINMENT SERVICES INC.
SUNSHINE CONCERTS, L.L.C.
By: SFX BROADCASTING OF THE MIDWEST,
INC.,
as the sole member
SUNSHINE DESIGNS, INC.
SUNSHINE DESIGNS, L.P.
By: SUNSHINE DESIGNS, INC.,
as general partner
SUNTEX ACQUISITION, INC.
SUNTEX ACQUISITION, L.P.
By: SUNTEX ACQUISITION, INC.,
as general partner
Indenture signature page - 9
<PAGE>
TAP PRODUCTIONS, INC.
TBA MEDIA, INC.
THE ALBUM NETWORK, INC.
THE GIN GAME TOURING COMPANY
By: MAGICWORKS ENTERTAINMENT
INCORPORATED,
as a majority holder
INTERNATIONAL MUSIC (CANADA) INC.
THE WEDDING TOUR COMPANY
TICKET SERVICE, INC.
CONCERT PRODUCTIONS (UK) LIMITED
INTERNATIONAL MUSIC (USA) INC.
INTERNATIONAL MUSIC LTD.
INTERNATIONAL MUSIC TOUR I LTD.
INTERNATIONAL MUSIC TOUR II LTD.
INTERNATIONAL MUSIC TOUR I (USA) INC.
INTERNATIONAL MUSIC TOUR II (USA) INC.
TOURING ARTISTS GROUP, INC. (FL)
Indenture signature page - 10
<PAGE>
TOURING PRODUCTIONS, INC.
TREMONT STREET THEATRE CORPORATION II,
INC.
TUNEFUL COMPANY, INC.
WARRENTON STREET THEATRE CORP.
WEST COAST AMPHITHEATER CORP.
WESTERN AMPHITHEATER PARTNERS
By: PAVILION PARTNERS,
as general partner and SM/PACE,
INC., as general partner of
PAVILION PARTNERS
WOLFGANG RECORDS
By: /s/ Howard J. Tytel
Name: Howard J. Tytel
Title: Executive Vice President
AMERICAN BROADWAY, INC.
CONCERT PRODUCTIONS INTERNATIONAL B.V.
CONNECTICUT PERFORMING ARTS PARTNERS
By: CONNECTICUT AMPHITHEATER
DEVELOPMENT CORPORATION and
NOC, INC.,
as general partners
Indenture signature page - 11
<PAGE>
FINANCIAL ADVISORY MANAGEMENT
ENTERPRISES, INC.
IRVING PLAZA CONCERTS, INC.
MAGICWORKS ENTERTAINMENT ASIA LIMITED
MARCO ENTERTAINMENT, INC.
PACE U.K.
PACE VARIETY ENTERTAINMENT, INC.
TOURING ARTISTS GROUP, INC. (OH)
By: /s/ Howard J. Tytel
------------------------------------
Name: Howard J. Tytel
Title: Authorized Agent
THE CHASE MANHATTAN BANK
By: /s/ Francine Springer
------------------------------------
Name: Francine Springer
Title: Assistant Vice President
Indenture signature page - 12
<PAGE>
EXHIBIT A1
(Face of Note)
[THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN
THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF
THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY
CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY
BE REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE
MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE
INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR
CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL
NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN
CONSENT OF THE COMPANY.](1)
[THE NOTE (OR ITS PREDECESSOR) EVIDENCED HEREBY HAS NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT") OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF,
THE HOLDER: REPRESENTS THAT (1) IT IS (A) A "QUALIFIED INSTITUTIONAL BUYER" (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) NOT A U.S. PERSON AND IS
ACQUIRING THE NOTE EVIDENCED HEREBY IN AN OFFSHORE TRANSACTION; (2) AGREES THAT
IT WILL NOT RESELL OR OTHERWISE TRANSFER THE NOTE EVIDENCED HEREBY EXCEPT TO
(A) THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) A QUALIFIED INSTITUTIONAL BUYER
IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) AN INSTITUTIONAL
ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE CHASE
MANHATTAN BANK, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), A SIGNED
LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
RESTRICTIONS ON TRANSFER OF THE NOTE EVIDENCED HEREBY (THE FORM OF WHICH LETTER
CAN BE OBTAINED FROM SUCH TRUSTEE OR A SUCCESSOR TRUSTEE, AS APPLICABLE), (D)
OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT,
(E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT (IF AVAILABLE) OR IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR (F) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT, AND, IN EACH CASE, IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OR ANY OTHER
APPLICABLE JURISDICTION; AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO
WHOM THE NOTE EVIDENCED HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE
EFFECT OF THIS LEGEND. IF THE PROPOSED TRANSFER IS PURSUANT TO CLAUSE (C), (D)
OR (E) ABOVE, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE CHASE
MANHATTAN BANK, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), SUCH
CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY
REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION
FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. AS USED HEREIN, THE
- ---------------------------
(1) This paragraph should be included only if Note is issued in global form.
A1-1
<PAGE>
TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE
MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.]2
CUSIP/CINS
-------------
9-1/8% Series A Senior Subordinated Notes due 2008
No. $
-------- -----------
SFX ENTERTAINMENT, INC.
promises to pay to or registered
----------------------------------------------
assigns, the principal sum of Dollars
------------------------------------------
on , 2008.
---------------
Interest Payment Dates: , and .
------------- ------------
Record Dates: , and .
-------------- -------------------
DATED: , 1998
SFX ENTERTAINMENT, INC.
BY:
----------------------------
Name:
Title:
BY:
----------------------------
Name:
Title:
This is one of the Global
Notes referred to in the
within-mentioned Indenture:
The Chase Manhattan Bank,
as Trustee
By:
--------------------------------
- ---------------------------
2 This paragraph should be included only if applicable pursuant to terms of the
Indenture.
A1-2
<PAGE>
(Reverse face of Note)
9-1/8% Series A Senior Subordinated Notes due 2008
Capitalized terms used herein shall have the meanings
assigned to them in the Indenture referred to below unless otherwise indicated.
1. INTEREST. SFX Entertainment, a Delaware corporation (the
"Company"), promises to pay interest on the principal amount of this Note at
9-1/8% per annum from November 25, 1998 until maturity and shall pay the
Liquidated Damages payable pursuant to Section 5 of the Registration Rights
Agreement referred to below. The Company will pay interest and Liquidated
Damages semi-annually on June 1 and December 1 of each year, or if any such day
is not a Business Day, on the next succeeding Business Day (each an "Interest
Payment Date"). Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
issuance; provided that if there is no existing Default in the payment of
interest, and if this Note is authenticated between a record date referred to
on the face hereof and the next succeeding Interest Payment Date, interest
shall accrue from such next succeeding Interest Payment Date; provided,
further, that the first Interest Payment Date shall be June 1, 1999. The
Company shall pay interest (including post-petition interest in any proceeding
under any Bankruptcy Law) on overdue principal and premium, if any, from time
to time on demand at a rate that is 1% per annum in excess of the rate then in
effect; it shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue installments of interest and
Liquidated Damages (without regard to any applicable grace periods) from time
to time on demand at the same rate to the extent lawful. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
2. METHOD OF PAYMENT. The Company will pay interest on the
Notes (except defaulted interest) and Liquidated Damages to the Persons who are
registered Holders of Notes at the close of business on the November 15 or May
15 next preceding the Interest Payment Date, even if such Notes are canceled
after such record date and on or before such Interest Payment Date, except as
provided in Section 2.12 of the Indenture with respect to defaulted interest.
The Notes will be payable as to principal, premium and Liquidated Damages, if
any, and interest at the office or agency of the Company maintained for such
purpose within or without the City and State of New York, or, at the option of
the Company, payment of interest and Liquidated Damages may be made by check
mailed to the Holders at their addresses set forth in the register of Holders,
and provided that payment by wire transfer of immediately available funds will
be required with respect to principal of and interest, premium and Liquidated
Damages on, all Global Notes and all other Notes the Holders of which shall
have provided wire transfer instructions to the Company or the Paying Agent.
Such payment shall be in such coin or currency of the United States of America
as at the time of payment is legal tender for payment of public and private
debts.
3. PAYING AGENT AND REGISTRAR. Initially, The Chase Manhattan
Bank, the Trustee under the Indenture, will act as Paying Agent and Registrar.
The Company may change any Paying Agent or Registrar without notice to any
Holder. The Company or any of its Subsidiaries may act in any such capacity.
4. INDENTURE. The Company issued the Notes under an Indenture
dated as of November 25, 1998 ("Indenture") between the Company and the
Trustee. The terms of the Notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (15 U.S. Code ss.ss. 77aaa-77bbbb). The Notes are subject to all such
terms, and Holders are referred to the Indenture and such Act for a statement
of such terms. To the
A1-3
<PAGE>
extent any provision of this Note conflicts with the express provisions of the
Indenture, the provisions of the indenture shall govern and be controlling. The
Notes are obligations of the Company limited to $200.0 million in aggregate
principal amount.
5. OPTIONAL REDEMPTION.
(a) Except as set forth in clause (b) of this Section 5, the
Company shall not have the option to redeem the Notes pursuant to this Section
5 prior to December 1, 2003. Thereafter, the Company shall have the option to
redeem the Notes, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 1 of the years indicated below:
YEAR PERCENTAGE
- ---- ----------
2003........................................................ 104.563%
2004........................................................ 103.042%
2005........................................................ 101.521%
2006 and thereafter......................................... 100.000%
(b) Notwithstanding the foregoing, prior to December 1, 2001,
the Company may, on any one or more occasions, redeem up to 35% of the
aggregate principal amount of Notes originally issued in the Offering at a
redemption price of 109.125% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the redemption date,
with the net cash proceeds of an offering of common equity of the Company
(other than Disqualified Stock); provided that (i) at least 65% of the
aggregate principal amount of the Notes originally issued in the Offering
remain outstanding immediately after the occurrence of each such redemption
(excluding Notes held by the Company and its Subsidiaries) and (ii) each such
redemption shall occur within 75 days after the date of the closing of any such
offering of common equity of the Company.
6. MANDATORY REDEMPTION.
Except as set forth in paragraph 7 below, the Company shall
not be required to make mandatory redemption or sinking fund payments with
respect to the Notes.
7. REPURCHASE AT OPTION OF HOLDER.
(a) If there is a Change of Control, the Company shall be
obligated to make an offer (a "Change of Control Offer") to each Holder of
Notes to repurchase all or any part (equal to $1,000 or an integral multiple
thereof) of such Holder's Notes at an offer price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase (the "Change of Control
Payment"). Within ten days following a Change of Control, the Company will mail
a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Notes on the date
specified in such notice, which date shall be no earlier than 30 days and no
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"), pursuant to the procedures required by the Indenture and
described in such notice.
(b) If the Company or a Subsidiary consummates any Asset
Sales, when the aggregate amount of Excess Proceeds exceeds $10.0 million, the
Company shall be required to make an
A1-4
<PAGE>
offer to all Holders of Notes and all holders of other pari passu Indebtedness
containing provisions similar to those set forth in the Indenture with respect
to offers to purchase or redeem such other pari passu Indebtedness with the
proceeds of sales of assets (an "Asset Sale Offer") to purchase the maximum
principal amount of Notes and such other pari passu Indebtedness that may be
purchased out of the Excess Proceeds at an offer price in cash in an amount
equal to 100% of the principal amount thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, thereon to the date of purchase, in accordance
with the procedures set forth in the Indenture and in such other pari passu
Indebtedness. To the extent that the aggregate amount of Notes and such other
pari passu Indebtedness tendered pursuant to an Asset Sale Offer is less than
the Excess Proceeds, the Company may use any remaining Excess Proceeds for any
purpose not otherwise prohibited by the Indenture. If the aggregate principal
amount of Notes and such other pari passu Indebtedness surrendered by Holders
thereof exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes and such other pari passu Indebtedness to be purchased on a pro rata
basis. Upon completion of an Asset Sale Offer, the amount of Excess Proceeds
shall be reset at zero.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed
at least 30 days but not more than 60 days before the redemption date to each
Holder whose Notes are to be redeemed at its registered address. Notes in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Notes held by a Holder are to be
redeemed. On and after the redemption date interest ceases to accrue on Notes
or portions thereof called for redemption.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in
registered form without coupons in denominations of $1,000 and integral
multiples of $1,000. The transfer of Notes may be registered and Notes may be
exchanged as provided in the Indenture. The Registrar and the Trustee may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and the Company may require a Holder to pay any taxes and
fees required by law or permitted by the Indenture. The Company need not
exchange or register the transfer of any Note or portion of a Note selected for
redemption, except for the unredeemed portion of any Note being redeemed in
part. Also, the Company need not exchange or register the transfer of any Notes
for a period of 15 days before a selection of Notes to be redeemed or during
the period between a record date and the corresponding Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note
may be treated as its owner for all purposes.
11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain
exceptions, the Indenture , the Subsidiary Guarantees or the Notes may be
amended or supplemented with the consent of the Holders of at least a majority
in principal amount of the then outstanding Notes voting as a single class
(including without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture, the Subsidiary Guarantees or
the Notes may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding Notes voting as a single class
(including consents obtained in connection with a tender offer or exchange
offer for Notes). Without the consent of any Holder of Notes, the Indenture,
the Subsidiary Guarantees or the Notes may be amended or supplemented to cure
any ambiguity, defect or inconsistency, to provide for uncertificated Notes in
addition to or in place of certificated Notes, to provide for the assumption of
the Company's or any Guarantor's obligations to Holders of the Notes in the
case of a merger or consolidation or sale of substantially all of the Company's
assets, to make any change that would provide any additional rights or benefits
to the Holders of the Notes or that does not adversely affect the legal rights
under the Indenture of any such Holder or to comply with the requirements of
the SEC in order to effect or maintain the qualification of the Indenture under
the Trust Indenture Act.
A1-5
<PAGE>
12. DEFAULTS AND REMEDIES. Events of Default include: (a) the
Company defaults for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the Notes, whether or not such
payment is prohibited by the provisions of Article 10 of the Indenture; (b) the
Company defaults in payment when due of the principal of or premium, if any, on
the Notes, whether or not such payment is prohibited by the provisions of
Article 10 of the Indenture; (c) the Company or any Restricted Subsidiary fails
to comply with any of the provisions of Section 4.15 or 5.01 of the Indenture;
(d) the Company or any Restricted Subsidiary fails for 30 days after written
notice by the Trustee or the Holders of at least 25% in principal amount of the
then outstanding Notes to comply with the provisions of Section 3.09, 4.07,
4.09 or 4.10 of the Indenture; (e) the Company or any Restricted Subsidiary
fails for 60 days after written notice by the Trustee or the Holders of at
least 25% in principal amount of the then outstanding Notes to comply with any
of its other agreements in the Indenture or the Notes; (f) the Company or any
Restricted Subsidiary defaults under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of
its Restricted Subsidiaries), whether such Indebtedness or guarantee now exists
or is created after the date of the Indenture, which default (i) is caused by a
failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (ii) results
in the acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$10.0 million or more; (g) the Company or any of its Restricted Subsidiaries
fails to pay final judgments aggregating in excess of $10.0 million, which
judgments are not paid, discharged or stayed for a period of 60 days; (h)
except as permitted by the Indenture, any Subsidiary Guarantee shall be held in
any judicial proceeding to be unenforceable or invalid or shall cease for any
reason to be in full force and effect or any Guarantor, or any Person acting on
behalf of any Guarantor, shall deny or disaffirm its obligations under its
Subsidiary Guarantee; (i) certain events of bankruptcy or insolvency with
respect to the Company or any of the Company's Restricted Subsidiaries that
constitutes a Significant Subsidiary or any group of Restricted Subsidiaries of
the Company that, taken together, would constitute a Significant Subsidiary. If
any Event of Default occurs and is continuing, the Trustee or the Holders of at
least 25% in principal amount of the then outstanding Notes may declare all the
Notes to be due and payable immediately. Notwithstanding the foregoing, in the
case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, any Restricted Subsidiary of the
Company that constitutes a Significant Subsidiary or any group of Restricted
Subsidiaries of the Company that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or
Event of Default (except a Default or Event of Default relating to the payment
of principal or interest) if it determines that withholding notice is in their
interest. In the case of any Event of Default occurring by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of the
Company with the intention of avoiding payment of the premium that the Company
would have had to pay if the Company then had elected to redeem the Notes
pursuant to Section 3.07 of the Indenture, an equivalent premium shall also
become and be immediately due and payable to the extent permitted by law upon
the acceleration of the Notes. If an Event of Default occurs prior to December
1, 2003 by reason of any willful action (or inaction) taken (or not taken) by
or on behalf of the Company with the intention of avoiding the prohibition on
redemption of the Notes prior to such date, then the premium specified in the
Indenture shall also become immediately due and payable to the extent permitted
by law upon the acceleration of the Notes. The Holders of a majority in
aggregate principal amount of the Notes then outstanding by notice to the
Trustee may on behalf of the Holders of all of the Notes waive any existing
A1-6
<PAGE>
Default or Event of Default and its consequences under the Indenture except a
continuing Default or Event of Default in the payment of interest on, or the
principal of, the Notes. The Company is required to deliver to the Trustee
annually a statement regarding compliance with the Indenture, and the Company
is required upon becoming aware of any Default or Event of Default, to deliver
to the Trustee a statement specifying such Default or Event of Default.
13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its
individual or any other capacity, may make loans to, accept deposits from, and
perform services for the Company or its Affiliates, and may otherwise deal with
the Company or its Affiliates, as if it were not the Trustee.
14. NO RECOURSE AGAINST OTHERS. A director, officer,
employee, incorporator or stockholder, of the Company, as such, shall not have
any liability for any obligations of the Company under the Notes or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder by accepting a Note waives and
releases all such liability. The waiver and release are part of the
consideration for the issuance of the Notes.
15. AUTHENTICATION. This Note shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating
agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the
name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN
ENT (= tenants by the entireties), JT TEN (= joint tenants with right of
survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (=
Uniform Gifts to Minors Act).
17. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES
AND RESTRICTED DEFINITIVE NOTES. In addition to the rights provided to Holders
of Notes under the Indenture, Holders of Restricted Global Notes and Restricted
Definitive Notes shall have all the rights set forth in the A/B Exchange
Registration Rights Agreement dated as of November 25, 1998, between the
Company and the parties named on the signature pages thereof (the "Registration
Rights Agreement").
18. CUSIP NUMBERS. Pursuant to a recommendation promulgated
by the Committee on Uniform Security Identification Procedures, the Company has
caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP
numbers in notices of redemption as a convenience to Holders. No representation
is made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Company will furnish to any Holder upon written request
and without charge a copy of the Indenture and/or the Registration Rights
Agreement. Requests may be made to:
SFX Entertainment, Inc.
650 Madison Avenue
New York, New York 10022
Attention: Howard J. Tytel, Esq.
A1-7
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
- -------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
--------------------------------------------------------
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
- -------------------------------------------------------------------------------
Date:
---------- Your Signature:
-----------------------------------
(Sign exactly as your name appears on the face of
this Note)
Tax Identification No:
----------------------------
SIGNATURE GUARANTEE:
---------------------------------
Signatures must be guaranteed by an "eligible
guarantor institution" meeting the requirements
of the Registrar, which requirements include
membership or participation in the Security
Transfer Agent Medallion Program ("STAMP") or
such other "signature guarantee program" as may
be determined by the Registrar in addition to, or
in substitution for, STAMP, all in accordance
with the Securities Exchange Act of 1934, as
mended.
A1-8
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the
Company pursuant to Section 4.10 or 4.15 of the Indenture, check the box below:
[ ] Section 4.10 [ ] Section 4.15
If you want to elect to have only part of the Note purchased
by the Company pursuant to Section 4.10 or Section 4.15 of the Indenture, state
the amount you elect to have purchased: $________
Date:
------------
Your Signature:
-----------------------------------
(Sign exactly as your name appears on the face of
this Note)
Tax Identification No:
----------------------------
SIGNATURE GUARANTEE:
---------------------------------
Signatures must be guaranteed by an "eligible
guarantor institution" meeting the requirements
of the Registrar, which requirements include
membership or participation in the Security
Transfer Agent Medallion Program ("STAMP") or
such other "signature guarantee program" as may
be determined by the Registrar in addition to, or
in substitution for, STAMP, all in accordance
with the Securities Exchange Act of 1934, as
amended.
A1-9
<PAGE>
SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE
The following exchanges of a part of this Global Note for an
interest in another Global Note or for a Definitive Note, or exchanges of a
part of another Global Note or Definitive Note for an interest in this Global
Note, have been made:
<TABLE>
<CAPTION>
Amount of Principal Amount of Signature of
decrease in Amount of increase in this Global Note authorized officer
Principal Amount of Principal Amount of following such of Trustee or Note
Date of Exchange this Global Note this Global Note decrease (or increase) Custodian
<S> <C> <C> <C> <C>
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</TABLE>
A1-10
<PAGE>
EXHIBIT A2
(Face of Note)
THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL
NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED
NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE
HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE
SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON.
THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE
INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE
BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY
CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY
BE REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE
MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE
INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR
CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL
NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN
CONSENT OF THE COMPANY.
THE NOTE (OR ITS PREDECESSOR) EVIDENCED HEREBY HAS NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT") OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF,
THE HOLDER: REPRESENTS THAT (1) IT IS (A) A "QUALIFIED INSTITUTIONAL BUYER" (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) NOT A U.S. PERSON AND IS
ACQUIRING THE NOTE EVIDENCED HEREBY IN AN OFFSHORE TRANSACTION; (2) AGREES THAT
IT WILL NOT RESELL OR OTHERWISE TRANSFER THE NOTE EVIDENCED HEREBY EXCEPT TO
(A) THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) A QUALIFIED INSTITUTIONAL BUYER
IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) AN INSTITUTIONAL
ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE CHASE
MANHATTAN BANK, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), A SIGNED
LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
RESTRICTIONS ON TRANSFER OF THE NOTE EVIDENCED HEREBY (THE FORM OF WHICH LETTER
CAN BE OBTAINED FROM SUCH TRUSTEE OR A SUCCESSOR TRUSTEE, AS APPLICABLE), (D)
OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT,
(E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT (IF AVAILABLE) OR IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR (F) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT, AND, IN EACH CASE, IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OR ANY OTHER
APPLICABLE JURISDICTION; AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO
WHOM THE NOTE EVIDENCED HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE
EFFECT OF THIS LEGEND. IF THE PROPOSED TRANSFER IS PURSUANT TO CLAUSE (C), (D)
OR (E) ABOVE, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE CHASE
MANHATTAN BANK, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), SUCH
CERTIFICATIONS, LEGAL OPINIONS OR OTHER
A2-1
<PAGE>
INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING
MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS
"OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS
GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
CUSIP/CINS
-----------
9-1/8% Series A Senior Subordinated Notes due 2008
No. $
------ ----------
SFX ENTERTAINMENT, INC.
promises to pay to or registered
---------------------------------------------
assigns, the principal sum of Dollars
------------------------------------------
on , 2008.
-----------------
Interest Payment Dates: , and .
------------- ------------
Record Dates: , and .
------------- ---------------------
DATED: , 1998
SFX ENTERTAINMENT, INC.
BY:
-------------------------------
Name:
Title:
BY:
-------------------------------
Name:
Title:
This is one of the Global
Notes referred to in the
within-mentioned Indenture:
The Chase Manhattan Bank,
as Trustee
By:
-------------------------------
A2-2
<PAGE>
(Reverse face of Note)
9-1/8% Series A Senior Subordinated Notes due 2008
Capitalized terms used herein shall have the meanings
assigned to them in the Indenture referred to below unless otherwise indicated.
1. INTEREST. SFX Entertainment, Inc., a Delaware corporation
(the "Company"), promises to pay interest on the principal amount of this Note
at 9-1/8% per annum from November 25, 1998 until maturity and shall pay the
Liquidated Damages payable pursuant to Section 5 of the Registration Rights
Agreement referred to below. The Company will pay interest and Liquidated
Damages semi-annually on June 1 and December 1 of each year, or if any such day
is not a Business Day, on the next succeeding Business Day (each an "Interest
Payment Date"). Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
issuance; provided that if there is no existing Default in the payment of
interest, and if this Note is authenticated between a record date referred to
on the face hereof and the next succeeding Interest Payment Date, interest
shall accrue from such next succeeding Interest Payment Date; provided,
further, that the first Interest Payment Date shall be June 1, 1999. The
Company shall pay interest (including post-petition interest in any proceeding
under any Bankruptcy Law) on overdue principal and premium, if any, from time
to time on demand at a rate that is 1% per annum in excess of the rate then in
effect; it shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue installments of interest and
Liquidated Damages (without regard to any applicable grace periods) from time
to time on demand at the same rate to the extent lawful. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
Until this Regulation S Temporary Global Note is exchanged
for one or more Regulation S Permanent Global Notes, the Holder hereof shall
not be entitled to receive payments of interest hereon; until so exchanged in
full, this Regulation S Temporary Global Note shall in all other respects be
entitled to the same benefits as other Notes under the Indenture.
2. METHOD OF PAYMENT. The Company will pay interest on the
Notes (except defaulted interest) and Liquidated Damages to the Persons who are
registered Holders of Notes at the close of business on the November 15 or May
15 next preceding the Interest Payment Date, even if such Notes are canceled
after such record date and on or before such Interest Payment Date, except as
provided in Section 2.12 of the Indenture with respect to defaulted interest.
The Notes will be payable as to principal, premium, interest and Liquidated
Damages at the office or agency of the Company maintained for such purpose
within or without the City and State of New York, or, at the option of the
Company, payment of interest and Liquidated Damages may be made by check mailed
to the Holders at their addresses set forth in the register of Holders, and
provided that payment by wire transfer of funds will be required with respect
to principal of and interest, premium and Liquidated Damages on, all Global
Notes and all other Notes the Holders of which shall have provided wire
transfer instructions to the Company or the Paying Agent. Such payment shall be
in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, The Chase Manhattan
Bank, the Trustee under the Indenture, will act as Paying Agent and Registrar.
The Company may change any Paying Agent or Registrar without notice to any
Holder. The Company or any of its Subsidiaries may act in any such capacity.
A2-3
<PAGE>
4. INDENTURE. The Company issued the Notes under an Indenture
dated as of November 25, 1998 ("Indenture") between the Company and the
Trustee. The terms of the Notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (15 U.S. Code ss.ss. 77aaa-77bbbb). The Notes are subject to all such
terms, and Holders are referred to the Indenture and such Act for a statement
of such terms. The Notes are obligations of the Company limited to $200.0
million in aggregate principal amount.
5. OPTIONAL REDEMPTION.
(a) Except as set forth in clause (b) of this Section 5, the
Company shall not have the option to redeem the Notes pursuant to this Section
5 prior to December 1, 2003. Thereafter, the Company shall have the option to
redeem the Notes, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 1 of the years indicated below:
YEAR PERCENTAGE
- ---- ----------
2003........................................................ 104.563%
2004........................................................ 103.042%
2005........................................................ 101.521%
2006 and thereafter......................................... 100.000%
(b) Notwithstanding the foregoing, prior to December 1, 2001,
the Company may, on any one or more occasions, redeem up to 35% of the
aggregate principal amount of Notes originally issued in the Offering at a
redemption price of 109.125% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the redemption date,
with the net cash proceeds of an offering of common equity of the Company
(other than Disqualified Stock); provided that (i) at least 65% of the
aggregate principal amount of the Notes originally issued in the Offering
remain outstanding immediately after the occurrence of each such redemption
(excluding Notes held by the Company and its Subsidiaries) and (ii) each such
redemption shall occur within 75 days after the date of the closing of any such
offering of common equity of the Company.
6. MANDATORY REDEMPTION.
Except as set forth in paragraph 7 below, the Company shall
not be required to make mandatory redemption payments with respect to the
Notes.
7. REPURCHASE AT OPTION OF HOLDER.
(a) If there is a Change of Control, the Company shall be
obligated to make an offer (a "Change of Control Offer") to each Holder of
Notes to repurchase all or any part (equal to $1,000 or an integral multiple
thereof) of such Holder's Notes at an offer price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase (the "Change of Control
Payment"). Within ten days following a Change of Control, the Company will mail
a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Notes on the date
specified in such notice, which date shall be no earlier than 30 days and no
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"), pursuant to the procedures required by the Indenture and
described in such notice.
A2-4
<PAGE>
(b) If the Company or a Subsidiary consummates any Asset
Sales, when the aggregate amount of Excess Proceeds exceeds $10.0 million, the
Company shall be required to make an offer to all Holders of Notes and all
holders of other pari passu Indebtedness containing provisions similar to those
set forth in the Indenture with respect to offers to purchase or redeem such
other pari passu Indebtedness with the proceeds of sales of assets (an "Asset
Sale Offer") to purchase the maximum principal amount of Notes and such other
pari passu Indebtedness that may be purchased out of the Excess Proceeds at an
offer price in cash in an amount equal to 100% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the
date of purchase, in accordance with the procedures set forth in the Indenture
and in such other pari passu Indebtedness. To the extent that the aggregate
amount of Notes and such other pari passu Indebtedness tendered pursuant to an
Asset Sale Offer is less than the Excess Proceeds, the Company may use any
remaining Excess Proceeds for any purpose not otherwise prohibited by the
Indenture. If the aggregate principal amount of Notes and such other pari passu
Indebtedness surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Notes and such other pari passu
Indebtedness to be purchased on a pro rata basis. Upon completion of an Asset
Sale Offer, the amount of Excess Proceeds shall be reset at zero.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed
at least 30 days but not more than 60 days before the redemption date to each
Holder whose Notes are to be redeemed at its registered address. Notes in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Notes held by a Holder are to be
redeemed. On and after the redemption date interest ceases to accrue on Notes
or portions thereof called for redemption.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in
registered form without coupons in denominations of $1,000 and integral
multiples of $1,000. The transfer of Notes may be registered and Notes may be
exchanged as provided in the Indenture. The Registrar and the Trustee may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and the Company may require a Holder to pay any taxes and
fees required by law or permitted by the Indenture. The Company need not
exchange or register the transfer of any Note or portion of a Note selected for
redemption, except for the unredeemed portion of any Note being redeemed in
part. Also, it need not exchange or register the transfer of any Notes for a
period of 15 days before a selection of Notes to be redeemed or during the
period between a record date and the corresponding Interest Payment Date.
This Regulation S Temporary Global Note is exchangeable in
whole or in part for one or more Global Notes only (i) on or after the
termination of the 40-day restricted period (as defined in Regulation S) and
(ii) upon presentation of certificates (accompanied by an Opinion of Counsel,
if applicable) required by Article 2 of the Indenture. Upon exchange of this
Regulation S Temporary Global Note for one or more Global Notes, the Trustee
shall cancel this Regulation S Temporary Global Note.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note
may be treated as its owner for all purposes.
11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain
exceptions, the Indenture , the Subsidiary Guarantees or the Notes may be
amended or supplemented with the consent of the Holders of at least a majority
in principal amount of the then outstanding Notes voting as a single class
(including without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture, the Subsidiary Guarantees or
the Notes may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding Notes voting as a single class
(including consents obtained in connection with a tender offer or exchange
offer for Notes). Without the consent of any Holder of Notes,
A2-5
<PAGE>
the Indenture, the Subsidiary Guarantees or the Notes may be amended or
supplemented to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Company's or any Guarantor's obligations to
Holders of the Notes in the case of a merger or consolidation or sale of
substantially all of the Company's assets, to make any change that would
provide any additional rights or benefits to the Holders of the Notes or that
does not adversely affect the legal rights under the Indenture of any such
Holder or to comply with the requirements of the SEC in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
12. DEFAULTS AND REMEDIES. Events of Default include: (a) the
Company defaults for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the Notes, whether or not such
payment is prohibited by the provisions of Article 10 of the Indenture; (b) the
Company defaults in payment when due of the principal of or premium, if any, on
the Notes, whether or not such payment is prohibited by the provisions of
Article 10 of the Indenture; (c) the Company or any Restricted Subsidiary fails
to comply with any of the provisions of Section 4.15 or 5.01 of the Indenture;
(d) the Company or any Restricted Subsidiary fails for 30 days after written
notice by the Trustee or the Holders of at least 25% in principal amount of the
then outstanding Notes to comply with the provisions of Section 3.09, 4.07,
4.09 or 4.10 of the Indenture; (e) the Company or any Restricted Subsidiary
fails for 60 days after written notice by the Trustee or the Holders of at
least 25% in principal amount of the then outstanding Notes to comply with any
of its other agreements in the Indenture or the Notes; (f) the Company or any
Restricted Subsidiary defaults under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of
its Restricted Subsidiaries), whether such Indebtedness or guarantee now exists
or is created after the date of the Indenture, which default (i) is caused by a
failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (ii) results
in the acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$10.0 million or more; (g) the Company or any of its Restricted Subsidiaries
fails to pay final judgments aggregating in excess of $10.0 million, which
judgments are not paid, discharged or stayed for a period of 60 days; (h)
except as permitted by the Indenture, any Subsidiary Guarantee shall be held in
any judicial proceeding to be unenforceable or invalid or shall cease for any
reason to be in full force and effect or any Guarantor, or any Person acting on
behalf of any Guarantor, shall deny or disaffirm its obligations under its
Subsidiary Guarantee; (i) certain events of bankruptcy or insolvency with
respect to the Company or any of the Company's Restricted Subsidiaries that
constitutes a Significant Subsidiary or any group of Restricted Subsidiaries of
the Company that, taken together, would constitute a Significant Subsidiary. If
any Event of Default occurs and is continuing, the Trustee or the Holders of at
least 25% in principal amount of the then outstanding Notes may declare all the
Notes to be due and payable immediately. Notwithstanding the foregoing, in the
case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, any Restricted Subsidiary of the
Company that constitutes a Significant Subsidiary or any group of Restricted
Subsidiaries of the Company that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or
Event of Default (except a Default or Event of Default relating to the payment
of principal or interest) if it determines that withholding notice is in their
interest. In the case of any Event of Default occurring by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of the
A2-6
<PAGE>
Company with the intention of avoiding payment of the premium that the Company
would have had to pay if the Company then had elected to redeem the Notes
pursuant to Section 3.07 of the Indenture, an equivalent premium shall also
become and be immediately due and payable to the extent permitted by law upon
the acceleration of the Notes. If an Event of Default occurs prior to December
1, 2003 by reason of any willful action (or inaction) taken (or not taken) by
or on behalf of the Company with the intention of avoiding the prohibition on
redemption of the Notes prior to such date, then the premium specified in the
Indenture shall also become immediately due and payable to the extent permitted
by law upon the acceleration of the Notes. The Holders of a majority in
aggregate principal amount of the Notes then outstanding by notice to the
Trustee may on behalf of the Holders of all of the Notes waive any existing
Default or Event of Default and its consequences under the Indenture except a
continuing Default or Event of Default in the payment of interest on, or the
principal of, the Notes. The Company is required to deliver to the Trustee
annually a statement regarding compliance with the Indenture, and the Company
is required upon becoming aware of any Default or Event of Default, to deliver
to the Trustee a statement specifying such Default or Event of Default.
13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its
individual or any other capacity, may make loans to, accept deposits from, and
perform services for the Company or its Affiliates, and may otherwise deal with
the Company or its Affiliates, as if it were not the Trustee.
14. NO RECOURSE AGAINST OTHERS. A director, officer,
employee, incorporator or stockholder, of the Company or any of the Guarantors,
as such, shall not have any liability for any obligations of the Company or
such Guarantor under the Notes, the Note Guarantees or the Indenture or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the
issuance of the Notes.
15. AUTHENTICATION. This Note shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating
agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the
name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN
ENT (= tenants by the entireties), JT TEN (= joint tenants with right of
survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (=
Uniform Gifts to Minors Act).
17. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES
AND RESTRICTED DEFINITIVE Notes. In addition to the rights provided to Holders
of Notes under the Indenture, Holders of Restricted Global Notes and Restricted
Definitive Notes shall have all the rights set forth in the A/B Exchange
Registration Rights Agreement dated as of November 25, 1998, between the
Company and the parties named on the signature pages thereof (the "Registration
Rights Agreement").
18. CUSIP NUMBERS. Pursuant to a recommendation promulgated
by the Committee on Uniform Security Identification Procedures, the Company has
caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP
numbers in notices of redemption as a convenience to Holders. No representation
is made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Company will furnish to any Holder upon written request
and without charge a copy of the Indenture and/or the Registration Rights
Agreement. Requests may be made to:
A2-7
<PAGE>
SFX Entertainment, Inc.
650 Madison Avenue
New York, New York 10022
Attention: Howard J. Tytel, Esq.
A2-8
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
- -------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
--------------------------------------------------------
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
- -------------------------------------------------------------------------------
Date:
--------
Your Signature:
-----------------------------------
(Sign exactly as your name appears on the face of
this Note)
Tax Identification No:
SIGNATURE GUARANTEE:
---------------------------------
Signatures must be guaranteed by an "eligible
guarantor institution" meeting the requirements
of the Registrar, which requirements include
membership or participation in the Security
Transfer Agent Medallion Program ("STAMP") or
such other "signature guarantee program" as may
be determined by the Registrar in addition to, or
in substitution for, STAMP, all in accordance
with the Securities Exchange Act of 1934, as
amended.
A2-9
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the
Company pursuant to Section 4.10 or 4.15 of the Indenture, check the
appropriate box below:
[ ] Section 4.10 [ ] Section 4.15
If you want to elect to have only part of the Note purchased
by the Company pursuant to Section 4.10 or Section 4.15 of the Indenture, state
the amount you elect to have purchased: $___________
- -------------------------------------------------------------------------------
Date:
--------
Your Signature:
(Sign exactly as your name appears on the face of
this Note)
Tax Identification No:
SIGNATURE GUARANTEE:
---------------------------------
Signatures must be guaranteed by an "eligible
guarantor institution" meeting the requirements
of the Registrar, which requirements include
membership or participation in the Security
Transfer Agent Medallion Program ("STAMP") or
such other "signature guarantee program" as may
be determined by the Registrar in addition to, or
in substitution for, STAMP, all in accordance
with the Securities Exchange Act of 1934, as
amended.
A2-10
<PAGE>
SCHEDULE OF EXCHANGES OF REGULATION S TEMPORARY GLOBAL NOTE
The following exchanges of a part of this Regulation S
Temporary Global Note for an interest in another Global Note, or of other
Restricted Global Notes for an interest in this Regulation S Temporary Global
Note, have been made:
<TABLE>
<CAPTION>
Amount of Principal Amount Signature of
decrease in Amount of increase in of this Global Note authorized officer
Principal Amount of Principal Amount of following such of Trustee or Note
Date of Exchange this Global Note this Global Note decrease (or increase) Custodian
<S> <C> <C> <C> <C>
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A2-11
<PAGE>
===============================================================================
EXECUTION COPY
9-1/8% SENIOR SUBORDINATED NOTES DUE 2008
REGISTRATION RIGHTS AGREEMENT
Dated as of November 25, 1998
by and among
SFX ENTERTAINMENT, INC.,
AS ISSUER,
THE GUARANTORS
and
MORGAN STANLEY & CO. INCORPORATED
LEHMAN BROTHERS INC.,
BANCBOSTON ROBERTSON STEPHENS INC., AND
BNY CAPITAL MARKETS, INC.
===============================================================================
<PAGE>
This Registration Rights Agreement (this "AGREEMENT") is made and
entered into as of November 25, 1998, by and among SFX Entertainment, Inc., a
Delaware corporation (the "COMPANY"), the Guarantors (as defined in the
Purchase Agreement (as defined below)), and Morgan Stanley & Co. Incorporated,
Lehman Brothers Inc., BancBoston Robertson Stephens Inc., and BNY Capital
Markets, Inc. (each an "INITIAL PURCHASER" and, collectively, the "INITIAL
PURCHASERS"), each of whom has agreed to purchase the Company's 9-1/8% Senior
Subordinated Notes due 2008 (the "SERIES A NOTES") pursuant to the Purchase
Agreement, dated November 19, 1998 (the "PURCHASE AGREEMENT").
This Agreement is made pursuant to the Purchase Agreement, by and
among the Company, the Guarantors and the Initial Purchasers. In order to
induce the Initial Purchasers to purchase the Series A Notes (as defined
below), the Company has agreed to provide the registration rights set forth in
this Agreement. The execution and delivery of this Agreement is a condition to
the obligations of the Initial Purchasers set forth in Section 8 of the
Purchase Agreement. Capitalized terms used herein and not otherwise defined
shall have the meaning assigned to them in the Indenture, dated November 25,
1998, between the Company and The Chase Manhattan Bank, as Trustee, relating to
the Series A Notes and the Series B Notes (the "INDENTURE").
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have
the following meanings:
Act: The Securities Act of 1933, as amended.
Affiliate: As defined in Rule 144 of the Act.
Broker-Dealer: Any broker or dealer registered under the Exchange Act.
Certificated Securities: Definitive Notes, as defined in the
Indenture.
Closing Date: The date hereof.
Commission: The Securities and Exchange Commission.
Consummate: An Exchange Offer shall be deemed "Consummated" for
purposes of this Agreement upon the occurrence of (a) the filing and
effectiveness under the Act of the Exchange Offer Registration Statement
relating to the Series B Notes to be issued in the Exchange Offer, (b) the
maintenance of such Exchange Offer Registration Statement continuously
effective and the keeping of the Exchange Offer open for a period not less than
the period required pursuant to Section 3(b) hereof and (c) the delivery by the
Company to the Registrar under the Indenture of Series B Notes in the same
aggregate principal amount as the aggregate principal amount of Series A Notes
tendered by Holders thereof pursuant to the Exchange Offer.
Effectiveness Deadline: As defined in Section 3(a) and 4(a) hereof.
Exchange Act: The Securities Exchange Act of 1934, as amended.
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Exchange Offer: The exchange and issuance by the Company of a
principal amount of Series B Notes (which shall be registered pursuant to the
Exchange Offer Registration Statement) equal to the outstanding principal
amount of Series A Notes that are tendered by such Holders in connection with
such exchange and issuance.
Exchange Offer Registration Statement: The Registration Statement
relating to the Exchange Offer, including the related Prospectus.
Exempt Resales: The transactions in which the Initial Purchasers
propose to sell the Series A Notes to certain "qualified institutional buyers,"
as such term is defined in Rule 144A under the Act and pursuant to Regulation S
under the Act.
Filing Deadline: As defined in Sections 3(a) and 4(a) hereof.
Guarantors: The Company's subsidiaries as listed on Schedule 1 of the
Purchase Agreement and listed as Guarantors.
Holders: As defined in Section 2 hereof.
Indemnified Holder: As defined in Section 8(a) hereof.
Old Notes: The Company's 9-1/8% Senior Subordinated Notes due February
1, 2008.
Prospectus: The prospectus included in a Registration Statement at the
time such Registration Statement is declared effective, as amended or
supplemented by any prospectus supplement and by all other amendments thereto,
including post-effective amendments, and all material incorporated by reference
into such Prospectus.
Recommencement Date: As defined in Section 6(d) hereof.
Registration Default: As defined in Section 5 hereof.
Registration Statement: Any registration statement of the Company and
the Guarantors relating to (a) an offering of Series B Notes pursuant to an
Exchange Offer or (b) the registration for resale of Transfer Restricted
Securities pursuant to the Shelf Registration Statement, in each case, (i) that
is filed pursuant to the provisions of this Agreement and (ii) including the
Prospectus included therein, all amendments and supplements thereto (including
post-effective amendments) and all exhibits and material incorporated by
reference therein.
Regulation S: Regulation S promulgated under the Act.
Restricted Broker-Dealer: Any Broker-Dealer that holds Series B Notes
that were acquired in the Exchange Offer in exchange for Series A Notes that
such Broker-Dealer acquired for its own account as a result of market making
activities or other trading activities (other than Series A Notes acquired
directly from the Company or any of its affiliates).
Rule 144: Rule 144 promulgated under the Act.
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Series A Notes: The Company's 9-1/8% Senior Subordinated Notes due
2008 to be issued pursuant to the Indenture: (i) in the Exchange Offer or (ii)
as contemplated by Section 4 hereof.
Series B Notes: The Company's 9-1/8% Senior Subordinated Notes due
2008 to be issued pursuant to the Indenture: (i) in the Exchange Offer or (ii)
as contemplated by Section 4 hereof.
Shelf Registration Statement: As defined in Section 4 hereof.
Suspension Notice: As defined in Section 6(d) hereof.
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb)
as in effect on the date of the Indenture.
Transfer Restricted Securities: Each Note, until the earliest to occur
of (a) the date on which such Note is exchanged in the Exchange Offer and
entitled to be resold to the public by the Holder thereof without complying
with the prospectus delivery requirements of the Act, (b) the date on which
such Note has been disposed of in accordance with a Shelf Registration
Statement, (c) the date on which such Note is disposed of by a Broker-Dealer
pursuant to the "Plan of Distribution" contemplated by the Exchange Offer
Registration Statement (including delivery of the Prospectus contained therein)
or (d) the date on which such Note is distributed to the public pursuant to
Rule 144 under the Act.
SECTION 2. HOLDERS
A Person is deemed to be a holder of Transfer Restricted Securities
(each, a "HOLDER") whenever such Person owns Transfer Restricted Securities.
SECTION 3. REGISTERED EXCHANGE OFFER
(a) Unless the Exchange Offer shall not be
permitted by applicable federal law (after
the procedures set forth in Section 6(a)(i)
below have been complied with), the Company
and the Guarantors shall (i) cause the
Exchange Offer Registration Statement to be
filed with the Commission as soon as
practicable after the Closing Date (the
"EXCHANGE OFFER FILING DATE"), but in no
event later than 100 days after the Closing
Date (such 100th day being the "FILING
DEADLINE"), (ii) use its best efforts to
cause such Exchange Offer Registration
Statement to become effective at the
earliest possible time, but in no event
later than 145 days after the Closing Date
(such 145th day being the "EFFECTIVENESS
DEADLINE"), (iii) in connection with the
foregoing, (A) file all pre-effective
amendments to such Exchange Offer
Registration Statement as may be necessary
in order to cause it to become effective,
(B) file, if applicable, a post-effective
amendment to such Exchange Offer
Registration Statement pursuant to Rule
430A under the Act and (C) cause all
necessary filings,
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if any, in connection with the registration
and qualification of the Series B Notes to
be made under the Blue Sky laws of such
jurisdictions as are necessary to permit
Consummation of the Exchange Offer, and
(iv) upon the effectiveness of such
Exchange Offer Registration Statement,
commence and Consummate the Exchange Offer.
The Exchange Offer shall be on the
appropriate form permitting registration of
the Series B Notes to be offered in
exchange for the Series A Notes that are
Transfer Restricted Securities and to
permit resales of Series B Notes by
Broker-Dealers that tendered into the
Exchange Offer for Series A Notes that such
Broker-Dealer acquired for its own account
as a result of market making activities or
other trading activities (other than Series
A Notes acquired directly from the Company
or any of its Affiliates) as contemplated
by Section 3(c) below.
(b) The Company and the Guarantors shall use
their respective best efforts to cause the
Exchange Offer Registration Statement to be
effective continuously, and shall keep the
Exchange Offer open for a period of not
less than the minimum period required under
applicable federal and state securities
laws to Consummate the Exchange Offer;
provided, however, that in no event shall
such period be less than 20 Business Days.
The Company and the Guarantors shall cause
the Exchange Offer to comply with all
applicable federal and state securities
laws. No securities other than the Series B
Notes shall be included in the Exchange
Offer Registration Statement. The Company
and the Guarantors shall use their
respective reasonable best efforts to cause
the Exchange Offer to be Consummated on the
earliest practicable date after the
Exchange Offer Registration Statement has
become effective, but in no event later
than 30 Business Days thereafter.
(c) The Company shall include a "Plan of
Distribution" section in the Prospectus
contained in the Exchange Offer
Registration Statement and indicate therein
that any Broker-Dealer who holds Transfer
Restricted Securities that were acquired
for the account of such Broker-Dealer as a
result of market-making activities or other
trading activities (other than Transfer
Restricted Securities acquired directly
from the Company or any Affiliate of the
Company), may exchange such Transfer
Restricted Securities pursuant to the
Exchange Offer;
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<PAGE>
however, such Broker-Dealer may be deemed
to be an "underwriter" within the meaning
of the Act and must, therefore, deliver a
prospectus meeting the requirements of the
Act in connection with its initial sale of
any Series B Notes received by such
Broker-Dealer in the Exchange Offer and
that the Prospectus contained in the
Exchange Offer Registration Statement may
be used to satisfy such prospectus delivery
requirement. Such "Plan of Distribution"
section shall also contain all other
information with respect to such sales by
such Broker-Dealers that the Commission may
require in order to permit such sales
pursuant thereto, but such "Plan of
Distribution" shall not name any such
Broker-Dealer or disclose the amount of
Transfer Restricted Securities held by any
such Broker-Dealer, except to the extent
required by the Commission as a result of a
change in policy, rules or regulations
after the date of this Agreement. See the
Shearman & Sterling no-action letter
(available July 2, 1993).
To the extent necessary to ensure that the Exchange Offer Registration
Statement is available for sales of Series B Notes by Broker-Dealers, the
Company and the Guarantors agree to use their respective best efforts to keep
the Exchange Offer Registration Statement continuously effective, supplemented
and amended as required by the provisions of Section 6(c) hereof and in
conformity with the requirements of this Agreement, the Act and the policies,
rules and regulations of the Commission as announced from time to time, for a
period of 180 days from the date on which the Exchange Offer is Registration
Statement is declared effective, or such shorter period as will terminate when
all Transfer Restricted Securities covered by such Registration Statement have
been sold pursuant thereto. The Company and the Guarantors shall promptly
provide sufficient copies of the latest version of such Prospectus to such
Broker-Dealers promptly upon request, and in no event later than one day after
such request, at any time during such period.
SECTION 4. SHELF REGISTRATION
(a) Shelf Registration. If (i) the Exchange
Offer is not permitted by applicable law
(after the Company and the Guarantors have
complied with the procedures set forth in
Section 6(a)(i) below) or (ii) if any
Holder of Transfer Restricted Securities
shall notify the Company within 20 Business
Days following the Consummation of the
Exchange Offer that (A) such Holder was
prohibited by law or Commission policy from
participating in the Exchange Offer or (B)
such Holder may not resell the Series B
Notes acquired by it in the Exchange Offer
to the public without delivering a
prospectus and the Prospectus contained in
the Exchange Offer Registration Statement
is not appropriate or available for such
resales
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<PAGE>
by such Holder or (C) such Holder is a
Broker-Dealer and holds Series A Notes
acquired directly from the Company or any
of its Affiliates, then the Company and the
Guarantors shall:
(x) cause to be filed, on or prior to 30 days after the earlier of (i)
the date on which the Company determines that the Exchange Offer Registration
Statement cannot be filed as a result of clause (a)(i) above and (ii) the date
on which the Company receives the notice specified in clause (a) (ii) above,
(such earlier date, the "FILING DEADLINE"), a shelf registration statement
pursuant to Rule 415 under the Act (which may be an amendment to the Exchange
Offer Registration Statement (the "SHELF REGISTRATION STATEMENT")), relating to
all Transfer Restricted Securities the Holders of which shall have provided the
information required pursuant to Section 4(b) hereof, and
(y) shall use their respective reasonable best efforts to cause such
Shelf Registration Statement to become effective on or prior to 90 days after
the Filing Deadline (such 90th day the "EFFECTIVENESS DEADLINE").
If, after the Company has filed an Exchange Offer Registration
Statement that satisfies the requirements of Section 3(a) above, the Company is
required to file and make effective a Shelf Registration Statement solely
because the Exchange Offer is not permitted under applicable federal law, then
the filing of the Exchange Offer Registration Statement shall be deemed to
satisfy the requirements of clause (x) above; provided that, in such event, the
Company shall remain obligated to meet the Effectiveness Deadline set forth in
clause (y).
The Company and the Guarantors shall use their respective reasonable
best efforts to keep any Shelf Registration Statement required by this Section
4(a) continuously effective, supplemented and amended as required by and
subject to the provisions of Sections 6(b) and (c) hereof to the extent
necessary to ensure that it is available for sales of Transfer Restricted
Securities by the Holders thereof entitled to the benefit of this Section 4(a),
and to ensure that it conforms with the requirements of this Agreement, the Act
and the policies, rules and regulations of the Commission as announced from
time to time, for a period of at least two years (as extended pursuant to
Section 6(c)(i)) following the date on which such Shelf Registration Statement
first becomes effective under the Act, or such shorter period as will terminate
when all Transfer Restricted Securities covered by such Registration Statement
have been sold pursuant thereto.
(b) Provision by Holders of Certain Information
in Connection with the Shelf Registration
Statement. No Holder of Transfer Restricted
Securities may include any of its Transfer
Restricted Securities in any Shelf
Registration Statement pursuant to this
Agreement unless and until such Holder
furnishes to the Company in writing, within
20 days after receipt of a request
therefor, the information specified in Item
507 or 508 of Regulation S-K, as
applicable, of the Act for use in
connection with any Shelf Registration
Statement or Prospectus or preliminary
Prospectus included therein. No Holder of
Transfer Restricted Securities shall be
entitled to liquidated damages pursuant to
Section 5
6
<PAGE>
hereof unless and until such Holder shall
have provided all such information. Each
selling Holder agrees to promptly furnish
additional information required to be
disclosed in order to make the information
previously furnished to the Company by such
Holder not materially misleading.
SECTION 5. LIQUIDATED DAMAGES
If (i) any Registration Statement required by this Agreement is not
filed with the Commission on or prior to the applicable Filing Deadline, (ii)
any such Registration Statement has not been declared effective by the
Commission on or prior to the applicable Effectiveness Deadline, (iii) the
Exchange Offer has not been Consummated within 30 Business Days after the
Exchange Offer Registration Statement is first declared effective by the
Commission or (iv) any Registration Statement required by this Agreement is
filed and declared effective but shall thereafter cease to be effective or fail
to be usable for its intended purpose without being succeeded within two
Business Days by a post-effective amendment to such Registration Statement that
cures such failure and that is itself declared effective within two Business
Days of its filing (each such event referred to in clauses (i) through (iv), a
"REGISTRATION DEFAULT"), then the Company and the Guarantors hereby jointly and
severally agree to pay to each Holder of Transfer Restricted Securities
affected thereby liquidated damages in an amount equal to $.05 per week per
$1,000 in principal amount of Transfer Restricted Securities held by such
Holder for each week or portion thereof that the Registration Default continues
for the first 90-day period immediately following the occurrence of such
Registration Default. The amount of the liquidated damages shall increase by an
additional $.05 per week per $1,000 in principal amount of Transfer Restricted
Securities with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of liquidated damages of $.50
per week per $1,000 in principal amount of Transfer Restricted Securities;
provided that the Company and the Guarantors shall in no event be required to
pay liquidated damages for more than one Registration Default at any given
time. Notwithstanding anything to the contrary set forth herein, (1) upon
filing of the Exchange Offer Registration Statement (and/or, if applicable, the
Shelf Registration Statement), in the case of (i) above, (2) upon the
effectiveness of the Exchange Offer Registration Statement (and/or, if
applicable, the Shelf Registration Statement), in the case of (ii) above, (3)
upon Consummation of the Exchange Offer, in the case of (iii) above, or (4)
upon the filing of a post-effective amendment to the Registration Statement or
an additional Registration Statement that causes the Exchange Offer
Registration Statement (and/or, if applicable, the Shelf Registration
Statement) to again be declared effective or made usable in the case of (iv)
above, the liquidated damages payable with respect to the Transfer Restricted
Securities as a result of such clause (i), (ii), (iii) or (iv), as applicable,
shall cease.
All accrued liquidated damages shall be paid to the Holders entitled
thereto, in the manner provided for the payment of interest in the Indenture,
on each Interest Payment Date, as more fully set forth in the Indenture and the
Notes. All obligations of the Company and the Guarantors set forth in the
preceding paragraph that are outstanding with respect to any Transfer
Restricted Security at the time such security ceases to be a Transfer
Restricted Security shall survive until such time as all such obligations with
respect to such Security shall have been satisfied in full.
SECTION 6. REGISTRATION PROCEDURES
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<PAGE>
(a) Exchange Offer Registration Statement. In
connection with the Exchange Offer, the
Company and the Guarantors shall comply
with all applicable provisions of Section
6(c) below, shall use their respective best
efforts to effect such exchange and to
permit the resale of Series B Notes by
Broker-Dealers that tendered in the
Exchange Offer Series A Notes that such
Broker-Dealer acquired for its own account
as a result of its market making activities
or other trading activities (other than
Series A Notes acquired directly from the
Company or any of its Affiliates) being
sold in accordance with the intended method
or methods of distribution thereof, and
shall comply with all of the following
provisions:
(i) If, following the date hereof
there has been announced a change
in Commission policy with respect
to exchange offers such as the
Exchange Offer that, in the
reasonable opinion of counsel to
the Company raises a substantial
question as to whether the
Exchange Offer is permitted by
applicable federal law, the
Company and the Guarantors hereby
agree to seek a no-action letter
or other favorable decision from
the Commission allowing the
Company and the Guarantors to
Consummate an Exchange Offer for
such Transfer Restricted
Securities. The Company and the
Guarantors hereby agree to pursue
the issuance of such a decision to
the Commission staff level but
shall not be required to take
commercially unreasonable action
to effect a change in Commission
policy. In connection with the
foregoing, the Company and the
Guarantors hereby agree to take
all such other actions as may be
requested by the Commission or
otherwise required in connection
with the issuance of such
decision, including without
limitation (A) participating in
telephonic conferences with the
Commission, (B) delivering to the
Commission staff an analysis
prepared by counsel to the Company
setting forth the legal bases, if
any, upon which such counsel has
concluded that such an Exchange
Offer should be permitted and (C)
diligently pursuing a resolution
(which need not be favorable) by
the Commission staff.
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<PAGE>
(ii) As a condition to its
participation in the Exchange
Offer, each Holder of Transfer
Restricted Securities (including,
without limitation, any Holder who
is a Broker Dealer) shall furnish,
upon the request of the Company,
prior to the Consummation of the
Exchange Offer, a written
representation to the Company and
the Guarantors (which may be
contained in the letter of
transmittal contemplated by the
Exchange Offer Registration
Statement) to the effect that (A)
it is not an Affiliate of the
Company, (B) it is not engaged in,
and does not intend to engage in,
and has no arrangement or
understanding with any person to
participate in, a distribution of
the Series B Notes to be issued in
the Exchange Offer and (C) it is
acquiring the Series B Notes in
its ordinary course of business.
In addition, all such Holders of
Transfer Restricted Securities
shall otherwise reasonably
cooperate with any reasonable
request of the Company relating to
the Company's and Guarantors'
preparation of the Exchange Offer
Registration Statement. Each
Holder using the Exchange Offer to
participate in a distribution of
the Series B Notes hereby
acknowledges and agrees that, if
the resales are of Series B Notes
obtained by such Holder in
exchange for Series A Notes
acquired directly from the Company
or an Affiliate thereof, it (1)
could not, under Commission policy
as in effect on the date of this
Agreement, rely on the position of
the Commission enunciated in
Morgan Stanley and Co., Inc.
(available June 5, 1991) and Exxon
Capital Holdings Corporation
(available May 13, 1988), as
interpreted in the Commission's
letter to Shearman & Sterling
dated July 2, 1993, and similar
no-action letters (including, if
applicable, any no-action letter
obtained pursuant to clause (i)
above), and (2) must comply with
the registration and prospectus
delivery requirements of the Act
in connection with a secondary
resale transaction and that such a
secondary resale transaction must
be covered by an effective
registration statement containing
the selling security holder
information required by Item 507
or 508, as applicable, of
Regulation S-K.
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<PAGE>
(iii) Prior to effectiveness of the
Exchange Offer Registration
Statement, the Company and the
Guarantors shall provide a
supplemental letter to the
Commission (A) stating that the
Company and the Guarantors are
registering the Exchange Offer in
reliance on the position of the
Commission enunciated in Exxon
Capital Holdings Corporation
(available May 13, 1988), Morgan
Stanley and Co., Inc. (available
June 5, 1991) as interpreted in
the Commission's letter to
Shearman & Sterling dated July 2,
1993, and, if applicable, any
no-action letter obtained pursuant
to clause (i) above, (B) including
a representation that neither the
Company nor any Guarantor has
entered into any arrangement or
understanding with any Person to
distribute the Series B Notes to
be received in the Exchange Offer
and that, to the best of the
Company's and each Guarantor's
information and belief, each
Holder participating in the
Exchange Offer is acquiring the
Series B Notes in its ordinary
course of business and has no
arrangement or understanding with
any Person to participate in the
distribution of the Series B Notes
received in the Exchange Offer and
(C) any other undertaking or
representation required by the
Commission as set forth in any
no-action letter obtained pursuant
to clause (i) above, if
applicable.
(b) Shelf Registration Statement. In connection
with the Shelf Registration Statement, the
Company and the Guarantors shall comply
with all the provisions of Section 6(c)
below and shall use their respective
reasonable best efforts to effect such
registration to permit the sale of the
Transfer Restricted Securities being sold
in accordance with the intended method or
methods of distribution thereof (as
indicated in the information furnished to
the Company pursuant to Section 4(b)
hereof), and pursuant thereto the Company
and the Guarantors will prepare and file
with the Commission a Registration
Statement relating to the registration on
any appropriate form under the Act, which
form shall be available for the sale of the
Transfer Restricted Securities in
accordance with the intended method or
methods of distribution thereof, within the
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<PAGE>
time periods and otherwise in accordance
with the provisions hereof.
(c) General Provisions. In connection with any
Registration Statement and any related
Prospectus required by this Agreement, the
Company and the Guarantors shall:
(i) use their respective reasonable best efforts to keep such
Registration Statement continuously effective and provide all
requisite financial statements for the period specified in Section 3
or 4 of this Agreement, as applicable. Upon the occurrence of any
event that would cause any such Registration Statement or the
Prospectus contained therein (A) to contain a material misstatement or
omission or (B) not to be effective and usable for resale of Transfer
Restricted Securities during the period required by this Agreement,
the Company and the Guarantors shall file promptly an appropriate
amendment to such Registration Statement curing such defect, and, if
Commission review is required, use their respective reasonable best
efforts to cause such amendment to be declared effective as soon as
practicable. Notwithstanding the foregoing, if the Board of Directors
of the Company determines in good faith that it is in the best
interests of the Company and the Guarantors not to disclose the
existence of or facts surrounding any proposed or pending material
corporate transaction involving the Company or the Guarantors, the
Company and the Guarantors may allow the Shelf Registration Statement
or the Exchange Offer Registration Statement to fail to be effective
and usable as a result of such nondisclosure for up to 120 days during
the three year period of effectiveness required by Section 4 hereof,
but in no event (x) for any period in excess of 45 consecutive days or
(y) for more than 60 days in any calendar year, provided, that in the
event the Exchange Offer is Consummated, the Company and the
Guarantors shall not allow the Exchange Offer Registration Statement
to fail to be effective and usable for a period in excess of 30 days
during the one year period of effectiveness required by Section 3
hereof;
(i) prepare and file with the
Commission such amendments and
post-effective amendments to the
applicable Registration Statement
as may be necessary to keep such
Registration Statement effective
for the applicable period set
forth in Section 3 or 4 hereof, as
the case may be; cause the
Prospectus to be supplemented by
any required Prospectus
supplement, and as so supplemented
to be filed pursuant to Rule 424
under the Act, and to comply fully
with Rules 424, 430A and 462, as
applicable, under the Act in a
timely manner; and comply with the
provisions of the Act with respect
to the disposition of all
securities covered by such
Registration Statement during the
applicable period in accordance
with the intended method or
methods of distribution by the
sellers thereof set forth in such
Registration Statement or
supplement to the Prospectus;
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<PAGE>
(ii) advise the selling Holders
promptly and, if requested by such
Persons, confirm such advice in
writing, (A) when the Prospectus
or any Prospectus supplement or
post-effective amendment has been
filed, and, with respect to any
applicable Registration Statement
or any post-effective amendment
thereto, when the same has become
effective, (B) of any request by
the Commission for amendments to
the Registration Statement or
amendments or supplements to the
Prospectus or for additional
information relating thereto, (C)
of the issuance by the Commission
of any stop order suspending the
effectiveness of the Registration
Statement under the Act or of the
suspension by any state securities
commission of the qualification of
the Transfer Restricted Securities
for offering or sale in any
jurisdiction, or the initiation of
any proceeding for any of the
preceding purposes, (D) of the
existence of any fact or the
happening of any event that makes
any statement of a material fact
made in the Registration
Statement, the Prospectus, any
amendment or supplement thereto or
any document incorporated by
reference therein untrue, or that
requires the making of any
additions to or changes in the
Registration Statement in order to
make the statements therein not
misleading, or that requires the
making of any additions to or
changes in the Prospectus in order
to make the statements therein, in
the light of the circumstances
under which they were made, not
misleading. If at any time the
Commission shall issue any stop
order suspending the effectiveness
of the Registration Statement, or
any state securities commission or
other regulatory authority shall
issue an order suspending the
qualification or exemption from
qualification of the Transfer
Restricted Securities under state
securities or Blue Sky laws, the
Company and the Guarantors shall
use their respective reasonable
best efforts to obtain the
withdrawal or lifting of such
order at the earliest possible
time;
(iii) subject to Section 6(c)(i), if any
fact or event contemplated by
Section 6(c)(iii)(D) above shall
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<PAGE>
exist or have occurred, prepare a
supplement or post-effective
amendment to the Registration
Statement or related Prospectus or
any document incorporated therein
by reference or file any other
required document so that, as
thereafter delivered to the
purchaser(s) of Transfer
Restricted Securities, the
Prospectus will not contain an
untrue statement of a material
fact or omit to state any material
fact necessary to make the
statements therein, in the light
of the circumstances under which
they were made, not misleading;
(iv) furnish to the Initial Purchasers
and each selling Holder named in
any Registration Statement or
Prospectus in connection with such
sale, if any, before filing with
the Commission, copies of any
Registration Statement or any
Prospectus included therein or any
amendments or supplements to any
such Registration Statement or
Prospectus (including all
documents incorporated by
reference after the initial filing
of such Registration Statement),
which documents will be subject to
the review and comment of such
Holders in connection with such
sale, if any, for a period of at
least three Business Days, and the
Company will not file any such
Registration Statement or
Prospectus or any amendment or
supplement to any such
Registration Statement or
Prospectus (including all such
documents incorporated by
reference) to which the selling
Holders of the Transfer Restricted
Securities covered by such
Registration Statement in
connection with such sale, if any,
shall reasonably object within
three Business Days after the
receipt thereof. A selling Holder
shall be deemed to have reasonably
objected to such filing if such
Registration Statement, amendment,
Prospectus or supplement, as
applicable, as proposed to be
filed, contains a material
misstatement or omission or fails
to comply with the applicable
requirements of the Act;
(v) promptly prior to the filing of
any document that is to be
incorporated by reference into a
Registration Statement or
Prospectus, provide
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<PAGE>
copies of such document to the
selling Holders in connection with
such sale, if any, make the
Company's and the Guarantors'
representatives available for
discussion of such document and
other customary due diligence
matters, and include such
information in such document prior
to the filing thereof as such
selling Holders may reasonably
request;
(vi) make available at reasonable times
for inspection by the selling
Holders participating in any
disposition pursuant to such
Registration Statement and any
attorney or accountant retained by
such selling Holders, all
financial and other records,
pertinent corporate documents of
the Company and the Guarantors and
cause the Company's and the
Guarantors' officers, directors
and employees to supply all
information reasonably requested
by any such selling Holder,
attorney or accountant in
connection with such Registration
Statement or any post-effective
amendment thereto subsequent to
the filing thereof and prior to
its effectiveness;
(vii) if requested by any selling
Holders in connection with such
sale, if any, promptly include in
any Registration Statement or
Prospectus, pursuant to a
supplement or post-effective
amendment if necessary, such
information as such selling
Holders may reasonably request to
have included therein, including,
without limitation, information
relating to the "Plan of
Distribution" of the Transfer
Restricted Securities; and make
all required filings of such
Prospectus supplement or
post-effective amendment as soon
as practicable after the Company
is notified of the matters to be
included in such Prospectus
supplement or post-effective
amendment;
(viii) furnish to each selling Holder in
connection with such sale, if any,
without charge, at least one copy
of the Registration Statement, as
first filed with the Commission,
and of each amendment thereto,
including all documents
incorporated by reference therein
and all
14
<PAGE>
exhibits (including exhibits
incorporated therein by reference);
(ix) deliver to each selling Holder,
without charge, as many copies of
the Prospectus (including each
preliminary prospectus) and any
amendment or supplement thereto as
such Persons reasonably may
request; the Company and the
Guarantors hereby consent to the
use (in accordance with law) of
the Prospectus and any amendment
or supplement thereto by each of
the selling Holders in connection
with the offering and the sale of
the Transfer Restricted Securities
covered by the Prospectus or any
amendment or supplement thereto;
(x) upon the request of any selling
Holder, enter into such agreements
(including underwriting
agreements) and make such
representations and warranties and
take all such other actions in
connection therewith in order to
expedite or facilitate the
disposition of the Transfer
Restricted Securities pursuant to
any applicable Registration
Statement contemplated by this
Agreement as may be reasonably
requested by any Holder of
Transfer Restricted Securities in
connection with any sale or resale
pursuant to any applicable
Registration Statement and in such
connection, the Company and the
Guarantors shall:
B. (A) upon request of any selling Holder, furnish (or in the case of
paragraphs (2) and (3), use its reasonable best efforts to cause to be
furnished) to each selling Holder, upon the effectiveness of the Shelf
Registration Statement or upon Consummation of the Exchange Offer, as
the case may be:
1. (1) a certificate, dated such date, signed on behalf of the
Company and each Guarantor by (x) the President or any Vice
President and (y) a principal financial or accounting officer
of the Company and such Guarantor, confirming, as of the date
thereof, the matters set forth in paragraphs (b), (d) and (e)
and the second sentence of paragraph (c) of Section 8 of the
Purchase Agreement and such other similar matters as the
selling Holders may reasonably request;
2. (2) an opinion, dated the date of Consummation of the
Exchange Offer, or the date of effectiveness of the Shelf
Registration Statement, as the case may be, of counsel for
the Company and the Guarantors covering matters similar to
those set forth in paragraph (h) of Section 8 of the Purchase
Agreement and such other matter as the selling Holders may
reasonably request, and in any event including
15
<PAGE>
a statement to the effect that such counsel has participated
in conferences with officers and other representatives of the
Company and the Guarantors, representatives of the
independent public accountants for the Company and the
Guarantors and have considered the matters required to be
stated therein and the statements contained therein, although
such counsel has not independently verified the accuracy,
completeness or fairness of such statements; and that such
counsel advises that, on the basis of the foregoing (relying
as to materiality to the extent such counsel deems
appropriate upon the statements of officers and other
representatives of the Company and the Guarantors) no facts
came to such counsel's attention that caused such counsel to
believe that the applicable Registration Statement (except as
to (a) financial statements, including the notes thereto, (b)
statistical data and (c) other financial and accounting data
(including, without limitation, the pro forma financial
information), in each case, included or omitted therefrom, as
to which no belief need be expressed), at the time such
Registration Statement or any post-effective amendment
thereto became effective and, in the case of the Exchange
Offer Registration Statement, as of the date of Consummation
of the Exchange Offer, contained an untrue statement of a
material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein
not misleading, or that the Prospectus (except as to (a)
financial statements, including the notes thereto, (b)
statistical data and (c) other financial and accounting data
(including, without limitation, the pro forma financial
information), in each case, included or omitted therefrom, as
to which no belief need be expressed) contained in such
Registration Statement as of its date and, in the case of the
opinion dated the date of Consummation of the Exchange Offer,
as of the date of Consummation, contained an untrue statement
of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading. Without limiting the foregoing, such counsel may
state further that such counsel assumes no responsibility
for, and has not independently verified, the accuracy,
completeness or fairness of the financial statements, notes
and schedules and other financial data included in any
Registration Statement contemplated by this Agreement or the
related Prospectus; and
3. (3) a customary comfort letter, dated the date of
Consummation of the Exchange Offer, or as of the date of
effectiveness of the Shelf Registration Statement, as the
case may be, from the Company's independent accountants, in
the customary form and covering matters of the type
customarily covered in comfort letters to underwriters in
connection with underwritten offerings, and affirming the
matters set forth in the comfort letters delivered pursuant
to Section 8(k) of the Purchase Agreement; and
C. (B) deliver such other documents and certificates as may be reasonably
requested by the selling Holders to evidence compliance with clause
(A) above and with any customary conditions contained in the Purchase
Agreement entered into by the Company and the Guarantors pursuant to
this clause (xi), if any;
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<PAGE>
(i) prior to any public offering of
Transfer Restricted Securities,
cooperate with the selling Holders
and their counsel in connection
with the registration and
qualification of the Transfer
Restricted Securities under the
securities or Blue Sky laws of
such jurisdictions as the selling
Holders may request and do any and
all other acts or things necessary
or advisable to enable the
disposition in such jurisdictions
of the Transfer Restricted
Securities covered by the
applicable Registration Statement;
provided, however, that neither
the Company nor any Guarantor
shall be required to register or
qualify as a foreign corporation
where it is not now so qualified
or to take any action that would
subject it to the service of
process in suits or to taxation,
other than as to matters and
transactions relating to the
Registration Statement, in any
jurisdiction where it is not now
so subject;
(ii) issue, upon the request of any
Holder of Series A Notes covered
by any Shelf Registration
Statement contemplated by this
Agreement, Series B Notes having
an aggregate principal amount
equal to the aggregate principal
amount of Series A Notes
surrendered to the Company by such
Holder in exchange therefor or
being sold by such Holder; such
Series B Notes to be registered in
the name of such Holder or in the
name of the purchaser(s) of such
Series B Notes, as the case may
be; in return, the Series A Notes
held by such Holder shall be
surrendered to the Company for
cancellation;
(iii) in connection with any sale of
Transfer Restricted Securities
that will result in such
securities no longer being
Transfer Restricted Securities,
cooperate with the selling Holders
to facilitate the timely
preparation and delivery of
certificates representing Transfer
Restricted Securities to be sold
and not bearing any restrictive
legends; and to register such
Transfer Restricted Securities in
such denominations and such names
as the selling Holders may request
at least two Business Days prior
to such sale of Transfer
Restricted Securities;
17
<PAGE>
(iv) use their respective reasonable
best efforts to cause the
disposition of the Transfer
Restricted Securities covered by
the Registration Statement to be
registered with or approved by
such other governmental agencies
or authorities as may be necessary
to enable the seller or sellers
thereof to consummate the
disposition of such Transfer
Restricted Securities, subject to
the proviso contained in clause
(xii) above;
(v) provide a CUSIP number for all
Transfer Restricted Securities not
later than the effective date of a
Registration Statement covering
such Transfer Restricted
Securities and provide the Trustee
under the Indenture with printed
certificates for the Transfer
Restricted Securities which are in
a form eligible for deposit with
the Depository Trust Company;
(vi) otherwise use their respective
reasonable best efforts to comply
with all applicable rules and
regulations of the Commission, and
make generally available to its
security holders with regard to
any applicable Registration
Statement, as soon as practicable,
a consolidated earnings statement
meeting the requirements of Rule
158 (which need not be audited)
covering a twelve-month period
beginning after the effective date
of the Registration Statement (as
such term is defined in paragraph
(c) of Rule 158 under the Act);
(vii) cause the Indenture to be
qualified under the TIA not later
than the effective date of the
first Registration Statement
required by this Agreement and, in
connection therewith, cooperate
with the Trustee and the Holders
to effect such changes to the
Indenture as may be required for
such Indenture to be so qualified
in accordance with the terms of
the TIA; and execute and use its
best efforts to cause the Trustee
to execute, all documents that may
be required to effect such changes
and all other forms and documents
required to be filed with the
Commission to enable such
Indenture to be so qualified in a
timely manner; and
18
<PAGE>
(viii) provide promptly to each Holder
upon request each document filed
with the Commission pursuant to
the requirements of Section 13 or
Section 15(d) of the Exchange Act.
(b) Restrictions on Holders. Each Holder agrees
by acquisition of a Transfer Restricted
Security that, upon receipt of the notice
referred to in Section 6(c)(i) or any
notice from the Company of the existence of
any fact of the kind described in Section
6(c)(iii)(D) hereof (in each case, a
"SUSPENSION NOTICE"), such Holder will
forthwith discontinue disposition of
Transfer Restricted Securities pursuant to
the applicable Registration Statement until
(i) such Holder's has received copies of
the supplemented or amended Prospectus
contemplated by Section 6(c)(iv) hereof, or
(ii) such Holder is advised in writing by
the Company that the use of the Prospectus
may be resumed, and has received copies of
any additional or supplemental filings that
are incorporated by reference in the
Prospectus (in each case, the
"RECOMMENCEMENT DATE"). Each Holder
receiving a Suspension Notice hereby agrees
that it will either (i) destroy any
Prospectuses, other than permanent file
copies, then in such Holder's possession
which have been replaced by the Company
with more recently dated Prospectuses or
(ii) deliver to the Company (at the
Company's expense) all copies, other than
permanent file copies, then in such
Holder's possession of the Prospectus
covering such Transfer Restricted
Securities that was current at the time of
receipt of the Suspension Notice. The time
period regarding the effectiveness of such
Registration Statement set forth in Section
3 or 4 hereof, as applicable, shall be
extended by a number of days equal to the
number of days in the period from and
including the date of delivery of the
Suspension Notice to the date of delivery
of the Recommencement Date.
SECTION 7. REGISTRATION EXPENSES
(a) All expenses incident to the Company's and
the Guarantors' performance of or
compliance with this Agreement will be
borne by the Company, regardless of whether
a Registration Statement becomes effective,
including without limitation: (i) all
registration and filing fees and expenses;
(ii) all fees and expenses of compliance
with federal securities and state Blue Sky
or securities laws; (iii) all expenses of
printing (including
19
<PAGE>
printing certificates for the Series B
Notes to be issued in the Exchange Offer
and printing of Prospectuses), messenger
and delivery services and telephone; (iv)
all fees and disbursements of counsel for
the Company, the Guarantors and the Holders
of Transfer Restricted Securities; (v) all
application and filing fees in connection
with listing the Series B Notes on a
national securities exchange or automated
quotation system pursuant to the
requirements hereof; and (vi) all fees and
disbursements of independent certified
public accountants of the Company and the
Guarantors (including the expenses of any
special audit and comfort letters required
by or incident to such performance) but
specifically excluding any transfer fees
and taxes, if any, relating to the sale and
disposition of Transfer Restricted
Securities by any Holder.
The Company will, in any event, bear its and the Guarantors' internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expenses of
any annual audit and the fees and expenses of any Person, including special
experts, retained by the Company or the Guarantors.
(b) In connection with any Registration
Statement required by this Agreement
(including, without limitation, the
Exchange Offer Registration Statement and
the Shelf Registration Statement), the
Company and the Guarantors will reimburse
the Purchasers and the Holders of Transfer
Restricted Securities being tendered in the
Exchange Offer and/or resold pursuant to
the "Plan of Distribution" contained in the
Exchange Offer Registration Statement or
registered pursuant to the Shelf
Registration Statement, as applicable, for
the reasonable fees and disbursements of
not more than one counsel, who shall be
Latham & Watkins, unless another firm shall
be chosen by the Holders of a majority in
principal amount of the Transfer Restricted
Securities for whose benefit such
Registration Statement is being prepared;
provided that such fees and disbursements
shall not exceed $25,000.
SECTION 8. INDEMNIFICATION
(a) The Company and the Guarantors agree,
jointly and severally, to indemnify and
hold harmless (i) each Holder and (ii) each
person, if any, who controls (within the
meaning of Section 15 of the Act or Section
20 of the Exchange Act) any Holder (any of
the persons referred to in this clause (ii)
being hereinafter referred to
20
<PAGE>
as a "controlling person") and (iii) the
respective officers, directors, partners,
employees, representatives and agents of
any Holder or any controlling person (any
person referred to in clause (i), (ii) or
(iii) may hereinafter be referred to as an
"INDEMNIFIED HOLDER"), from and against any
and all losses, claims, damages,
liabilities, judgments, (including without
limitation, any legal or other expenses
incurred in connection with investigating
or defending any matter, including any
action that could give rise to any such
losses, claims, damages, liabilities or
judgments) caused by any untrue statement
or alleged untrue statement of a material
fact contained in any Registration
Statement, preliminary prospectus or
Prospectus (or any amendment or supplement
thereto) provided by the Company to any
holder or any prospective purchaser of
Series B Notes, or caused by any omission
or alleged omission to state therein a
material fact required to be stated therein
or necessary to make the statements therein
not misleading, except insofar as such
losses, claims, damages, liabilities or
judgments are caused by an untrue statement
or omission or alleged untrue statement or
omission that is based upon information
furnished in writing to the Company by any
of the Holders.
(b) Each Holder of Transfer Restricted
Securities agrees, severally and not
jointly, to indemnify and hold harmless the
Company and the Guarantors, and their
respective directors, and officers,
partners, employees, representatives and
agents and each person, if any, who
controls (within the meaning of Section 15
of the Act or Section 20 of the Exchange
Act) the Company, or the Guarantors to the
same extent as the foregoing indemnity from
the Company and the Guarantors to each of
the Indemnified Holders, but only with
reference to information relating to such
Indemnified Holder furnished in writing to
the Company by such Indemnified Holder
expressly for use in any Registration
Statement. In no event shall any
Indemnified Holder be liable or responsible
for any amount in excess of the amount by
which the total amount received by such
Indemnified Holder with respect to its sale
of Transfer Restricted Securities pursuant
to a Registration Statement exceeds (i) the
amount paid by such Indemnified Holder for
such Transfer Restricted Securities and
(ii) the amount of any damages that such
Indemnified Holder has otherwise been
required to pay
21
<PAGE>
by reason of such untrue or alleged untrue
statement or omission or alleged omission.
(c) In case any action shall be commenced
involving any person in respect of which
indemnity may be sought pursuant to Section
8(a) or 8(b) (the "INDEMNIFIED PARTY"), the
indemnified party shall promptly notify the
person against whom such indemnity may be
sought (the "INDEMNIFYING PERSON") in
writing and the indemnifying party shall
assume the defense of such action,
including the employment of counsel
reasonably satisfactory to the indemnified
party and the payment of all fees and
expenses of such counsel, as incurred
(except that in the case of any action in
respect of which indemnity may be sought
pursuant to both Sections 8(a) and 8(b), an
Indemnified Holder shall not be required to
assume the defense of such action pursuant
to this Section 8(c), but may employ
separate counsel and participate in the
defense thereof, but the fees and expenses
of such counsel, except as provided below,
shall be at the expense of the Indemnified
Holder). Any indemnified party shall have
the right to employ separate counsel in any
such action and participate in the defense
thereof, but the fees and expenses of such
counsel shall be at the expense of the
indemnified party unless (i) the employment
of such counsel shall have been
specifically authorized in writing by the
indemnifying party, (ii) the indemnifying
party shall have failed to assume the
defense of such action or employ counsel
reasonably satisfactory to the indemnified
party or (iii) the named parties to any
such action (including any impleaded
parties) include both the indemnified party
and the indemnifying party, and the
indemnified party shall have been advised
by such counsel that there may be one or
more legal defenses available to it which
are different from or additional to those
available to the indemnifying party (in
which case the indemnifying party shall not
have the right to assume the defense of
such action on behalf of the indemnified
party). In any such case, the indemnifying
party shall not, in connection with any one
action or separate but substantially
similar or related actions arising out of
the same general allegations or
circumstances, be liable for the fees and
expenses of more than one separate firm of
attorneys (in addition to any local
counsel) for all indemnified parties and
all such fees and expenses shall be
reimbursed as they are incurred. Such firm
shall be designated in writing by a
22
<PAGE>
majority of the Indemnified Holders, in the
case of the parties indemnified pursuant to
Section 8(a), and by the Company, in the
case of parties indemnified pursuant to
Section 8(b). The indemnifying party shall
not be liable, shall not indemnify or hold
harmless the indemnified party from and
against any and all losses, claims,
damages, liabilities and judgments by
reason of any settlement of any action
effected without its written consent. No
indemnifying party shall, without the prior
written consent of the indemnified party,
effect any settlement or compromise of, or
consent to the entry of judgment with
respect to, any pending or threatened
action in respect of which the indemnified
party is or could have been a party and
indemnity or contribution may be or could
have been sought hereunder by the
indemnified party, unless such settlement,
compromise or judgment (i) includes an
unconditional release of the indemnified
party from all liability on claims that are
or could have been the subject matter of
such action and (ii) does not include a
statement as to or an admission of fault,
culpability or a failure to act, by or on
behalf of the indemnified party.
(d) To the extent that the indemnification
provided for in this Section 8 is
unavailable to an indemnified party in
respect of any losses, claims, damages,
liabilities or judgments referred to
therein, then each indemnifying party, in
lieu of indemnifying such indemnified
party, shall contribute to the amount paid
or payable by such indemnified party as a
result of such losses, claims, damages,
liabilities or judgments (i) in such
proportion as is appropriate to reflect the
relative benefits received by the Company
and the Guarantors, on the one hand, and
the Holders, on the other hand, from their
sale of Transfer Restricted Securities or
(ii) if the allocation provided by clause
8(d)(i) is not permitted by applicable law,
in such proportion as is appropriate to
reflect not only the relative benefits
referred to in clause 8(d)(i) above but
also the relative fault of the Company and
the Guarantors, on the one hand, and of the
Indemnified Holder, on the other hand, in
connection with the statements or omissions
which resulted in such losses, claims,
damages, liabilities or judgments, as well
as any other relevant equitable
considerations. The relative fault of the
Company and the Guarantors, on the one
hand, and of the Indemnified Holder, on the
other hand, shall be determined by
reference to, among other things,
23
<PAGE>
whether the untrue or alleged untrue
statement of a material fact or the
omission or alleged omission to state a
material fact relates to information
supplied by the Company or such Guarantor,
on the one hand, or by the Indemnified
Holder, on the other hand, and the parties'
relative intent, knowledge, access to
information and opportunity to correct or
prevent such statement or omission. The
amount paid or payable by a party as a
result of the losses, claims, damages,
liabilities and judgments referred to above
shall be deemed to include, subject to the
limitations set forth in the second
paragraph of Section 8(a), any legal or
other fees or expenses reasonably incurred
by such party in connection with
investigating or defending any action or
claim.
The Company, the Guarantors and each Holder agree that it would not be
just and equitable if contribution pursuant to this Section 8(d) were
determined by pro rata allocation (even if the Holders were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or judgments referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any
matter, including any action that could have given rise to such losses, claims,
damages, liabilities or judgments. Notwithstanding the provisions of this
Section 8, no Holder or its related Indemnified Holders shall be required to
contribute, in the aggregate, any amount in excess of the amount by which the
total received by such Holder with respect to the sale of its Transfer
Restricted Securities pursuant to a Registration Statement exceeds the sum of
(A) the amount paid by such Holder for such Transfer Restricted Securities plus
(B) the amount of any damages which such Holder has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Holders'
obligations to contribute pursuant to this Section 8(c) are several in
proportion to the respective principal amount of Transfer Restricted Securities
held by each of the Holders hereunder and not joint.
SECTION 9. RULE 144A
The Company and each Guarantor hereby agrees with each Holder, for so
long as any Transfer Restricted Securities remain outstanding and during any
period in which the Company or such Guarantor is not subject to Section 13 or
15(d) of the Securities Exchange Act, to make available, upon request of any
Holder of Transfer Restricted Securities, to any Holder or beneficial owner of
Transfer Restricted Securities in connection with any sale thereof and any
prospective purchaser of such Transfer Restricted Securities designated by such
Holder or beneficial owner, the information required by Rule 144A(d)(4) under
the Act in order to permit resales of such Transfer Restricted Securities
pursuant to Rule 144A.
SECTION 10. MISCELLANEOUS
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<PAGE>
(a) Remedies. The Company and the Guarantors
acknowledge and agree that any failure by
the Company and/or the Guarantors to comply
with their respective obligations under
Sections 3 and 4 hereof may result in
material irreparable injury to the Initial
Purchasers or the Holders for which there
is no adequate remedy at law, that it will
not be possible to measure damages for such
injuries precisely and that, in the event
of any such failure, the Initial Purchasers
or any Holder may obtain such relief as may
be required to specifically enforce the
Company's and the Guarantor's obligations
under Sections 3 and 4 hereof. The Company
and the Guarantors further agree to waive
the defense in any action for specific
performance that a remedy at law would be
adequate.
(b) No Inconsistent Agreements. Neither the
Company nor any Guarantor will, on or after
the date of this Agreement, enter into any
agreement with respect to its securities
that is inconsistent with the rights
granted to the Holders in this Agreement or
otherwise conflicts with the provisions
hereof. Neither the Company nor any
Guarantor has previously entered into any
agreement granting any registration rights
with respect to its securities to any
Person. The rights granted to the Holders
hereunder do not in any way conflict with
and are not inconsistent with the rights
granted to the holders of the Company's and
the Guarantors' securities under any
agreement in effect on the date hereof.
(c) Amendments and Waivers. The provisions of
this Agreement may not be amended, modified
or supplemented, and waivers or consents to
or departures from the provisions hereof
may not be given unless (i) in the case of
Section 5 hereof and this Section 10(c)(i),
the Company has obtained the written
consent of Holders of all outstanding
Transfer Restricted Securities and (ii) in
the case of all other provisions hereof,
the Company has obtained the written
consent of Holders of a majority of the
outstanding principal amount of Transfer
Restricted Securities (excluding Transfer
Restricted Securities held by the Company
of its Affiliates). Notwithstanding the
foregoing, a waiver or consent to departure
from the provisions hereof that relates
exclusively to the rights of Holders whose
securities are being tendered pursuant to
the Exchange Offer and that does not affect
directly or indirectly the
25
<PAGE>
rights of other Holders whose securities
are not being tendered pursuant to such
Exchange Offer may be given by the Holders
of a majority of the outstanding principal
amount of Transfer Restricted Securities
subject to such Exchange Offer.
(d) Third Party Beneficiary. The Holders shall
be third party beneficiaries to the
agreements made hereunder between the
Company and the Guarantors, on the one
hand, and the Initial Purchasers, on the
other hand, and shall have the right to
enforce such agreements directly to the
extent they may deem such enforcement
necessary or advisable to protect its
rights or the rights of Holders hereunder.
(e) Notices. All notices and other
communications provided for or permitted
hereunder shall be made in writing by
hand-delivery, first-class mail (registered
or certified, return receipt requested),
telex, telecopier, or air courier
guaranteeing overnight delivery:
(i) if to a Holder, at the address set
forth on the records of the
Registrar under the Indenture,
with a copy to the Registrar under
the Indenture; and
(ii) if to the Company or the
Guarantors:
SFX Entertainment, Inc.
650 Madison Avenue
New York, New York 10022
Telecopier No.: (212) 753-3188
Attention: Howard J. Tytel, Esq.
With a copy to:
Baker & McKenzie
805 Third Avenue
New York, New York 10022
Telecopier No.: (212) 751-5700
Attention: Howard M. Berkower, Esq.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when
receipt acknowledged, if telecopied; and on the next business day, if timely
delivered to an air courier guaranteeing overnight delivery.
26
<PAGE>
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address specified in the Indenture.
(f) Upon the date of filing of the Exchange
Offer or a Shelf Registration Statement, as
the case may be, notice shall be delivered
to Morgan Stanley & Co. Incorporated, on
behalf of the Initial Purchasers (in the
form attached hereto as Exhibit A) and
shall be addressed to: Attention: Corporate
Finance Department, 1585 Broadway, New
York, New York 10036.
(g) Successors and Assigns. This Agreement
shall inure to the benefit of and be
binding upon the successors and assigns of
each of the parties, including without
limitation and without the need for an
express assignment, subsequent Holders of
Transfer Restricted Securities; provided,
that nothing herein shall be deemed to
permit any assignment, transfer or other
disposition of Transfer Restricted
Securities in violation of the terms hereof
or of the Purchase Agreement or the
Indenture. If any transferee of any Holder
shall acquire Transfer Restricted
Securities in any manner, whether by
operation of law or otherwise, such
Transfer Restricted Securities shall be
held subject to all of the terms of this
Agreement, and by taking and holding such
Transfer Restricted Securities such Person
shall be conclusively deemed to have agreed
to be bound by and to perform all of the
terms and provisions of this Agreement,
including the restrictions on resale set
forth in this Agreement and, if applicable,
the Purchase Agreement, and such Person
shall be entitled to receive the benefits
hereof.
(h) Counterparts. This Agreement may be
executed in any number of counterparts and
by the parties hereto in separate
counterparts, each of which when so
executed shall be deemed to be an original
and all of which taken together shall
constitute one and the same agreement.
(i) Headings. The headings in this Agreement
are for convenience of reference only and
shall not limit or otherwise affect the
meaning hereof.
(j) Governing Law. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO THE CONFLICT OF LAW RULES
THEREOF.
27
<PAGE>
(k) Severability. In the event that any one or
more of the provisions contained herein, or
the application thereof in any
circumstance, is held invalid, illegal or
unenforceable, the validity, legality and
enforceability of any such provision in
every other respect and of the remaining
provisions contained herein shall not be
affected or impaired thereby.
(l) Entire Agreement. This Agreement is
intended by the parties as a final
expression of their agreement and intended
to be a complete and exclusive statement of
the agreement and understanding of the
parties hereto in respect of the subject
matter contained herein. There are no
restrictions, promises, warranties or
undertakings, other than those set forth or
referred to herein with respect to the
registration rights granted with respect to
the Transfer Restricted Securities. This
Agreement supersedes all prior agreements
and understandings between the parties with
respect to such subject matter.
28
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
SFX ENTERTAINMENT, INC.
BGP ACQUISITION, L.L.C.
By: SFX ENTERTAINMENT, INC.,
as managing member
SFX NETWORK GROUP, L.L.C.
By: SFX ENTERTAINMENT, INC.,
as managing member
WESTBURY MUSIC FAIR, L.L.C.
By: SFX ENTERTAINMENT, INC.,
as managing member
By: /s/ Howard J. Tytel
------------------------------------------
Name: Howard J. Tytel
Title: General Counsel, Executive Vice
President And Secretary
AKG, INC.
AMERICAN ARTISTS, INC.
AMERICAN ARTISTS LIMITED, INC.
AMPHITHEATER ENTERTAINMENT PARTNERSHIP
By: SM/PACE, INC.,
as general partner
ANT THEATRICAL PRODUCTIONS, INC.
ARDEE FESTIVALS N.J. INC.
Registration Rights Agreement signature page.
<PAGE>
ARDEE PRODUCTIONS, LTD.
ATLANTA CONCERTS, INC.
AUDREY & JANE, INC.
AVALON ACQUISITION CORP.
BEACH CONCERTS, INC.
BG PRESENTS, INC.
BILL GRAHAM ENTERPRISES, INC.
BILL GRAHAM MANAGEMENT, INC.
BILL GRAHAM PRESENTS, INC.
BOSTON PLAYHOUSE REALTY, INC.
BOYLSTON STREET THEATRE CORP.
BROADWAY CONCERTS, INC.
BROADWAY SERIES ASSOCIATES, INC.
BROADWAY SERIES MANAGEMENT GROUP, INC.
CAMARILLO AMPHITHEATER MANAGING
PARTNERS, INC.
Registration Rights Agreement signature page.
<PAGE>
CHEVA TOURING COMPANY
By: MAGICWORKS ENTERTAINMENT
INCORPORATED,
as a majority holder
CONCERTS, INC.
CONNECTICUT AMPHITHEATER DEVELOPMENT
CORPORATION
CONNECTICUT CONCERTS INCORPORATED
CONNECTICUT PERFORMING ARTS, INC.
CONN TICKETING COMPANY
By: NORTHEAST TICKETING COMPANY and
SOUTHEAST TICKETING COMPANY,
as general partners
CONTEMPORARY GROUP ACQUISITION CORP.
CONTEMPORARY GROUP, INC.
CONTEMPORARY MARKETING, INC.
CONTEMPORARY PRODUCTIONS INCORPORATED
CONTEMPORARY SPORTS INCORPORATED
COOLEY AND CONLON MANAGEMENT CO.
DEER CREEK AMPHITHEATER CONCERTS, INC.
Registration Rights Agreement signature page.
<PAGE>
DEER CREEK AMPHITHEATER CONCERTS, L.P.
By: DEER CREEK AMPHITHEATER
CONCERTS, INC.,
as general partner
DELSENER/SLATER ENTERPRISES, LTD.
DICESARE-ENGLER, INC.
DICESARE-ENGLER PROMOTIONS, INC.
DLC CORP.
DUMB DEAL, INC.
EAGLE EYE ENTERTAINMENT INC.
EAGLE EYE ENTERTAINMENT USA INC.
EMI ACQUISITION SUB, INC.
ENTERTAINMENT PERFORMING ARTS, INC.
EVENT MERCHANDISING INC.
EXIT 116 REVISITED, INC.
FALK ASSOCIATES MANAGEMENT ENTERPRISES,
INC.
FESTIVAL PRODUCTIONS, INC.
Registration Rights Agreement signature page.
<PAGE>
FILLMORE CORPORATION
Registration Rights Agreement signature page.
<PAGE>
FILLMORE FINGERS, INC.
GERSHWINS' FASCINATING RHYTHM
By: MAGICWORKS ENTERTAINMENT
INCORPORATED,
as a majority holder
GSAC PARTNERS
By: SM/PACE INC.,
as the parent corporation of the general
partner
HIGH COTTON, INC.
IN HOUSE TICKETS, INC.
IRVINE MEADOWS AMPHITHEATER
By: AVALON ACQUISITION CORP.,
as general partner
JEFKO TOURING COMPANY
By: MAGICWORKS ENTERTAINMENT
INCORPORATED,
as a majority holder
MAGICWORKS CONCERTS, INC.
MAGICWORKS ENTERTAINMENT INCORPORATED
MAGICWORKS ENTERTAINMENT
INTERNATIONAL, INC.
MAGICWORKS EXHIBITIONS, INC.
MAGICWORKS EXHIBITIONS JOINT VENTURE
Registration Rights Agreement signature page.
<PAGE>
By: MAGICWORKS ENTERTAINMENT
INCORPORATED,
as a majority holder
MAGICWORKS FASHION MANAGEMENT, INC.
MAGICWORKS MERCHANDISING, INC.
MAGICWORKS SPORTS MANAGEMENT, INC.
MAGICWORKS THEATRICALS, INC.
MAGICWORKS TRANSPORTATION, INC.
MAGICWORKS WEST, INC.
MELODY TENT AND AMPHITHEATER, INC.
MURAT CENTER CONCERTS, INC.
MURAT CENTER CONCERTS, L.P.
By: MURAT CENTER CONCERTS, INC.,
as general partner
NEW AVALON, INC.
NOC, INC.
NORTHEAST TICKETING COMPANY
OAKDALE THEATER CONCERTS, INC.
OLD PCI, INC.
Registration Rights Agreement signature page.
<PAGE>
PACE AEP ACQUISITION, INC.
PACE AMPHITHEATER MANAGEMENT, INC.
PACE AMPHITHEATERS, INC.
PACE BAYOU PLACE, INC.
PACE COMMUNICATIONS, INC.
PACE CONCERTS, LTD.
By: PACE CONCERTS GP, INC.,
as general partner
PACE CONCERTS GP, INC.
PACE ENTERTAINMENT CORPORATION
PACE ENTERTAINMENT GROUP, LTD.
By: PACE ENTERTAINMENT GP CORP.,
as general partner
PACE ENTERTAINMENT GP CORP.
PACE MILTON KEYNES, INC.
PACE MOTOR SPORTS, INC.
PACE MUSIC GROUP, INC.
PACE PRODUCTIONS, INC.
PACE THEATRICAL GROUP, INC.
Registration Rights Agreement signature page.
<PAGE>
PACE TOURING, INC.
PACE U.K. HOLDING CORPORATION
PAVILION PARTNERS
By: SM/PACE, INC.,
as managing partner
PEC, INC.
PERFORMING ARTS MANAGEMENT OF NORTH
MIAMI, INC.
POLARIS AMPHITHEATER CONCERTS, INC.
PTG-FLORIDA, INC.
QN CORP.
RUGRATS AMERICAN TOUR, LTD.
By: PACE VARIETY ENTERTAINMENT, INC.,
as general partner
SFX ACQUISITION CORP.
SFX BROADCASTING OF THE MIDWEST, INC.
SFX CONCERTS, INC.
SFX DELAWARE, INC.
SFX RADIO NETWORK, INC.
SFX SPORTS GROUP, INC.
Registration Rights Agreement signature page.
<PAGE>
SFX TOURING, INC.
SHELLI MEADOWS, INC.
SHORELINE AMPHITHEATRE, LTD.
SHORELINE AMPHITHEATRE PARTNERS
By: SHORELINE AMPHITHEATRE, LTD.,
as general partner
SM/PACE, INC.
SOUTHEAST TICKETING COMPANY
SOUTHERN PROMOTIONS, INC.
STEP ENTERTAINMENT SERVICES INC.
SUNSHINE CONCERTS, L.L.C.
By: SFX BROADCASTING OF THE MIDWEST,
INC.,
as the sole member
SUNSHINE DESIGNS, INC.
SUNSHINE DESIGNS, L.P.
By: SUNSHINE DESIGNS, INC.,
as general partner
SUNTEX ACQUISITION, INC.
SUNTEX ACQUISITION, L.P.
By: SUNTEX ACQUISITION, INC.,
as general partner
Registration Rights Agreement signature page.
<PAGE>
TAP PRODUCTIONS, INC.
TBA MEDIA, INC.
THE ALBUM NETWORK, INC.
THE GIN GAME TOURING COMPANY
By: MAGICWORKS ENTERTAINMENT
INCORPORATED,
as a majority holder
INTERNATIONAL MUSIC (CANADA) INC.
THE WEDDING TOUR COMPANY
TICKET SERVICE, INC.
CONCERT PRODUCTIONS (UK) LIMITED
INTERNATIONAL MUSIC (USA) INC.
INTERNATIONAL MUSIC LTD.
INTERNATIONAL MUSIC TOUR I LTD.
INTERNATIONAL MUSIC TOUR II LTD.
INTERNATIONAL MUSIC TOUR I (USA) INC.
INTERNATIONAL MUSIC TOUR II (USA) INC.
TOURING ARTISTS GROUP, INC. (FL)
Registration Rights Agreement signature page.
<PAGE>
TOURING PRODUCTIONS, INC.
TREMONT STREET THEATRE CORPORATION II,
INC.
TUNEFUL COMPANY, INC.
WARRENTON STREET THEATRE CORP.
WEST COAST AMPHITHEATER CORP.
WESTERN AMPHITHEATER PARTNERS
By: PAVILION PARTNERS,
as general partner and SM/PACE, INC., as
general partner of PAVILION PARTNERS
WOLFGANG RECORDS
By: /s/ Howard J. Tytel
------------------------------------------
Name: Howard J. Tytel
Title: Executive Vice President
AMERICAN BROADWAY, INC.
CONCERT PRODUCTIONS INTERNATIONAL B.V.
CONNECTICUT PERFORMING ARTS PARTNERS
By: CONNECTICUT AMPHITHEATER
DEVELOPMENT CORPORATION and
NOC, INC.,
as general partners
Registration Rights Agreement signature page.
<PAGE>
FINANCIAL ADVISORY MANAGEMENT
ENTERPRISES, INC.
IRVING PLAZA CONCERTS, INC.
MAGICWORKS ENTERTAINMENT ASIA LIMITED
MARCO ENTERTAINMENT, INC.
PACE U.K.
PACE VARIETY ENTERTAINMENT, INC.
TOURING ARTISTS GROUP, INC. (OH)
By: /s/ Howard J. Tytel
------------------------------------------
Name: Howard J. Tytel
Title: Authorized Agent
Registration Rights Agreement signature page.
<PAGE>
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
MORGAN STANLEY & CO. INCORPORATED
By: /s/ J. Knee
-------------------------------------
Name: J. Knee
Title: Principal
LEHMAN BROTHERS INC.
By: /s/ Steven Berhenfeld
-------------------------------------
Name: Steven Berhenfeld
Title: Managing Director
BANCBOSTON ROBERTSON STEPHENS INC.
By: /s/ Julia D. Van Trees
-------------------------------------
Name: Julia D. Van Trees
Title: Managing Director
BNY CAPITAL MARKETS, INC.
By: /s/ Bennett Leichman
-------------------------------------
Name: Bennett Leichman
Title: Vice President
Registration Rights Agreement signature page.
<PAGE>
January 25, 1999
SFX Entertainment, Inc.
650 Madison Avenue, 16th Floor
New York, New York 10022
Gentlemen:
We have acted as counsel to SFX Entertainment, Inc., a Delaware
corporation (the "Company"), in connection with its filing with the Securities
and Exchange Commission (the "SEC") of a registration statement on Form S-4
(the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the issuance of up to 2,183,867 shares
of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"),
pursuant to the Agreement and Plan of Merger, dated as of July 23, 1998, as
amended, by and among the Company, SFX Acquisition Corp., a wholly-owned
subsidiary of the Company ("Acquisition Sub"), and The Marquee Group, Inc.
("Marquee"), pursuant to which (1) Acquisition Sub shall be merged with and
into Marquee, (2) Marquee shall be the surviving corporation and (3) each share
of common stock of Marquee shall be automatically converted into shares of
Class A Common Stock and each outstanding warrant, option and stock
appreciation right of Marquee shall be assumed by the Company, all as more
fully described in the Registration Statement. Capitalized terms not otherwise
defined herein shall have the meanings set forth in the Registration Statement.
We have reviewed executed copies of the merger agreement and we have
examined the originals, or photostatic or certified copies, of such records of
the Company, certificates of officers of the Company and of public documents,
and such other documents as we have deemed relevant and necessary as the basis
of the opinion set forth below. In such examination we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents
submitted to us as photostatic or certified copies and the authenticity of the
originals of such copies.
Based upon and subject to the foregoing, we are of the opinion that:
(1) The shares of Class A Common Stock covered by the Registration
Statement have been duly and validly authorized, and when issued in
accordance with the terms of the merger agreement, will be legally issued,
fully paid and non-assessable.
<PAGE>
SFX Entertainment, Inc.
January 25, 1999
Page 2
(2) The shares of Class A Common Stock which may be issued from time
to time upon the exercise of the options and warrants issued by Marquee
and to be assumed by the Company pursuant to the merger agreement have
been duly and validly authorized, and upon payment of the exercise price
in accordance with the applicable warrant or option agreement, and
assuming no change in the applicable law or facts, will be legally issued,
fully paid and non-assessable.
We hereby consent to the use of our opinion as herein set forth as an
exhibit to the Registration Statement and to the use of our name under the
caption "Legal Matters" in the prospectus forming a part of the Registration
Statement. In giving this consent, this firm does not hereby admit that it
comes within the category of persons whose consent is required under Section 7
of the Securities Act or the rules and regulations of the SEC promulgated
thereunder.
Very truly yours,
Baker & McKenzie
<PAGE>
January 25, 1999
SFX Entertainment, Inc.
650 Madison Ave., 16th Floor
New York, NY 10022
The Marquee Group, Inc.
888 Seventh Ave., 37th Floor
New York, NY 10019
Ladies and Gentlemen:
We have acted as counsel to SFX Entertainment, Inc., a Delaware
corporation ("SFX"), and The Marquee Group, Inc., a Delaware corporation
("Marquee"), in connection with the contemplated merger (the "Merger") under
the laws of the State of Delaware of SFX Acquisition Corp. ("SFX Acquisition"),
a newly formed, direct wholly owned subsidiary of SFX, with and into Marquee
pursuant to an Agreement and Plan of Merger dated as of July 23, 1998, as
amended, by and among SFX, SFX Acquisition and Marquee (the "Merger
Agreement."). This opinion is delivered pursuant to section 6.11(b) of the
Merger Agreement. Except as otherwise defined herein, capitalized terms have
the meanings set forth in the Merger Agreement.
In rendering our opinion, we have reviewed and relied upon the
accuracy and completeness of the facts, information, covenants, and
representations contained in originals or copies, certified or otherwise
identified to our satisfaction, of the Merger Agreement, the Marquee Proxy
Statement/SFX Prospectus (the "Proxy Statement/Prospectus") which was included
in the Registration Statement on Form S-4 filed by SFX with the Securities and
Exchange Commission ("SEC"), and such other documents as we have deemed
necessary or appropriate as a basis for the opinion set forth below. In
addition, we have relied upon certain statements, representations, and
agreements made by SFX, SFX Acquisition, and Marquee, including representations
set forth in certificates in the Form of Exhibits D and E to the Merger
Agreement (the "Tax Certificates"). Our opinion is conditioned on, among other
things, the accuracy of such facts, information, covenants and representations
set forth in the documents referred to above and the statements,
representations and agreements made by SFX, SFX Acquisition and Marquee,
including those set forth in the Tax Certificates.
In our examination of documents in connection with this opinion, we
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies and the authenticity of the originals of such
<PAGE>
SFX Entertainment, Inc.
The Marquee Group, Inc.
January 25, 1999
Page 2
documents. We also have assumed that all the transactions related to the Merger
or contemplated by the Merger Agreement will be consummated in accordance with
such documents, and that none of the terms and conditions contained therein
will have been waived or modified in any respect prior to the Effective Time.
Moreover, we have assumed that the Merger qualifies as a statutory merger under
the laws of the State of Delaware.
In rendering our opinion, we have considered the applicable provisions
of the Internal Revenue Code of 1986, as amended ("Code"), the Treasury
Regulations promulgated thereunder, interpretive rulings of the Internal
Revenue Service ("IRS"), pertinent judicial decisions, and such other
authorities as we have considered relevant all as in effect on the date hereof.
It should be noted that statutes, regulations, judicial decisions and
administrative interpretations are subject to change at any time and, in some
circumstances, with retroactive effect. A change in any of the authorities upon
which our opinion is based could affect our conclusions as set forth herein.
Based solely upon and subject to the foregoing, we are of the opinion
that, under current law, (i) the Merger will constitute a reorganization for
United States federal income tax purposes within the meaning of section 368(a)
of the Code, (ii) SFX, SFX Acquisition and Marquee will each be a party to the
reorganization within the meaning of section 368(b) of the Code, and (iii)
neither Marquee or its stockholders will recognize any gain, loss or dividend
income for United States federal income tax purposes as a result of the Merger,
other than (in the case of Marquee stockholders) to the extent Marquee
stockholders receive cash in lieu of fractional shares or are deemed to receive
any other consideration as a result of the Merger. This opinion represents our
best legal judgment and has no binding effect on the IRS or the courts.
Accordingly, no assurance can be given that the IRS or a court will agree with
the conclusions reached herein.
Except as set forth above, we express no opinion to any party as to
the tax consequences, whether federal, state, local, or foreign, of the Merger
or any transaction related to the Merger or contemplated by the Merger
Agreement. We are furnishing this opinion to you solely in connection with
section 6.11(b) of the Merger Agreement, and it is not to be used, circulated,
quoted or otherwise referred to for any purpose without our express written
permission. We hereby consent to the use of our name under the heading "The
Merger--Federal Income Tax Consequences" in the Proxy Statement/Prospectus. In
giving this consent, we do not thereby admit that we are within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933
or the rules and regulations of the SEC promulgated thereunder. This opinion is
expressed as of the date hereof, and we disclaim any undertaking to advise you
of any subsequent changes of the facts stated or assumed herein or any
subsequent changes in applicable law.
Sincerely,
BAKER & MCKENZIE
David G. Glickman, Partner
<PAGE>
AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO. 1
-----------------------------------------------
AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO. 1 (this "AMENDMENT"), dated
as of November 20, 1998, to the Credit and Guarantee Agreement (as amended, the
"CREDIT AGREEMENT"), dated as of February 26, 1998, by and among SFX
Entertainment, Inc., a Delaware corporation (the "BORROWER"), the Subsidiary
Guarantors party thereto, the several banks and other parties from time to time
parties thereto (the "LENDERS"), Goldman Sachs Credit Partners L.P. and Lehman
Commercial Paper Inc., as co-documentation agents, and The Bank of New York, as
the administrative agent (in such capacity, the "ADMINISTRATIVE AGENT").
RECITALS
--------
I. Capitalized terms used herein which are not otherwise defined herein
shall have the respective meanings ascribed thereto in the Credit Agreement.
II. The Borrower has proposed to issue up to an additional $200,000,000 of
subordinated notes. Such issuance would not meet the requirements of Section
8.1 of the Credit Agreement. The Borrower has asked that the Credit Agreement
be amended to permit such issuance.
III. The Borrower acquired 100% of the capital stock of Magicworks
Entertainment Incorporated, a Delaware corporation ("MAGICWORKS") on September
11, 1998. Share certificates evidencing the capital stock of certain
Subsidiaries of Magicworks (the "MAGICWORKS SHARE CERTIFICATES") are in the
possession of a third party and, therefore, the Borrower is not in compliance
with Section 7.9(iv) of the Credit Agreement which requires stock of each new
Subsidiary to be delivered to the Administrative Agent within ten Business Days
of the acquisition thereof (the "7.9(iv) REQUIREMENT"). The Borrower has asked
that the 7.9(iv) Requirement and any resulting Default be waived.
IV. The Borrower has asked that certain non wholly-owned Subsidiaries
(single-purpose touring companies) acquired in connection with the acquisition
of Magicworks, be treated as "Excluded Subsidiaries" under the Credit
Agreement.
Accordingly, in consideration of the Recitals and the covenants and
conditions hereinafter set forth, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Borrower, the Subsidiary Guarantors and the Administrative Agent agree as
follows:
1. The Administrative Agent waives the 7.9(iv) Requirement with respect to
the Magicworks Share Certificates until March 31, 1999.
<PAGE>
2. Section 1.1 of the Credit Agreement is amended by adding the following
defined terms:
"SECOND SUBORDINATED INDENTURE" means the Indenture, dated as of
November 24, 1998, among the Borrower, the guarantors party thereto and
The Chase Manhattan Bank, as trustee.
"SECOND SUBORDINATED NOTES" means, collectively, the 9.125% Series A
Senior Subordinated Notes due 2008 and the 9.125% Series B Senior
Subordinated Notes due 2008 issued by the Borrower pursuant to the Second
Subordinated Indenture.
3. The defined term "APPLICABLE MARGIN" contained in Section 1.1 of the
Credit Agreement is amended and restated in its entirety as set forth on
Schedule A hereto.
4. The defined term "CHANGE OF CONTROL" contained in Section 1.1 of the
Credit Agreement is amended by adding the phrase "or the Second Subordinated
Indenture" immediately after the phrase "in the Subordinated Indenture".
5. The defined term "DISQUALIFIED STOCK" contained in Section 1.1 of the
Credit Agreement is amended by adding the phrase "later of the date on which
the Second Subordinated Notes mature or the" immediately after the phrase "91
days after the".
6. The defined term "SENIOR DEBT" contained in Section 1.1 of the Credit
Agreement is amended by adding the phrase "and the Second Subordinated Notes"
immediately after the phrase "the Subordinated Notes".
7. The defined term "TRANSACTION DOCUMENTS" contained in Section 1.1 of
the Credit Agreement is amended by adding the phrase "(and, solely for purposes
of Section 11.4, the Second Subordinated Notes and the Second Subordinated
Indenture)" immediately after the phrase "the Subordinated Notes,".
8. Schedule 1.1A to the Credit Agreement is amended by adding each of the
following thereto:
The Gin Game Touring Company
Jefko Touring Company
Cheva Touring Company
Magicworks Exhibitions Joint Venture
Gershwins' Fascinating Rhythm
2
<PAGE>
9. Section 4.15 of the Credit Agreement is amended by adding the phrase
"and the Second Subordinated Indenture" immediately before the period at the
end thereof.
10. Section 8.1(e) of the Credit Agreement is amended and restated in its
entirety as follows:
(e) up to $350,000,000 of Indebtedness in respect of the Subordinated
Notes and up to $200,000,000 of Indebtedness in respect of the Second
Subordinated Notes;
11. Section 8.12(a) of the Credit Agreement is amended and restated in its
entirety as follows:
(a) The Borrower shall not, and shall not permit any Restricted
Subsidiary to, enter into or agree to any amendment, modification or
waiver of any term or condition of any Subordinated Note, any Second
Subordinated Note, the Subordinated Indenture or the Second Subordinated
Indenture.
12. Section 8.14 of the Credit Agreement is amended (i) by adding the
phrase "or any Second Subordinated Note" immediately after the phrase "any
Subordinated Note" in subsection (a); and (ii) by adding the phrase "or any
Second Subordinated Notes" immediately after the phrase "the Subordinated
Notes" in subsection (b).
13. Section 9.1(f) of the Credit Agreement is amended by adding the phrase
"or the Second Subordinated Indenture" immediately after the phrase "the
Subordinated Indenture".
14. Sections 1 - 13 of this Amendment shall not be effective until such
date (the "AMENDMENT EFFECTIVE DATE") as each of the following conditions shall
have been satisfied:
(a) Required Lenders shall have consented to the execution and
delivery hereof by the Administrative Agent, and
(b) The Borrower shall have paid to the Administrative Agent, for the
account of each Lender that executes and delivers this Amendment to the
Administrative Agent by 2:00 p.m., New York time on Tuesday, November 24,
1998, an amendment fee of 0.25% of the aggregate of such Lender's
Revolving Commitment and outstanding Term Loan.
15. As of the date hereof, the Borrower hereby (a) reaffirms and admits
the validity and enforceability of the Loan Documents and all of its
obligations thereunder,
3
<PAGE>
(b) agrees and admits that it has no defenses to or offsets against any
such obligation, (c) represents and warrants that, except as otherwise
described herein, no Default has occurred and is continuing, and that each
of the representations and warranties made by it in the Credit Agreement
is true and correct with the same effect as though such representation and
warranty had been made on such date, and (d) agrees to pay the reasonable
fees and disbursements of Special Counsel in connection with this
Amendment.
16. In all other respects, the Loan Documents shall remain in full force
and effect, and no consent in respect of any term or condition of any Loan
Document contained herein shall be deemed to be a consent in respect of any
other term or condition contained in any Loan Document.
17. This Amendment may be executed in any number of counterparts all of
which, taken together, shall constitute one Amendment. In making proof of this
Amendment, it shall only be necessary to produce the counterpart executed and
delivered by the party to be charged.
18. THIS AMENDMENT IS BEING EXECUTED AND DELIVERED IN, AND IS INTENDED TO
BE PERFORMED IN, THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCEABLE
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
4
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
IN WITNESS WHEREOF, the parties hereto have caused this Consent to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.
SFX ENTERTAINMENT, INC.
By: /s/ Thomas P. Benson
------------------------------
Name: Thomas P. Benson
----------------------------
Title: VP & CPO
---------------------------
EACH OF THE SUBSIDIARY GUARANTORS
LISTED ON SCHEDULE I HERETO
By: /s/ Thomas P. Benson
------------------------------
Name: Thomas P. Benson
----------------------------
Title: VP & CPO
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
THE BANK OF NEW YORK,
in its individual capacity, as
Issuer, and as Administrative
Agent
By: /s/ illegible
------------------------------
Name: illegible
----------------------------
Title: Vice President
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
GOLDMAN SACHS CREDIT PARTNERS L.P.,
in its individual capacity and as
Co-Documentation Agent
By: /s/ Edward Forst
------------------------------
Name: Edward Forst
----------------------------
Title: Authorized Signatory
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
LEHMAN COMMERCIAL PAPER INC.,
as Co-Documentation Agent
By: /s/ illegible
------------------------------
Name: illegible
----------------------------
Title: Authorized Signatory
---------------------------
SYNDICATED LOAN FUNDING TRUST
By: Lehman Commercial Paper Inc.
not in its individual capacity
but solely as Asset Manager
By: /s/ illegible
------------------------------
Name: illegible
----------------------------
Title: Authorized Signatory
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
BANKBOSTON, N.A.
By: /s/ illegible
------------------------------
Name: illegible
----------------------------
Title: Director
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
FIRST DOMINION FUNDING I
By: /s/ Andrew H. Marshak
------------------------------
Name: Andrew Marshak
----------------------------
Title: Authorized Signatory
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
STATE STREET BANK AND TRUST COMPANY
By: /s/ John Tyler
------------------------------
Name: John Tyler
----------------------------
Title: Vice President
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
PNC BANK, NATIONAL ASSOCIATION
By: /s/ illegible
------------------------------
Name: illegible
----------------------------
Title: Vice President
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
INDOSUEZ CAPITAL FUNDING IV, L.P.
By: Indosuez Capital Luxembourg,
as Collateral Manager
By: /s/ Francoise Berthelot
------------------------------
Name: Francoise Berthelot
----------------------------
Title: Authorized Signatory
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
THE ING CAPITAL SENIOR SECURED
HIGH INCOME FUND, L.P.
By: ING CAPITAL ADVISORS, INC.,
as Investment Advisor
By: /s/ Michael J. Campbell
------------------------------
Name: Michael J. Campbell
----------------------------
Title: Senior Vice President
& Portfolio Manager
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
ARCHIMEDES FUNDING, L.L.C.
By: ING CAPITAL ADVISORS, INC.,
as Collateral Manager
By: /s/ Michael J. Campbell
------------------------------
Name: Michael J. Campbell
----------------------------
Title: Senior Vice President
& Portfolio Manager
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
ARCHIMEDES FUNDING, II, LTD.
By: ING CAPITAL ADVISORS, INC.,
as Collateral Manager
By: /s/ Michael J. Campbell
------------------------------
Name: Michael J. Campbell
----------------------------
Title: Senior Vice President
& Portfolio Manager
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
CANADIAN IMPERIAL BANK OF COMMERCE
By: /s/ Karen Volk
------------------------------
Name: Karen Volk
----------------------------
Title: Authorized Signatory
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
CONTINENTAL ASSURANCE COMPANY
Separate Account (E)
By: Highland Capital Management, L.P.,
as attorney-in-fact
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
MERRILL LYNCH GLOBAL INVESTMENT
SERIES: INCOME STRATEGIES PORTFOLIO
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By: /s/ John M. Johnson
------------------------------------
Name: John M. Johnson
----------------------------------
Title: Authorized Signatory
---------------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By: /s/ John M. Johnson
------------------------------------
Name: John M. Johnson
----------------------------------
Title: Authorized Signatory
---------------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
PAM CAPITAL FUNDING, L.P.
By: Highland Capital Management, L.P.,
as Collateral Manager
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
SENIOR DEBT PORTFOLIO
By: Boston Management and Research,
as Investment Advisor
By: /s/ Payson F. Swaffield
------------------------------
Name: Payson F. Swaffield
----------------------------
Title: Vice President
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
SENIOR INCOME TRUST
By: Boston Management and Research,
as Investment Advisor
By: /s/ Payson F. Swaffield
------------------------------
Name: Payson F. Swaffield
----------------------------
Title: Vice President
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
VAN KAMPEN AMERICAN CAPITAL PRIME
RATE INCOME TRUST
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
VAN KAMPEN AMERICAN CAPITAL
SENIOR INCOME TRUST
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
ABN AMRO BANK
By: /s/ Andrew Dry
------------------------------
Name: Andrew Dry
----------------------------
Title: Group Vice President
---------------------------
By: /s/ Frances O.R. Logan
------------------------------
Name: Frances O.R. Logan
----------------------------
Title: Group Vice President
---------------------------
<PAGE>
SFX AMENDMENT NO. 3, CONSENT NO. 4 AND WAIVER NO.1
FREMONT FINANCIAL CORPORATION
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
<PAGE>
SCHEDULE A
----------
"APPLICABLE MARGIN" means, at all times during which the applicable period
set forth below is in effect: (i) with respect to Revolving Loans consisting of
ABR Advances, the percentage set forth below under the heading "Revolving Loan
ABR Margin" and adjacent to such applicable period, (ii) with respect to
Revolving Loans consisting of Eurodollar Advances and Letter of Credit Fees,
the percentage set forth below under the heading "Revolving Loan Eurodollar and
LC Margin" and adjacent to such applicable period, (iii) with respect to Term
Loans consisting of ABR Advances, the percentage set forth below under the
heading "Term Loan ABR Margin" and adjacent to such applicable period, and (iv)
with respect to Term Loans consisting of Eurodollar Advances, the percentage
set forth below under the heading "Term Loan Eurodollar Margin" and adjacent to
such applicable period:
<TABLE>
<CAPTION>
- ------------------------------------------- ------------------ -------------- --------------- ----------------
Revolving
Revolving Loan Term Term
Loan Eurodollar Loan Loan
ABR and LC ABR Eurodollar
Period Margin Margin Margin Margin
- ------------------------------------------- ------------------ -------------- --------------- ----------------
<S> <C> <C> <C> <C>
when the Total Leverage Ratio is 2.125% 3.250% 2.500% 3.625%
equal to or greater than 6.50:1.00
- ------------------------------------------- ------------------ -------------- --------------- ----------------
when the Total Leverage Ratio is 2.000% 3.125% 2.500% 3.625%
equal to or greater than 6.00:1.00
but less than 6.50:1.00
- ------------------------------------------- ------------------ -------------- --------------- ----------------
when the Total Leverage Ratio is 1.750% 2.875% 2.250% 3.375%
equal to or greater than 5.50:1.00
but less than 6.00:1.00
- ------------------------------------------- ------------------ -------------- --------------- ----------------
when the Total Leverage Ratio is 1.500% 2.625% 2.125% 3.250%
equal to or greater than 5.00:1.00
but less than 5.50:1.00
- ------------------------------------------- ------------------ -------------- --------------- ----------------
when the Total Leverage Ratio is 1.250% 2.375% 2.125% 3.250%
equal to or greater than 4.50:1.00
but less than 5.00:1.00
- ------------------------------------------- ------------------ -------------- --------------- ----------------
when the Total Leverage Ratio is 1.000% 2.125% 2.000% 3.125%
equal to or greater than 4.00:1.00
but less than 4.50:1.00
- ------------------------------------------- ------------------ -------------- --------------- ----------------
<PAGE>
<CAPTION>
- ------------------------------------------- ------------------ -------------- --------------- ----------------
when the Total Leverage Ratio is 0.750% 1.875% 2.000% 3.125%
equal to or greater than 3.50:1.00
but less than 4.00:1.00
- ------------------------------------------- ------------------ -------------- --------------- ----------------
when the Total Leverage Ratio is 0.500% 1.625% 2.000% 3.125%
less than 3.50:1.00
- ------------------------------------------- ------------------ -------------- --------------- ----------------
</TABLE>
During the period commencing on the Effective Date and ending on the date of
delivery to the Administrative Agent of a Compliance Certificate for the fiscal
quarter ending September 30, 1998 pursuant to Section 7.1(c), the Total
Leverage Ratio for purposes of determining the Applicable Margin shall be
deemed to be greater than 6.50:1.00. Thereafter, changes in the Applicable
Margin resulting from a change in the Total Leverage Ratio shall be based upon
the Compliance Certificate most recently delivered pursuant to Section 7.1(c)
or 8.5(a) and shall become effective on the date such Compliance Certificate is
delivered to the Administrative Agent and the Lenders. Notwithstanding anything
to the contrary contained in this definition, if the Borrower shall fail to
deliver to the Administrative Agent a Compliance Certificate on or prior to any
date required hereby, for purposes of calculating the Applicable Margin, the
Total Leverage Ratio from and including such date to the date of delivery to
the Administrative Agent of such Compliance Certificate shall be deemed to be
greater than 6.50:1.00.
2
<PAGE>
Page 1
L&W DRAFT OF 11/20/98
MORGAN STANLEY - SFX
SFX ENTERTAINMENT, INC.
$200,000,000
9-1/8% SENIOR SUBORDINATED NOTES DUE 2008
PURCHASE AGREEMENT
November 19, 1998
MORGAN STANLEY & CO. INCORPORATED
LEHMAN BROTHERS INC.
BANCBOSTON SECURITIES INC.
BNY CAPITAL MARKETS, INC.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
SFX Entertainment, Inc., a Delaware corporation (the "COMPANY") and
each of the entities listed on Schedule I hereto (the "SUBSIDIARIES") hereby
confirms its agreement with each of Morgan Stanley & Co. Incorporated, Lehman
Brothers Inc., BancBoston Securities Inc. and BNY Capital Markets, Inc.
(collectively, the "INITIAL PURCHASERS"), as set forth below.
1. The Notes. Subject to the terms and conditions herein
contained, the Company proposes to issue and sell (the "OFFERING") to the
Initial Purchasers $200,000,000 in aggregate principal amount of its 9-1/8%
Senior Subordinated Notes due 2008 (the "INITIAL NOTES"). The payment of
principal, premium, if any, interest and Liquidated Damages (as defined below),
if any, on the Notes and the Company's 9-1/8% Senior Subordinated Notes due
2008 to be issued in the Exchange Offer referred to below (the "NEW NOTES" and,
together with the Initial Notes, the "NOTES") will be unconditionally
guaranteed on a senior subordinated basis by each of the Subsidiaries listed as
Guarantors on Schedule 1 hereto (collectively, the "GUARANTORS") pursuant to
their guarantees of the Notes (the "SUBSIDIARY GUARANTEES"). The Initial Notes
are to be issued pursuant to an indenture to be dated as of the Closing Date
(the "INDENTURE") among the Company, the Guarantors and The Chase Manhattan
Bank, as trustee (the "TRUSTEE").
Capitalized terms used herein and not otherwise defined are used as
defined in the Offering Memorandum (as defined below) or the Indenture.
Upon original issuance thereof, and until such time as is no longer
required under the applicable requirements of the Securities Act of 1933, as
amended (the "SECURITIES ACT"), the Initial Notes (and all securities issued in
exchange therefor or in substitution thereof) shall bear the following legend:
<PAGE>
Page 2
["THE NOTE (OR ITS PREDECESSOR) EVIDENCED HEREBY HAS NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT
BE OFFERED OR SOLD EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS
ACQUISITION HEREOF, THE HOLDER: (1) REPRESENTS THAT IT IS (A) A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR
(B) NOT A U.S. PERSON AND IS ACQUIRING THE NOTE EVIDENCED HEREBY IN AN
OFFSHORE TRANSACTION; (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE
TRANSFER THE NOTE EVIDENCED HEREBY EXCEPT TO (A) THE COMPANY OR ANY
SUBSIDIARY THEREOF, (B) A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH
RULE 144A UNDER THE SECURITIES ACT, (C) AN INSTITUTIONAL ACCREDITED
INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE CHASE MANHATTAN
BANK, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
RESTRICTIONS ON TRANSFER OF THE NOTE EVIDENCED HEREBY (THE FORM OF WHICH
LETTER CAN BE OBTAINED FROM SUCH TRUSTEE OR A SUCCESSOR TRUSTEE, AS
APPLICABLE), (D) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904
UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION
PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR IN
ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT, AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OR ANY OTHER APPLICABLE JURISDICTION; AND (3)
AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE NOTE EVIDENCED
HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND.
IF THE PROPOSED TRANSFER IS PURSUANT TO CLAUSE (C), (D) OR (E) ABOVE, THE
HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE CHASE MANHATTAN BANK,
AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), SUCH CERTIFICATIONS,
LEGAL OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM
THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND
"U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE
SECURITIES ACT."]
The Company has prepared a final offering memorandum to be dated the
date hereof (as amended or supplemented, the "OFFERING MEMORANDUM"), setting
forth or including a description of the terms of the Initial Notes, the terms
of the Offering, a description of the Company and the Subsidiaries and any
material developments relating to the Company and the Subsidiaries occurring
after November 19, 1998. Copies of the Offering Memorandum will be delivered by
the Company to the Initial Purchasers pursuant to the terms of this Purchase
<PAGE>
Page 3
Agreement (this "AGREEMENT"). The Company hereby confirms that it has
authorized the use of the Offering Memorandum in connection with the offering
and resale of the Initial Notes by the Initial Purchasers in accordance with
Section 4 hereof.
Each Initial Purchaser has advised the Company that it will make
offers (the "EXEMPT RESALES") of the Initial Notes purchased by them hereunder
on the terms set forth in the Offering Memorandum, as amended or supplemented,
solely to (i) persons whom the Initial Purchasers reasonably believe to be
qualified institutional buyers ("QUALIFIED INSTITUTIONAL BUYERS") as defined in
Rule 144A under the Securities Act, as such rule may be amended from time to
time ("RULE 144A"), and (ii) to persons other than U.S. Persons in offshore
transactions meeting the requirements of Rule 903 of Regulation S (such persons
specified in clauses (i) and (ii) being referred to herein as the "ELIGIBLE
PURCHASERS"). As used herein, the terms "offshore transaction" and "U.S.
Person" have the respective meanings given to them in Regulation S. Each
Initial Purchaser will offer the Initial Notes to Eligible Purchasers initially
at the price set forth on the cover page of the Offering Memorandum. Such price
may be changed at any time without notice.
Holders (including subsequent transferees) of the Initial Notes will
have the registration rights set forth in the registration rights agreement
(the "REGISTRATION RIGHTS AGREEMENT"), to be dated the Closing Date. Pursuant
to the Registration Rights Agreement, the Company will agree to file with the
Securities and Exchange Commission (the "COMMISSION") under the circumstances
set forth therein, (i) a registration statement under the Securities Act (the
"EXCHANGE OFFER REGISTRATION STATEMENT") relating to the New Notes to be
offered in exchange for the Initial Notes (such offer to exchange being
referred to collectively as the "EXCHANGE OFFER") and, if required, (ii) a
shelf registration statement pursuant to Rule 415 under the Securities Act (the
"SHELF REGISTRATION STATEMENT," and together with the Exchange Offer
Registration Statement, the "REGISTRATION STATEMENTS") relating to the Exchange
Offer and resale of the Initial Notes by certain holders of such Notes, and to
use all commercially reasonable efforts to cause such Registration Statements
to be declared effective.
The Initial Notes will be offered and sold to the Initial Purchasers
without being registered under the Securities Act in reliance on an exemption
from such registration requirements.
The Initial Purchasers and their direct and indirect transferees will
be entitled to the benefits of the Registration Rights Agreement, substantially
in the form attached hereto as Exhibit A, pursuant to which the Company and the
Guarantors will agree to use their best efforts (i) to commence, among other
things, an offer to exchange the Initial Notes for New Notes that have been
registered under the Securities Act, and that otherwise are identical in all
respects to the Initial Notes, or, if required, (ii) to cause a shelf
registration statement to become effective under the Securities Act and to
remain effective for the period designated in such Registration Rights
Agreement.
2. Representations and Warranties of the Company and the
Subsidiaries. The Company and each Subsidiary represents and warrants to and
agrees with the Initial Purchasers as follows:
(a) The Offering Memorandum as of its date did not, and the Offering
Memorandum as of the Closing Date will not, contain any untrue statement of a
material fact or omit to state a
<PAGE>
Page 4
material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading; provided,
however, that the Company and the Subsidiaries make no representation or
warranty as to information contained in or omitted from the Offering Memorandum
in reliance upon and in conformity with written information relating to the
Initial Purchasers furnished to the Company by such Initial Purchaser
specifically for inclusion in the Offering Memorandum.
(b) Assuming the Initial Notes are issued, sold and delivered under
the circumstances contemplated by the Offering Memorandum and this Agreement,
that the representations and warranties and covenants of the Initial Purchasers
contained in Section 4 hereof are true, correct and complete, and that the
Initial Purchasers comply with their covenants in Section 4 hereof, (i)
registration under the Securities Act of the Initial Notes or qualification of
the Indenture in respect of the Initial Notes under the Trust Indenture Act of
1939, as amended (the "TRUST INDENTURE ACT"), is not required in connection
with the offer and sale of the Initial Notes to the Initial Purchasers in the
manner contemplated by the Offering Memorandum or this Agreement and (ii)
initial resales of the Initial Notes by the Initial Purchasers on the terms and
in the manner set forth in the Offering Memorandum and Section 4 hereof are
exempt from the registration requirements of the Securities Act.
(c) No securities of the same class (within the meaning of Rule
144A(d)(3) under the Securities Act) as the Initial Notes are listed on any
national securities exchange registered under Section 6 of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT") or quoted on an automated
inter-dealer quotation system.
(d) Neither the Company nor any affiliate (as defined in Rule 501(b)
of Regulation D under the Securities Act ("REGULATION D")) of the Company has,
directly or through any agent (provided that no representation is made as to
the Initial Purchasers or any person acting on their behalf), (i) sold, offered
for sale, solicited offers to buy or otherwise negotiated in respect of any
security (as defined in the Securities Act) that is or will be integrated with
the offering and sale of the Initial Notes in a manner that would require the
registration of the Initial Notes under the Securities Act or (ii) engaged in
any form of general solicitation or general advertising (within the meaning of
Regulation D) in connection with the offering of the Initial Notes.
(e) Neither the Company nor any of the Subsidiaries has taken, nor
will any of them take, directly or indirectly, any action designed to, or that
could reasonably be expected to, cause or result in stabilization or
manipulation of the price of the Initial Notes to facilitate the sale and
resale of the Initial Notes.
(f) The Offering Memorandum, as of its date, contains the information
specified in Rule 144A(d)(4) under the Securities Act.
(g) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware with full corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Offering Memorandum, is and, after giving effect
to the Pending Acquisitions (as defined in the Offering Memorandum), will be
duly registered and qualified to conduct its business and is and, after giving
effect to the Pending Acquisitions, will be in good standing, in each
jurisdiction or place where the nature of its business requires such
registration or qualification, except where the failure to be so qualified
would not have a material adverse effect or a prospective material
<PAGE>
Page 5
adverse effect on the assets, liabilities, results of operations, management,
condition (financial or other), prospects, properties, business or net worth of
the Company and its direct and indirect subsidiaries, taken as a whole (a
"MATERIAL ADVERSE EFFECT").
(h) All of the issued shares of capital stock of the Company have been
duly authorized, are validly issued, fully paid and nonassessable and have been
issued in compliance with all applicable federal and state securities laws.
(i) Neither the Company nor any of the Subsidiaries owns or controls
any subsidiaries other than the Subsidiaries. Each Subsidiary is a corporation
duly organized, validly existing and in good standing in the jurisdiction of
its incorporation, with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the Offering
Memorandum, is and, after giving effect to the Pending Acquisitions, will be
duly registered and qualified to conduct its business and is and, after giving
effect to the Pending Acquisitions, will be in good standing, in each
jurisdiction or place where the nature of its business requires such
registration or qualification, except where the failure to be so qualified
would not have a Material Adverse Effect; all of the outstanding shares of
capital stock of each of the Subsidiaries have been duly authorized and validly
issued, are fully paid and nonassessable and free of any preemptive or similar
rights, and are owned by the Company directly, or indirectly through one of the
other Subsidiaries, free and clear of any lien, adverse claim, security
interest or other encumbrance (except for security interests under the existing
Senior Credit Facility) and have been issued in compliance with all applicable
federal and state securities laws.
(j) The Company and each of the Subsidiaries have full corporate power
and authority to enter into this Agreement, the Indenture, the Registration
Rights Agreement, the indenture governing the Exchange Notes (as defined in the
Offering Memorandum), the consent related to the Senior Credit Facility and the
purchase agreements and other agreements relating to each of the Pending
Acquisitions (the "ACQUISITION DOCUMENTS") (each a "TRANSACTION DOCUMENT" and
collectively the "TRANSACTION DOCUMENTS"), to carry out all the terms and
provisions hereof and thereof to be carried out by them and to issue, and
deliver the Notes and the Subsidiary Guarantees, as applicable, as provided
herein and therein.
(k) This Agreement has been duly authorized, validly executed and
delivered by the Company and each Subsidiary and constitutes a legal, valid and
binding agreement of the Company and each of the Subsidiaries (assuming it is a
legal, valid and binding agreement of the Initial Purchasers), enforceable
against the Company and each Subsidiary in accordance with its terms except to
the extent that: (i) the same may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other laws now or
hereafter in effect relating to creditors' rights generally or by general
principles of equity whether asserted in an action at law or in equity and (ii)
rights to indemnity and contribution hereunder may be limited by state or
federal securities laws.
(l) The execution and delivery of the Registration Rights Agreement
have been duly authorized by the Company and each of the Guarantors and when
duly executed and delivered by the Company and each of the Guarantors (assuming
the due execution and delivery by the Initial Purchasers) will constitute the
legal, valid and binding agreement of the Company and each of the Guarantors
(assuming it is a legal, valid and binding agreement of the Initial
Purchasers), enforceable against the Company and each Guarantor in accordance
with its
<PAGE>
Page 6
terms except to the extent that: (i) the same may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or other laws now
or hereafter in effect relating to creditors' rights generally or by general
principles of equity whether asserted in an action at law or in equity and (ii)
rights to indemnity and contribution hereunder may be limited by state or
federal securities laws.
(m) The execution and delivery of the Indenture have been duly
authorized by the Company and each of the Guarantors and when duly executed and
delivered by the Company and each of the Guarantors (assuming the due execution
and delivery by the Trustee) will constitute the legal, valid and binding
agreement of the Company and each of the Guarantors, enforceable against the
Company and each Guarantor in accordance with its terms except to the extent
that: (i) the same may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other laws now or hereafter in effect
relating to creditors' rights generally or by general principles of equity
whether asserted in an action at law or in equity and (ii) rights to indemnity
and contribution hereunder may be limited by state or federal securities laws.
(n) The Initial Notes have been duly authorized by the Company and,
when duly executed, authenticated, issued and delivered by the Company upon
payment therefor as provided herein, will be validly issued and outstanding,
and will constitute the legal, valid and binding obligations of the Company,
entitled to the benefits of the Indenture and enforceable against the Company
in accordance with their terms except to the extent that: (i) the same may be
limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other laws now or hereafter in effect relating to creditors'
rights generally or by general principles of equity whether asserted in an
action at law or in equity and (ii) rights to indemnity and contribution
hereunder may be limited by state or federal securities laws.
(o) The New Notes have been duly authorized by the Company and, when
duly executed, authenticated, issued and delivered by the Company upon exchange
for the Initial Notes as provided for in the Registration Rights Agreement,
will be validly issued and outstanding, and will constitute the legal, valid
and binding obligations of the Company, entitled to the benefits of the
Indenture and enforceable against the Company in accordance with their terms
except to the extent that: (i) the same may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or other laws now
or hereafter in effect relating to creditors' rights generally or by general
principles of equity whether asserted in an action at law or in equity and (ii)
rights to indemnity and contribution hereunder may be limited by state or
federal securities laws.
(p) The Subsidiary Guarantees to be endorsed on the Initial Notes have
been duly authorized by the Guarantors and, when duly executed, authenticated,
issued and delivered by the Guarantors as provided herein and when the Initial
Notes have been duly executed, authenticated, issued and delivered upon payment
therefor as provided herein, will be validly issued and outstanding, and will
constitute the legal, valid and binding obligations of each of the Guarantors,
entitled to the benefits of the Indenture and enforceable against the
Guarantors in accordance with their terms except to the extent that: (i) the
same may be limited by bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other laws now or hereafter in effect relating to
creditors' rights generally or by general principles of equity whether asserted
in an action at law or in equity and (ii) rights to indemnity and contribution
<PAGE>
Page 7
hereunder may be limited by state or federal securities laws.
(q) The Subsidiary Guarantees to be endorsed on the New Notes have
been duly authorized by the Guarantors and, when duly executed, authenticated,
issued and delivered and when the New Notes have been duly executed,
authenticated, issued and delivered by the Guarantors upon exchange for the
Initial Notes as provided for in the Registration Rights Agreement, will be
validly issued and outstanding, and will constitute the legal, valid and
binding obligations of each of the Guarantors, entitled to the benefits of the
Indenture and enforceable against the Guarantors in accordance with their terms
except to the extent that: (i) the same may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or other laws now
or hereafter in effect relating to creditors' rights generally or by general
principles of equity whether asserted in an action at law or in equity and (ii)
rights to indemnity and contribution hereunder may be limited by state or
federal securities laws.
(r) The execution and delivery of each of the other Transaction
Documents to which the Company or any Subsidiary is a party have been duly
authorized by the Company and each Subsidiary party thereto and each of such
other Transaction Documents which has been executed prior to or on the date
hereof has been duly executed and delivered by the Company and each Subsidiary
party thereto and is the legal, valid and binding agreement of the Company and
each Subsidiary party thereto (assuming it is a legal, valid and binding
agreement of the other parties thereto), enforceable against the Company and
each Subsidiary party thereto in accordance with its terms except to the extent
that: (i) the same may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other laws now or hereafter in effect
relating to creditors' rights generally or by general principles of equity
whether asserted in an action at law or in equity; and (ii) rights to indemnity
and contribution hereunder may be limited by state or federal securities laws.
(s) The Company has an authorized, issued and outstanding
capitalization as set forth in the Offering Memorandum. The authorized capital
stock of the Company conforms to the description thereof contained in the
Offering Memorandum.
(t) The Company's capitalization at September 30, 1998, and adjusted
capitalization at such date after giving effect to the [Financing] (as defined
in the Offering Memorandum) and the Pending Acquisitions, is, in each case, as
set forth in the Offering Memorandum under the caption "Capitalization."
(u) Except as disclosed in the Offering Memorandum, there are no
outstanding (A) securities or obligations of the Company or any of the
Subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such Guarantor, (B) warrants, rights or options to subscribe for
or purchase from the Company or any of the Subsidiaries any such capital stock
or any such convertible or exchangeable securities or obligations, or (C)
obligations of the Company or any of the Subsidiaries to issue any shares of
capital stock, any such convertible or exchangeable securities or obligations,
or any such warrants, rights or options.
(v) Except as disclosed in the Offering Memorandum and as set forth in
the Registration Rights Agreement, there are no contracts, agreements or
understandings between the Company and any person granting such person the
right to require the Company to file a registration statement under the
Securities Act with respect to any securities owned or to be
<PAGE>
Page 8
owned by such person or to require the Company to include such securities in
any securities being registered pursuant to any registration statement filed by
the Company under the Securities Act.
(w) The consolidated financial statements of the Company and the
Subsidiaries and the financial statements of each of the businesses to be
acquired in the Pending Acquisitions (collectively, the "ACQUISITION ENTITIES")
included in the Offering Memorandum comply as to form in all material respects
with the requirements applicable to registration statements on Form S-1 under
the Securities Act and present fairly in all material respects the financial
position of the Company on a consolidated basis and of each of the Acquisition
Entities, respectively, and the results of operations and changes in financial
condition as of the dates and for the periods therein specified. Such financial
statements have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved (except as
otherwise noted therein). The selected financial data set forth under the
captions ["Offering Memorandum Summary--Summary Consolidated Financial Data of
the Company," "Selected Consolidated Financial Data of the Company" and
"Unaudited Pro Forma Condensed Combined Financial Statements"] in the Offering
Memorandum fairly present, on the basis stated in the Offering Memorandum, the
information included. The other financial and statistical information and data
set forth in the Offering Memorandum is, in all material respects, accurately
presented and prepared on a basis consistent with such financial statements and
the books and records of the Company, the Subsidiaries and the Acquisition
Entities, as applicable. The unaudited pro forma condensed combined financial
statements and the related notes thereto included in the Offering Memorandum
comply as to form in all material respects with the requirements applicable to
pro forma financial statements included in registration statements on Form S-1
under the Securities Act and present fairly, as stated therein, the pro forma
financial position and results of operations at the respective dates and for
the respective periods indicated. The pro forma adjustments are factually
supportable. All adjustments necessary to fairly present this pro forma
information have been made.
(x) Each of Ernst & Young LLP, Arthur Andersen LLP and
PriceWaterhouseCoopers LLP, who have certified certain financial statements of
the Company, its consolidated subsidiaries and the Acquisition Entities, and
whose reports appear in the Offering Memorandum, were independent public
accountants under Rule 101 of AICPA's Code of Professional Conduct and its
interpretations and rulings during the periods covered by the financial
statements on which they reported contained in the Offering Memorandum.
(y) Subsequent to the date of the most recent balance sheet for each
of the Company, the Subsidiaries and each of the Acquisition Entities included
in the Offering Memorandum, except as set forth in the Offering Memorandum, (i)
none of the Company, any of the Subsidiaries or any Acquisition Entity has
incurred any liabilities or obligations, direct or contingent, or entered into
any transaction not in the ordinary course of business, except such as would
not have a Material Adverse Effect and (ii) none of the Company, any of the
Subsidiaries or any Acquisition Entity has sustained, since the date of the
latest audited financial statements included in the Offering Memorandum, any
material losses or interferences with its business from fire, explosion, flood
or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, except such as would
not have a Material Adverse Effect.
(z) Each of the Transaction Documents, the Initial Notes and the
Subsidiary
<PAGE>
Page 9
Guarantees conform in all material respects to the respective statements
relating thereto contained in the Offering Memorandum.
(aa) Except as disclosed in the Offering Memorandum (including,
without limitation, the documents incorporated by reference therein), there are
no business relationships or related party transactions which would be required
to be disclosed therein by Item 404 of Regulation S-K of the Commission and
each business relationship or related party transaction described therein is a
fair and accurate description of the relationships and transactions so
described.
(bb) None of the Company or the Subsidiaries, nor, to the Company's
knowledge, any of the Acquisition Entities or any director, officer, agent,
employee or other person associated with or acting on behalf of the Company or
any of the Subsidiaries, has used any corporate funds during the last five
years for any unlawful contribution, gift, entertainment or other unlawful
expense relating to political activity; made any unlawful payment to any
foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the Foreign Corrupt Practices
Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment,
kickback or other unlawful payment, except such as would not have a Material
Adverse Effect.
(cc) Except as disclosed in the Offering Memorandum, the execution,
delivery and performance of this Agreement, the execution, delivery and
performance of the other Transaction Documents, and the consummation by the
Company and the Subsidiaries of the transactions contemplated hereby and
thereby will not (A) require any consent, approval, authorization or other
order (which has not been obtained) of any court, regulatory body,
administrative agency or other governmental body except such as may be required
under the Securities Act, the Exchange Act, the Trust Indenture Act, securities
regulatory bodies (including self-regulatory bodies), securities exchanges or
the securities or Blue Sky laws of the various states and under the
Hart-Scott-Rodino Anti-Trust Improvement Act of 1976; (B) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of the Subsidiaries; (C) require
any consent or approval (which has not been obtained) of the parties to, or
conflict with or constitute a breach of any of the terms or provisions of, or a
default under, any agreement or other instrument to which the Company or any of
the Subsidiaries is a party or by which the Company or any of the Subsidiaries
or their respective property is bound; (D) violate or conflict with any laws or
administrative regulations, rulings of court, decrees applicable to the
Company, any of the Subsidiaries or their respective property; or (E) result in
the creation or imposition of any lien (other than under the Senior Credit
Facility) on any asset of the Company or any of the Subsidiaries, except, in
the case of (A), (C), (D), or (E) above, such as would not, either singly or in
the aggregate, have a Material Adverse Effect.
(dd) Except as disclosed in the Offering Memorandum, each of the
Company, the Subsidiaries and the Acquisition Entities is operating in material
compliance with all (and has not violated any) laws, regulations,
administrative orders or rulings or court decrees applicable to it or to any of
its property (including without limitation those relating to environmental,
safety or similar matters, federal or state laws relating to the hiring,
promotion or pay of employees), except for violations which would not have a
Material Adverse Effect.
(ee) Except as, singly or in the aggregate, would not have a Material
Adverse Effect,
<PAGE>
Page 10
(i) the Company and the Subsidiaries, have (A) such permits, licenses,
franchises and authorizations of governmental or regulatory authorities
("PERMITS") as are necessary to own, lease and operate their properties and to
conduct their businesses as presently conducted, and (B) fulfilled and
performed all of their material obligations with respect to the Permits, and
(ii) no event has occurred that would allow, or after notice or lapse of time
would allow, revocation or termination of any Permit or that would result in
any other material impairment of the rights granted to the Company or any of
the Subsidiaries under any Permit, and (iii) neither the Company nor any
Subsidiary has any reason to believe that any governmental body or agency is
considering limiting, suspending or revoking any Permit.
(ff) No legal or governmental proceedings are pending to which the
Company, any of the Subsidiaries or any of the Acquisition Entities is a party
or to which the property of the Company, any of the Subsidiaries or any of the
Acquisition Entities is subject that would be required to be described in a
registration statement on Form S-1 under the Securities Act and are not
described in the Offering Memorandum, and no such proceedings have been
threatened against the Company, any of the Subsidiaries or any of the
Acquisition Entities or with respect to any of their respective properties; and
no contract or other document would be required to be described in a
registration statement on Form S-1 under the Securities Act that is not
described in the Offering Memorandum.
(gg) None of the Company, the Subsidiaries or, to the knowledge of the
Company, the sellers of the Acquisition Entities is in breach or violation of
any of the terms or provisions of any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company, any of the
Subsidiaries or, to the knowledge of the Company, any of sellers of the
Acquisition Entities, as applicable, is a party or by which the Company, any of
the Subsidiaries or, to the knowledge of the Company, any of the sellers of the
Acquisition Entities, as applicable, is bound or to which any of the property
or assets of the Company, any of the Subsidiaries or, to the knowledge of the
Company, any of sellers of the Acquisition Entities, as applicable, is subject,
nor is the Company, any of the Subsidiaries or, to the knowledge of the
Company, any of the sellers of the Acquisition Entities in violation of the
provisions of its charter, by-laws, operating agreement or other organizational
documents or any statute or any judgment, order, rule or regulation of any
court or governmental agency or body having jurisdiction over the Company, any
of the Subsidiaries, to the knowledge of the Company, any of the sellers of the
Acquisition Entities or any of their properties or assets (except to the extent
any such conflict, breach, violation or default is cured at or prior to the
Closing Date and within the grace period applicable thereto or would not have a
Material Adverse Effect).
(hh) Each of the Company, the Subsidiaries and the sellers of each of
the Acquisition Entities has (i) good title to all of the properties and assets
owned by them as described in the Offering Memorandum, free and clear of all
liens, charges, encumbrances or restrictions (except security interests under
the Senior Credit Facility), except as would not have a Material Adverse Effect
and (ii) peaceful and undisturbed possession in all material respects under all
material leases to which such person is a party as lessee, except as would not
have a Material Adverse Effect.
(ii) The Company, the Subsidiaries and the sellers of each of the
Acquisition Entities own or possess adequate rights to use all material
trademarks, service marks, tradenames, trademark registrations, service mark
registrations and copyrights necessary for the conduct of their businesses, and
to the Company's knowledge, the conduct of their businesses will not
<PAGE>
Page 11
conflict with, and neither the Company nor any of the Subsidiaries has received
any notice of any claim of conflict with, any such rights of others (except in
any such case for any conflict that would not have a Material Adverse Effect).
(jj) Each of the Company, the Subsidiaries and the Acquisition
Entities is in compliance in all material respects with all presently
applicable provisions of the Employee Retirement Income Security Act of 1974,
as amended, including the regulations and published interpretations thereunder
("ERISA"); no "reportable event" (as defined in ERISA) has occurred with
respect to any "pension plan" (as defined in ERISA) for which the Company or
any Subsidiary would have any liability; none of the Company or the
Subsidiaries has incurred or expects to incur liability under (i) Title IV of
ERISA with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Section 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"CODE"); and each "pension plan" for which the Company or any Subsidiary would
have any liability that is intended to be qualified under Section 401(a) of the
Code is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification, except, in each case, as would not have a Material Adverse
Effect.
(kk) There is (i) no material unfair labor practice complaint pending
against the Company, any of the Subsidiaries or any of the Acquisition
Entities, or, to the best knowledge of the Company, threatened against any of
them, before the National Labor Relations Board or any state or local labor
relations board, and no significant grievance or significant arbitration
proceeding arising out of or under any collective bargaining agreement is so
pending against the Company, any of the Subsidiaries or any of the Acquisition
Entities, or, to the best knowledge of the Company, threatened against any of
them, (ii) no material strike, labor dispute, slowdown or stoppage pending
against the Company, any of the Subsidiaries or any of the Acquisition Entities
nor, to the best knowledge of the Company, threatened against the Company, any
of the Subsidiaries or any of the Acquisition Entities and (iii) to the best
knowledge of the Company, no union representation question existing with
respect to the employees of the Company, any of the Subsidiaries or any of the
Acquisition Entities and, to the best knowledge of the Company, no union
organizing activities are taking place, except, in each case, as would not have
a Material Adverse Effect.
(ll) The Company and each of the Subsidiaries has reviewed the effect
of Environmental Laws (as defined below) and the disposal of hazardous or toxic
substances, wastes, pollutants and contaminants on the business, assets,
operations and properties of the Company, each of the Subsidiaries and each of
the Acquisition Entities, as applicable, and identified and evaluated
associated costs and liabilities (including, without limitation, any material
capital and operating expenditures required for clean-up, closure of properties
and compliance with Environmental Laws, all permits, licenses and approvals,
all related constraints on operating activities and all potential liabilities
to third parties). On the basis of such reviews, the Company has reasonably
concluded that such associated costs and liabilities would not have a Material
Adverse Effect. None of the Company, the Subsidiaries or the Acquisition
Entities has violated any environmental, safety or similar law or regulation
applicable to it or its business or property relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), lacks any permit,
license or other approval required of it under applicable Environmental Laws or
is violating any term or condition of such permit, license or approval which
could reasonably
<PAGE>
Page 12
be expected to, either individually or in the aggregate, have a Material
Adverse Effect.
(mm) The Company, the Subsidiaries and the Acquisition Entities have
filed all federal, state and local income and franchise tax returns required to
be filed through the date hereof and have paid, or made adequate reserve or
provision for the payment of, all taxes shown as due thereon except in any case
where such failure would not have a Material Adverse Effect, and the Company
has no knowledge of any tax deficiency that has had (or would have) a Material
Adverse Effect.
(nn) The Company and the Subsidiaries (i) make and keep accurate books
and records and (ii) maintain internal accounting controls which provide
reasonable assurance that (A) transactions are executed in accordance with
management's specific or general authorization, (B) transactions are recorded
as necessary to permit preparation of their consolidated financial statements
and to maintain accountability for their assets, (C) access to their assets is
permitted only in accordance with management's specific or general
authorization and (D) the reported accountability for their assets is compared
with existing assets at reasonable intervals.
(oo) Neither the Company nor any of the Subsidiaries is, or after
giving effect to the Offering and the sale of the Notes and the application of
the proceeds thereof as described in the Offering Memorandum will be, (i) an
"investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940, as amended, or (ii) a
"holding company" or a "subsidiary company" or an "affiliate" of a holding
company within the meaning of the Public Utility Holding Company Act of 1935,
as amended.
(pp) Each of the Company, the Subsidiaries and the Acquisition
Entities has complied with all provisions of Florida Statutes, ss.517.075,
relating to doing business in Cuba.
(qq) None of the Company, the Subsidiaries or any agent thereof acting
on behalf of any of them has taken, and none of them will take, any action that
might cause this Agreement or the issuance or sale of the Notes to violate
Regulation G (12 C.F.R. Part 207), Regulation T (12 C.F.R. Part 220),
Regulation U (12 C.F.R. Part 221) or Regulation X (12 C.F.R. Part 224) of the
Board of Governors of the Federal Reserve
(rr) The Company has delivered to the Initial Purchasers true and
correct, executed copies of each Transaction Document that has been executed
prior to the date hereof and there have been no amendments, alterations,
modifications or waivers thereto or in the exhibits or schedules thereto other
than those as to which the Initial Purchasers shall previously have been
advised and shall not have reasonably objected after being furnished a copy
thereof.
(ss) Other than as contemplated by this Agreement, the Transaction
Documents and the Offering Memorandum, there is no broker, finder or other
party that is entitled to receive from the Company or any of the Subsidiaries
any brokerage or finder's fee or other fee or commission as a result of any of
the transactions contemplated by this Agreement or any of the Transaction
Documents.
(tt) None of the Company or any of its affiliates or any person acting
on its or their behalf (other than the Initial Purchasers) has engaged or will
engage during the applicable restricted period in any directed selling efforts
within the meaning of Rule 902(b) of Regulation
<PAGE>
Page 13
S with respect to the Notes, and the Company and its affiliates and all persons
acting on its or their behalf (other than the Initial Purchasers) have complied
with and will comply with the offering restrictions requirements of Regulation
S in connection with the offering of the Notes outside of the United States.
(uu) The sale of the Initial Notes pursuant to Regulation S are
"offshore transactions" and are not part of a plan or scheme to evade the
registration provision of the Securities Act.
(vv) Neither the Company nor any affiliate (as defined in Rule 501(b)
of Regulation D under the Securities Act, an "AFFILIATE") of the Company has
directly, or through any agent, (i) sold, offered for sale solicited offers to
buy or otherwise negotiated in respect of, any security (as defined in the
Securities Act) which is or will be integrated with the sale of the Notes in a
manner that would require the registration under the Securities Act of the
Notes or (ii) engaged in a form of general solicitation or general advertising
in connection with the offering of the Notes , (as those terms are used in
Regulation D under the Securities Act) or in any manner involving a public
offering within the meaning of Section 4(2) of the Securities Act.
(ww) It is not necessary in connection with the offer, sale and
delivery of the Notes to the Initial Purchasers in the manner contemplated by
this Purchase Agreement to register the Notes under the Securities Act or to
qualify the Indenture under the Trust Indenture Act of 1939, as amended.
3. Purchase, Sale and Delivery of the Initial Notes. On the basis
of the representations, warranties, agreements and covenants herein contained
and subject to the terms and conditions herein set forth, the Company agrees to
issue and sell to the Initial Purchasers, and the Initial Purchasers agree,
severally and not jointly, to purchase from the Company, at 97.625% of their
principal amount, the respective aggregate principal amounts of the Initial
Notes set forth in Schedule II hereto. Certificates in definitive form for the
Initial Notes that the Initial Purchasers have agreed to purchase hereunder,
and in such denomination or denominations and registered in such name or names
as the Initial Purchasers request upon notice to the Company at least 48 hours
prior to the Closing Date, shall be delivered by or on behalf of the Company to
the Initial Purchasers for the account of the Initial Purchasers against
payment to or upon the order of the Company of the purchase price by wire
transfer in federal (same-day) funds net of the overnight cost of such funds,
which amount shall be agreed upon by mutual consent of the parties hereto. Such
delivery of and payment for the Initial Notes shall be made at the offices of
Baker & McKenzie, 805 Third Avenue, New York, New York 10022, at 9:00 A.M., New
York City time, on November 25, 1998, or at such other place, time or date as
the Initial Purchasers and the Company may agree upon, such time and date of
delivery against payment being herein referred to as the "CLOSING DATE." The
Company will make such certificate or certificates for the Initial Notes
available for checking and packaging by the Initial Purchasers at the offices
in New York, New York of Morgan Stanley & Co. Incorporated at least 24 hours
prior to the Closing Date. Time shall be of the essence, and delivery at the
time and place specified pursuant to this Agreement is a further condition of
the obligation of the Initial Purchasers hereunder.
4. Offering of Notes; Restrictions on Transfer.
(a) Each Initial Purchaser, severally and not jointly, represents and
warrants that such Initial Purchaser is a qualified institutional buyer as
defined in Rule 144A under the
<PAGE>
Page 14
Securities Act (a "QIB"). Each Initial Purchaser, severally and not jointly,
agrees with the Company that (i) it will not solicit offers for, or offer or
sell, such Notes by any form of general solicitation or general advertising (as
those terms are used in Regulation D under the Securities Act) or in any manner
involving a public offering within the meaning of Section 4(2) of the
Securities Act and (ii) it will solicit offers for such Notes only from, and
will offer such Notes only to , persons that it reasonably believes to be (A)
in the case of offers inside the United States, QIBs, and (B) in the case of
offers outside the United States, to persons other than U.S. Persons ("FOREIGN
PURCHASERS," which term shall include dealers or other professional fiduciaries
in the United States acting on a discretionary basis for foreign beneficial
owners (other than an estate or trust)) in reliance upon Regulation S under the
Securities Act that, in each case, in purchasing such Notes are deemed to have
represented and agreed as provided in the Offering Memorandum under the caption
"Transfer Restrictions."
(b) Each Initial Purchaser, severally and not jointly, represents,
warrants, and agrees with respect to offers and sales outside the United States
that:
(i) such Initial Purchaser understands that no action has been or
will be taken in any jurisdiction by the Company that would permit a
public offering of the Notes, or possession or distribution of the
Offering Memorandum or any other offering or publicity material
relating to the Notes, in any country or jurisdiction where action for
the purpose is required;
(ii) such Initial Purchaser will comply with all applicable laws
and regulations in each jurisdiction in which it acquires, offers,
sells or delivers Notes or has in its possession or distributes
Offering Memorandum or any such other material, in all cases at its
own expense;
(iii) the Notes have not been registered under the Securities Act
and may not be offered or sold within the United States or to, or for
the account or benefit of U.S. persons except in accordance with Rule
144A or Regulation S under the Securities Act or pursuant to another
exemption form the registration requirements of the Securities Act;
(iv) such Initial Purchaser has offered the Notes and will offer
and sell the Notes (A) as part of their distribution at any time and
(B) otherwise until 40 days after the latter of the commencement of
the offering and the Closing Date only in accordance with Rule 903 of
Regulation S or as otherwise permitted in Section 4(a) accordingly,
neither such Initial Purchaser, its Affiliates nor any persons action
on its or their behalf have engaged or will engage in any directed
selling efforts (within the meaning of Regulation S) with respect to
the Notes, any such Initial Purchaser, its Affiliates and any such
persons have complied and will comply with the offering restrictions
requirement of Regulation S.
(v) such Initial Purchaser has (A) not offered or sold and, prior
to the date six months after the Closing Date will not offer to sell
any Notes to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted
and will not result in an offer to the public in the United
<PAGE>
Page 15
Kingdom within the meaning of the Public Offers of Securities
Regulations 1995; (B) complied and will comply with all applicable
provisions of the Financial Services Act of 1986 with respect to
anything done by it in relation to the Notes in, from or otherwise
involving the United Kingdom, and (C) only issued or passed on and will
only issue or pass on in the United Kingdom any document received by it
in connection with the issue of the Notes to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 (as amended) or is
a person to whom such document may otherwise lawfully be issued or
passed on;
(vi) such Initial Purchaser understands that the Notes have not
been and will not be registered under the Securities and Exchange Law
of Japan, and represents that it has not offered or sold and agrees
not to offer or sell directly or indirectly, any Notes in Japan or for
the account of any resident thereof except pursuant to any exemption
form the registration requirements of the Securities and Exchange Law
of Japan and otherwise in compliance with applicable provisions of
Japanese law; and
(vii) such Initial Purchaser agrees that, at or prior to
confirmation of sales of the Notes, it will have sent to each
distributor, dealer or person receiving a selling concession, fee or
other remuneration that purchases Notes from it during the restricted
period a confirmation or notice to substantially the following effect:
"The Securities covered hereby have not been registered under the
U.S. Securities Act of 1933 (the "Securities Act") and may not be
offered and sold within the United States or to, or for the account or
benefit of, U.S. persons (i) as part of their distribution at any time
or (ii) otherwise until 40 days after the later of the commencement of
the offering and the closing date, except in either case in accordance
with Regulation S (or Rule 144A if available) under the Securities
Act. Terms used above have the meaning given to them in Regulation S."
Terms used in this Section 7(b) have the meaning given to them in Regulation S.
5. Covenants of the Company and the Subsidiaries. The Company and
each of the Subsidiaries covenant and agree with the Initial Purchasers as
follows:
(a) To furnish to the Initial Purchasers, without charge, as many
copies of the Offering Memorandum and any supplements and amendments thereto as
they may reasonably request.
(b) Prior to making any amendment or supplement to the Offering
Memorandum, the Company shall furnish a copy thereof to the Initial Purchasers
and counsel to the Initial Purchasers and will not effect any such amendment or
supplement to which the Initial Purchasers shall reasonably object by notice to
the Company after a reasonable period to review, which shall not in any case be
longer than three business days after receipt of such copy.
<PAGE>
Page 16
(c) If, at any time prior to completion of the distribution of the
Initial Notes by the Initial Purchasers to purchasers, any event shall occur or
condition exist as a result of which it is necessary, in the reasonable opinion
of counsel for the Initial Purchasers or counsel for the Company, to amend or
supplement the Offering Memorandum in order that the Offering Memorandum will
not include an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein not misleading in light
of the circumstances existing at the time it is delivered to a purchaser, or if
it is necessary to amend or supplement the Offering Memorandum to comply with
applicable law, to promptly prepare such amendment or supplement as may be
necessary to correct such untrue statement or omission or so that the Offering
Memorandum, as so amended or supplemented, will comply with applicable law and
to furnish to the Initial Purchasers such number of copies as they may
reasonably request.
(d) So long as any Initial Notes are outstanding and are "Restricted
Securities" within the meaning of Rule 144(a)(3) under the Securities Act, to
furnish to holders of the Initial Notes and prospective purchasers of Initial
Notes designated by such holders, upon request of such holders or such
prospective purchasers, the information, if any, required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
(e) For a period of five years following the Closing Date, to furnish
to the Initial Purchasers copies of any annual reports, quarterly reports and
current reports filed with the Commission on Forms 10-K, 10-Q and 8-K, or such
other similar forms as may be designated by the Commission, and such other
documents, reports and information as shall be furnished by the Company to the
Trustee or to the holders of the Notes pursuant to the Indenture.
(f) The Company, as soon as practicable, will make generally available
to holders of the Initial Notes and to the Initial Purchasers consolidated
earnings statements of the Company and its subsidiaries (which need not be
certified by an independent public accountant) that satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder.
(g) To use their reasonable best efforts to qualify the Initial Notes
for sale under the securities or Blue Sky laws of such jurisdictions as the
Initial Purchasers reasonably designate and to continue such qualifications in
effect so long as reasonably required for the distribution of the Initial
Notes. The Company and the Subsidiaries will also arrange for the determination
of the eligibility for investment of the Initial Notes under the laws of such
jurisdictions as the Initial Purchasers reasonably request. Notwithstanding the
foregoing, neither the Company nor any of the Subsidiaries shall be obligated
to qualify as a foreign corporation in any jurisdiction in which it is not so
qualified or to file a general consent to service of process in any
jurisdiction.
(h) To use their best efforts to permit the Initial Notes to be
designated as eligible for trading in the Private Offerings, Resales and
Trading through Automated Linkages Market ("PORTAL") securities in accordance
with the rules and regulations adopted by the National Association of
Securities Dealers, Inc. relating to trading in the PORTAL market and to permit
the Initial Notes to be eligible for clearance and settlement through The
Depository Trust Company ("DTC").
(i) Not to, and will cause their affiliates not to, sell, offer for
sale or solicit offers to buy or otherwise negotiate in respect of any security
(as defined in the Securities Act) in a transaction that could be integrated
with the sale of the Initial Notes in a manner which would
<PAGE>
Page 17
require the registration under the Securities Act of the Initial Notes.
(j) Except following the effectiveness of any Registration Statement
(as defined in the Registration Rights Agreement) and except for such offers as
may be made as a result of, or subsequent to, filing such Registration
Statement or amendments thereto prior to the effectiveness thereof, not to, and
will cause their affiliates not to, solicit any offer to buy or offer to sell
the Initial Notes by means of any form of general solicitation or general
advertising (as those terms are used in Regulation D under the Securities Act)
or in any manner involving a public offering within the meaning of Section 4(2)
of the Securities Act.
(k) For a period of 180 days from the date of the Offering Memorandum,
not to, directly or indirectly, sell, offer to sell, contract to sell, grant
any option to purchase, issue any instrument convertible into or exchangeable
for, or otherwise transfer or dispose of (or enter into any transaction or
device which is designed to, or could be expected to, result in the disposition
in the future of), debt securities of the Company or any of the Subsidiaries,
except (i) for the New Notes in connection with the Exchange Offer or (ii) with
the prior written consent of Morgan Stanley & Co. Incorporated; provided that,
in each case, immediately after giving effect to such transaction, no default
or event of default exists under the Indenture.
(l) To apply the net proceeds from the sale of the Initial Notes as
set forth in the Offering Memorandum.
(m) To take such steps as shall be necessary to ensure that neither
the Company nor any of the Subsidiaries shall become (i) an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
or (ii) a "holding company" or a "subsidiary company" or an "affiliate" of a
"holding company" within the meaning of the Public Utility Holding Company Act
of 1935, as amended.
(n) Not to, and will cause their affiliates not to, take any actions
which would require the registration under the Securities Act of the Initial
Notes.
(o) If, prior to the completion of the distribution of the Initial
Notes, the Company or any Subsidiary commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after the
date the Offering Memorandum or if the information reported in the Offering
Memorandum, if any, concerning the Company's or any Guarantor's business with
Cuba or with any person or affiliate located in Cuba changes in any material
way, the Company will provide the Florida Department of Banking and Finance
(the "DEPARTMENT") notice of such business or change, as appropriate, in a form
acceptable to the Department.
(p) To do all things necessary to satisfy the closing conditions set
forth in Section 7 hereof.
6. Expenses. The Company and the Subsidiaries, jointly and
severally, agree to pay all costs and expenses incident to the performance of
their obligations under this Agreement, whether or not the transactions
contemplated herein are consummated or this Agreement is terminated pursuant to
Section 9 hereof, including all costs and expenses incident to (i) the
printing, word processing or other production of documents with respect to the
transactions, including any costs of printing the Offering Memorandum and any
amendment or supplement thereto and any "Blue Sky" memoranda, (ii) all
arrangements relating to the delivery
<PAGE>
Page 18
to the Initial Purchasers of copies of the foregoing documents and the costs of
distributing the foregoing documents, (iii) the fees and disbursements of the
counsel, the accountants and any other experts or advisors retained by the
Company or the Subsidiaries, (iv) preparation (including printing), issuance
and delivery to the Initial Purchasers of the Initial Notes, including
trustee's fees, (v) the qualification of the Initial Notes under state
securities and "Blue Sky" laws, including filing fees and fees and
disbursements of counsel for the Initial Purchasers relating thereto, (vi) the
costs and expenses of DTC and its nominee, including its book-entry system;
(vii) all expenses and listing fees incurred in connection with the application
for quotation of the Initial Notes on the PORTAL market, (viii) expenses of the
Company and the Guarantors in connection with any meetings with prospective
investors in the Initial Notes, (ix) fees and expenses of the Trustee,
including fees and expenses of counsel to the Trustee, (x) any fees charged by
investment rating agencies for the rating of the Initial Notes and (xi) all
other costs and expenses incident to the performance of the obligations of the
Company and the Subsidiaries under this Agreement. If the sale of the Initial
Notes provided for herein is not consummated because any condition to the
obligations of the Initial Purchasers set forth in Section 7 hereof is not
satisfied, because this Agreement is terminated pursuant to Section 10 hereof
or because of any failure, refusal or inability on the part of the Company or
the Subsidiaries to perform all obligations and satisfy all conditions on their
part to be performed or satisfied hereunder other than by reason of a default
by the Initial Purchasers, the Company and the Subsidiaries will reimburse the
Initial Purchasers upon demand (accompanied by documentation) for all
out-of-pocket expenses (including counsel fees and disbursements) that shall
have been incurred by the Initial Purchasers in connection with the proposed
purchase and sale of the Initial Notes. The Company shall not in any event be
liable to the Initial Purchasers for the loss of anticipated profits from the
transactions covered by this Agreement.
7. Conditions of the Initial Purchasers' Obligations. The
obligation of the Initial Purchasers to purchase and pay for the Initial Notes
are, in their sole discretion, subject to the accuracy, when made and on the
Closing Date, of the representations and warranties of the Company and the
Subsidiaries contained herein, to the performance by the Company and the
Subsidiaries of their obligations hereunder, and to each of the following
additional terms and conditions:
(a) The Initial Purchasers shall not have discovered and disclosed to
the Company on or prior to the Closing Date that the Offering Memorandum
contains an untrue statement of a fact which, in the reasonable opinion of
Latham & Watkins, counsel for the Initial Purchasers, is material or omits to
state a fact which, in the opinion of such counsel, is material and is
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(b) All of the representations and warranties of the Company and the
Subsidiaries contained in this Agreement shall be true and correct on the date
hereof and on the Closing Date with the same force and effect as if made on and
as of the date hereof and the Closing Date, respectively. The Company and the
Subsidiaries shall have performed or complied with all of the agreements herein
contained and required to be performed or complied with by them at or prior to
the Closing Date.
(c) The Offering Memorandum shall have been printed and copies
distributed to the Initial Purchasers not later than 9:00 a.m., New York City
time, on the day following the date of this Agreement or at such later date and
time as to which the Initial Purchasers may agree. No
<PAGE>
Page 19
stop order suspending the qualification or exemption from qualification of the
Initial Notes in any jurisdiction referred to in Section 5(g) shall have been
issued and no proceeding for that purpose shall have been commenced or shall be
pending or to the knowledge of the Company and the Subsidiaries threatened.
(d) No action shall have been taken and no statute, rule, regulation
or order shall have been enacted, adopted or issued by any governmental agency
which would, as of the Closing Date, have a Material Adverse Effect; no action,
suit or proceeding shall have been commenced and be pending against or
affecting or, to the best knowledge of the Company and the Subsidiaries,
threatened against, the Company or any of the Subsidiaries before any court or
arbitrator or any governmental body, agency or official that, if adversely
determined, could reasonably be expected to result in a Material Adverse
Effect; and no stop order shall have been issued by the Commission or any
governmental agency of any jurisdiction referred to in Section 5(g) preventing
the use of the Offering Memorandum, or any amendment or supplement thereto, or
which could reasonably be expected to have a Material Adverse Effect.
(e) Since the dates as of which information is given in the Offering
Memorandum and other than as set forth in the Offering Memorandum, (i) there
has not been, singly or in the aggregate, any material adverse change, or any
development involving or which may reasonably be expected to involve, a
prospective material adverse change, in the assets, liabilities, results of
operation, management, condition (financial or other), prospects, properties,
business or net worth of the Company, the Subsidiaries and the Acquisition
Entities, taken as a whole (each a "MATERIAL ADVERSE CHANGE"), or any material
change in the long-term debt, or material increase in the short-term debt, from
that set forth in the Offering Memorandum; (ii) no dividend or distribution of
any kind shall have been declared, paid or made by the Company on any class of
its capital stock; (iii) the Company, the Subsidiaries and the Acquisition
Entities shall not have incurred any liabilities or obligations, direct or
contingent, that are material, individually or in the aggregate, to the
Company, the Subsidiaries and the Acquisition Entities, taken as a whole, and
that are required to be disclosed on a balance sheet or notes thereto in
accordance with generally accepted accounting principles and are not disclosed
on the latest balance sheet or notes thereto included in the Offering
Memorandum.
(f) The Initial Purchasers shall have received a certificate, dated
the Closing Date, signed on behalf of the Company by (i) Robert F.X. Sillerman,
Executive Chairman, (ii) Howard J. Tytel, General Counsel, Secretary and
Executive Vice President, and (iii) Thomas P. Benson, Vice President and Chief
Financial Officer, in each case of the Company, confirming that (A) such
officers, have participated in conferences with other officers and
representatives of the Company and the Subsidiaries, representatives of the
independent public accountants of the Company and the Subsidiaries and
representatives of counsel to the Company and the Subsidiaries at which the
contents of the Offering Memorandum and related matters were discussed and (B)
the matters set forth in paragraphs (b), (d) and (e) and the second sentence of
paragraph (c) of this Section 7 are true and correct as of the Closing Date.
(g) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement, the Notes, the Subsidiary
Guarantees, the Indenture, the Registration Rights Agreement, the Offering
Memorandum and all other legal matters relating to this Agreement and the
transactions contemplated hereby including, without limitation, the Pending
Acquisitions and the consent related to the Senior Credit Facility, shall be
satisfactory in all material respects to counsel for the Initial Purchasers,
and the Company and the
<PAGE>
Page 20
Subsidiaries shall have furnished to such counsel all documents and information
that they may reasonably request to enable them to pass upon such matters.
(h) Baker & McKenzie, counsel for the Company and the Subsidiaries,
shall have furnished to the Initial Purchasers its written opinion, as counsel
to the Company and the Subsidiaries, addressed to the Initial Purchasers and
dated the Closing Date, in form and substance reasonably satisfactory to the
Initial Purchasers, to the effect that:
(i) the Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware with full
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Offering Memorandum, and is
duly registered and qualified to conduct its business and is in good
standing, in each jurisdiction or place where the nature of its business
requires such registration or qualification, except where the failure to be
so qualified would not have a Material Adverse Effect;
(ii) all of the issued shares of capital stock of the Company
have been duly authorized, are validly issued, fully paid and
nonassessable;
(iii) each Subsidiary is a corporation duly organized, validly
existing and in good standing in the jurisdiction of its incorporation,
with full corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Offering
Memorandum, and is duly registered and qualified to conduct its business
and is in good standing, in each jurisdiction or place where the nature of
its business requires such registration or qualification, except where the
failure to be so qualified would not have a Material Adverse Effect;
(iv) all of the outstanding shares of capital stock of each of
the Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable and free of any preemptive or similar rights, and
are owned by the Company directly, or indirectly through one of the other
Subsidiaries, to such counsel's knowledge, free and clear of any lien,
adverse claim, security interest or other encumbrance (except for security
interests under Senior Credit Facility);
(v) the Company and each of the Guarantors has full corporate
power and authority to issue, sell and deliver the Initial Notes to the
Initial Purchasers as provided herein and to enter into this Agreement, the
Indenture, the Registration Rights Agreement and the other Transaction
Documents to which they are a party, to carry out all the terms and
provisions hereof and thereof to be carried out by them and to issue, and
deliver the Notes and the Subsidiary Guarantees, as applicable, as provided
herein and therein;
(vi) this Agreement has been duly authorized, validly executed
and delivered by the Company and each Subsidiary and constitutes the legal,
valid and binding agreement of the Company and each of the Subsidiaries
(assuming it is a legal, valid and binding agreement of the Initial
Purchasers), enforceable against the Company and each Subsidiary in
accordance with its terms except to the extent that: (i) the same may be
limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other laws now or hereafter in effect relating to creditors'
rights generally
<PAGE>
Page 21
or by general principles of equity whether asserted in an action
at law or in equity; and (ii) rights to indemnity and contribution
hereunder may be limited by state or federal securities laws;
(vii) the execution and delivery of the Registration Rights
Agreement have been duly authorized by the Company and each of the
Guarantors and the Registration Rights Agreement has been duly executed and
delivered by the Company and each of the Guarantors and is the legal, valid
and binding agreement of the Company and each Guarantor (assuming it is a
legal, valid and binding agreement of the Initial Purchasers), enforceable
against the Company and each Guarantor in accordance with its terms except
to the extent that: (i) the same may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other laws now or
hereafter in effect relating to creditors' rights generally or by general
principles of equity whether asserted in an action at law or in equity; and
(ii) rights to indemnity and contribution hereunder may be limited by state
or federal securities laws;
(viii) the execution and delivery of the Indenture have been duly
authorized by the Company and each of the Guarantors and the Indenture has
been duly executed and delivered by the Company and each Guarantor and is
the legal, valid and binding agreement of the Company and each of the
Guarantors (assuming it is a legal, valid and binding agreement of the
Trustee), enforceable against the Company and each Guarantor in accordance
with its terms except to the extent that: (i) the same may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium
or other laws now or hereafter in effect relating to creditors' rights
generally or by general principles of equity whether asserted in an action
at law or in equity; and (ii) rights to indemnity and contribution
hereunder may be limited by state or federal securities laws;
(ix) the Initial Notes have been duly authorized, executed,
issued and delivered by the Company and, assuming due authentication by the
Trustee, are legal, valid and binding obligations of the Company, entitled
to the benefits of the Indenture and enforceable against the Company in
accordance with their terms except to the extent that: (i) the same may be
limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other laws now or hereafter in effect relating to creditors'
rights generally or by general principles of equity whether asserted in an
action at law or in equity; and (ii) rights to indemnity and contribution
hereunder may be limited by state or federal securities laws;
(x) the New Notes have been duly authorized by the Company, and,
when duly executed, authenticated, issued and delivered by the Company,
will be validly issued and outstanding, and will constitute the legal,
valid and binding obligations of the Company, entitled to the benefits of
the Indenture and enforceable against the Company in accordance with their
terms except to the extent that: (i) the same may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or other laws
now or hereafter in effect relating to creditors' rights generally or by
general principles of equity whether asserted in an action at law or in
equity; and (ii) rights to indemnity and contribution hereunder may be
limited by state or federal securities laws;
(xi) the Subsidiary Guarantees endorsed on the Initial Notes have
been duly authorized, executed, issued and delivered by the Guarantors and
are the legal, valid
<PAGE>
Page 22
and binding obligations of each of the Guarantors, entitled to
the benefits of the Indenture and enforceable against the Guarantors in
accordance with their terms except to the extent that: (i) the same may be
limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other laws now or hereafter in effect relating to creditors'
rights generally or by general principles of equity whether asserted in an
action at law or in equity; and (ii) rights to indemnity and contribution
hereunder may be limited by state or federal securities laws;
(xii) the Subsidiary Guarantees to be endorsed on the New Notes
have been duly authorized by the Guarantors and, when duly executed,
authenticated, issued and delivered by each of the Guarantors and when the
New Notes have been duly executed, authenticated, issued and delivered,
will be validly issued and outstanding, and will constitute the legal,
valid and binding obligations of each of the Guarantors, entitled to the
benefits of the Indenture and enforceable against the Guarantors in
accordance with their terms except to the extent that: (i) the same may be
limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other laws now or hereafter in effect relating to creditors'
rights generally or by general principles of equity whether asserted in an
action at law or in equity; and (ii) rights to indemnity and contribution
hereunder may be limited by state or federal securities laws;
(xiii) the execution and delivery of each of the other
Transaction Documents to which the Company or any Subsidiary is a party
have been duly authorized by the Company and each Subsidiary party thereto
and each of such other Transaction Documents which has been executed prior
to or on the Closing Date has been duly executed and delivered by the
Company and each Subsidiary party thereto and is the legal, valid and
binding agreement of the Company and each Subsidiary party thereto
(assuming it is a legal, valid and binding agreement of the other parties
thereto), enforceable against the Company and each Subsidiary party thereto
in accordance with its terms except to the extent that: (i) the same may be
limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other laws now or hereafter in effect relating to creditors'
rights generally or by general principles of equity whether asserted in an
action at law or in equity; and (ii) rights to indemnity and contribution
hereunder may be limited by state or federal securities laws;
(xiv) the descriptions of the Indenture, the Initial Notes, the
Subsidiary Guarantees, the Registration Rights Agreement and the other
Transaction Documents in the Offering Memorandum conform in all material
respects to the terms thereof;
(xv) the statements set forth under the heading "Description of
the Notes" in the Offering Memorandum, insofar as such statements purport
to summarize certain provisions of the Initial Notes, provide a fair
summary of such provisions; and the statements in the Offering Memorandum,
insofar as they are descriptions of contracts, agreements or other legal
documents, or refer to statements of law or legal conclusions, are accurate
in all material respects and present fairly the information shown;
(xvi) the statements set forth under the heading "Description of
Other Debt" in the Offering Memorandum, insofar as such statements purport
to summarize certain provisions of the outstanding indebtedness of the
Company, provide a fair summary of
<PAGE>
Page 23
such provisions;
(xvii) to the best knowledge of such counsel, no legal or
governmental proceedings are pending to which the Company or any of the
Subsidiaries is a party or to which the property of the Company or any of
the Subsidiaries is subject that would be required to be described in a
registration statement on Form S-1 under the Securities Act that is not
described in the Offering Memorandum, and, to the best knowledge of such
counsel, no such proceedings have been threatened against the Company or
any of the Subsidiaries or with respect to any of their respective
properties; and, to the best knowledge of such counsel, no contract or
other document would be required to be described in a registration
statement on Form S-1 under the Securities Act that is not described in the
Offering Memorandum;
(xviii) except as disclosed in the Offering Memorandum, the
execution, delivery and performance of this Agreement, the execution,
delivery and performance of the other Transaction Documents to be entered
into on or before the Closing Date by the Company and the Subsidiaries, and
the consummation by the Company and the Subsidiaries of the transactions
contemplated hereby and thereby will not (A) require any consent, approval,
authorization or other order (which has not been obtained) of any court,
regulatory body, administrative agency or other governmental body, except
such as may be required under the Securities Act, the Exchange Act, the
Trust Indenture Act, securities regulatory bodies (including
self-regulatory bodies), securities exchanges or the securities or Blue Sky
laws of the various states and the Hart-Scott-Rodino Anti-Trust Improvement
Act of 1976 with respect to the Pending Acquisitions; (B) conflict with or
constitute a breach of any of the terms or provisions of, or a default
under, the charter or by-laws of the Company or any of the Subsidiaries;
(C) to the best knowledge of such counsel, require any consent or approval
(which has not been obtained) of the parties to, or conflict with or
constitute a breach of any of the terms or provisions of, or a default
under, any agreement or other instrument to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiaries
or their respective property is bound; (D) to the best knowledge of such
counsel, violate or conflict with any laws or administrative regulations,
rulings of court or decrees applicable to the Company, any of the
Subsidiaries or their respective property; or (E) to the best knowledge of
such counsel, result in the creation or imposition of any lien (except
pursuant to the Senior Credit Facility) on any asset of the Company or any
of the Subsidiaries, except, in the case of (A), (C), (D) or (E) above,
such as would not, either singly or in the aggregate, have a Material
Adverse Effect;
(xix) neither the Company nor any of the Subsidiaries is (i) an
"investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940, as amended, or
(ii) a "holding company" or a "subsidiary company" or an "affiliate" of a
"holding company" within the meaning of the Public Utility Holding Company
Act of 1935, as amended;
(xx) assuming that the representations and warranties of the
Initial Purchasers contained in Section 4 hereof are true, correct and
complete and that the Company, the Subsidiaries and Initial Purchasers
comply with their respective covenants in Sections 4 and 5 hereof, (A)
registration under the Securities Act of the Initial Notes or qualification
of the Indenture under the Trust Indenture Act is not
<PAGE>
Page 24
required in connection with the offer and sale of the Initial
Notes to the Initial Purchasers in the manner contemplated by the Offering
Memorandum and this Agreement, and (B) initial resales of the Initial Notes
by the Initial Purchasers on the terms and in the manner set forth in the
Offering Memorandum and Section 4 hereof are exempt from the registration
requirements of the Securities Act;
(xxi) no securities of the same class (within the meaning of Rule
144A(d)(3) under the Securities Act) as the Initial Notes are listed on any
national securities exchange registered under Section 6 of the Exchange Act
or quoted on an automated inter-dealer quotation system; and (xxii) the
issuance or sale of the Notes, the issuance of the Subsidiary Guarantees
and the application by the Company of the net proceeds thereof as set forth
in the Offering Memorandum will not violate Regulation G, T, U or X of the
Board of Governors of the Federal Reserve System.
In addition, such counsel shall state that it has participated in
conferences with officers and other representatives of the Company and the
Subsidiaries, representatives of the independent public accountants of the
Company and the Subsidiaries and representatives of and counsel for the
Initial Purchasers at which the contents of the Offering Memorandum and
related matters were discussed and, although such counsel has not
undertaken to investigate or verify independently, and does not assume any
responsibility for, the accuracy, completeness or fairness of the
statements contained in the Offering Memorandum, on the basis of the
foregoing, no information has come to the attention of such counsel that
causes such counsel to believe that the Offering Memorandum (except as to
(a) financial statements, including the notes thereto and (b) other
financial and accounting data (including, without limitation, the pro forma
financial information), in each case, included therein or omitted
therefrom, as to which no belief need be expressed), as of its date or the
Closing Date, contained or contains an untrue statement of a material fact
or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may state that its
opinion is limited to matters governed by the federal laws of the United
States of America (other than the Communications Laws), the General
Corporation Law of the State of Delaware and the laws of the State of New
York.
(i) The Initial Purchasers shall have received on the Closing Date an
opinion of Latham & Watkins, counsel for the Initial Purchasers, dated the
Closing Date and addressed to the Initial Purchasers, in form and substance
reasonably satisfactory to the Initial Purchasers.
(j) The Company shall have furnished to the Initial Purchasers
customary comfort letters of Ernst & Young LLP, Arthur Andersen LLP and
PriceWaterhouseCoopers LLP, addressed to the Initial Purchasers and dated such
Closing Date.
(k) The Company, the Guarantors and the Trustee shall have entered
into the Indenture and the Initial Purchasers shall have received counterparts,
conformed as executed,
<PAGE>
Page 25
thereof.
(l) The Company, the Guarantors and the Initial Purchasers shall have
entered into the Registration Rights Agreement and the Initial Purchasers shall
have received counterparts, conformed as executed, thereof.
(m) The Company and each other party thereto shall have entered into
the consent (the form and substance of which shall be reasonably acceptable to
the Initial Purchasers) with respect to the Senior Credit Facility and the
Initial Purchasers shall have received counterparts, conformed as executed,
thereof and of all other documents and agreements entered into in connection
therewith.
(n) The Company shall have entered into each of the Transaction
Documents, the form and substance of each of which shall be reasonably
acceptable to the Initial Purchasers (provided that any Transaction Document
that was entered into and delivered to each of the Initial Purchasers and their
counsel prior to the date of this Agreement shall be deemed acceptable to the
Initial Purchasers in form and substance for purposes of this Section 7), and
the Initial Purchasers shall have received counterparts, conformed as executed,
thereof and of all other documents and agreements entered into in connection
therewith. There shall exist at and as of the Closing Date, after giving effect
to the transactions contemplated by this Agreement and the other Transaction
Documents, no conditions that would constitute a default or an event that with
notice or the lapse of time, or both, would constitute a default under any of
the other Transaction Documents or that would have a Material Adverse Effect on
the Company's ability to consummate the Pending Acquisitions as described in
the Offering Memorandum. Each Transaction Document shall be in full force and
effect.
(o) The Company shall have furnished to the Initial Purchasers a
certificate, dated the Closing Date, of its Vice President and Chief Financial
Officer as to the solvency of the Company and the Subsidiaries following
consummation of the transactions contemplated hereby.
(p) (i) None of the Company, any of the Subsidiaries or any of the
Acquisition Entities shall have sustained since the date of the latest audited
financial statements included in the Offering Memorandum losses or
interferences with their businesses, taken as a whole, from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Offering Memorandum or (ii) since such date there
shall not have been any change in the capital stock or long-term debt of the
Company, any of the Subsidiaries or any of the Acquisition Entities or any
change, or any development involving a prospective change, in or affecting the
general affairs, management, financial position, stockholders' equity or
results of operations of the Company, the Subsidiaries and the Acquisition
Entities, taken as a whole, otherwise than as set forth or contemplated in the
Offering Memorandum, the effect of which, in any such case described in clause
(i) or (ii), is, in the reasonable judgment of the Initial Purchasers, so
material and adverse as to make it impracticable or inadvisable to proceed with
the offering or the delivery of the Initial Notes being delivered on the
Closing Date on the terms and in the manner contemplated herein and in the
Offering Memorandum.
(q) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock
<PAGE>
Page 26
Exchange or The Nasdaq Stock Market's National Market or in the
over-the-counter market shall have been suspended or materially limited, or
minimum prices shall have been established on such exchange by the Commission,
or by such exchange or by any other regulatory body or governmental authority
having jurisdiction, (ii) a banking moratorium shall have been declared by
federal or state authorities, (iii) the United States shall have become engaged
in hostilities, there shall have been an escalation in hostilities involving
the United States or there shall have been a declaration of a national
emergency or war by the United States or (iv) there shall have occurred such a
material adverse change in general economic, political or financial conditions
(or the effect of international conditions on the financial markets in the
United States shall be such) as to make it, in the judgment of the Initial
Purchasers, impracticable or inadvisable to proceed with the offering or
delivery of the Initial Notes being delivered on the Closing Date on the terms
and in the manner contemplated herein and in the Offering Memorandum.
(r) Subsequent to the execution and delivery of this Agreement, (i) no
downgrading shall have occurred in the rating accorded the Initial Notes or any
other debt security of the Company by a nationally recognized statistical
rating organization, as that term is defined by the Commission for purposes of
Rule 436(g)(2) under the Securities Act, and (ii) no such organization shall
have publicly announced that it has under surveillance or review, with possible
negative implications, its rating of any of the Initial Notes or any other debt
security of the Company.
(s) There shall exist at and as of the Closing Date no conditions that
would constitute a default (or an event that with notice or the lapse of time,
or both, would constitute a default) under the Senior Credit Facility. On the
Closing Date, the Senior Credit Facility shall be in full force and effect and
shall not have been modified.
(t) Latham & Watkins shall have been furnished with such documents, in
addition to those set forth above, as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in this
Section 7 and in order to evidence the accuracy, completeness or satisfaction
in all material respects of any of the representations, warranties or
conditions herein contained.
(u) Prior to the Closing Date, the Company and the Subsidiaries shall
have furnished to the Initial Purchasers such further information, certificates
and documents as the Initial Purchasers may reasonably request.
All such opinions, certificates, letters, schedules, documents or
instruments delivered pursuant to this Agreement will comply with the
provisions hereof only if they are reasonably satisfactory in all material
respects to the Initial Purchasers and counsel for the Initial Purchasers.
8. Indemnification and Contribution.
(a) The Company and each Subsidiary jointly and severally agree to
indemnify and hold harmless each Initial Purchaser and each person, if any, who
controls any Initial Purchaser within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act from and against any and all
losses, claims, damages and liabilities (including, without limitation , any
legal other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of
<PAGE>
Page 27
material fact contained in either Memorandum (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or cause
by any omission or alleged omission to state therein a material fact necessary
to make the statements therein in the light of the circumstances under which
they were made not misleading, except insofar as such losses, claims, damages
or liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information relating to any Initial
Purchaser furnished to the Company in writing by such Initial Purchaser through
you expressly for use therein.
(b) Each Initial Purchaser agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers and each
person, if any, who controls the Company within the meaning of either Section
15 of the Securities Act or Section 20 of the Exchange Act to the same extent
as the foregoing indemnity from the Company to such Initial Purchaser, but only
with reference to information relating to such Initial Purchaser furnished to
the Company in writing by such Initial Purchaser through you expressly for the
use in either Memorandum or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect to which indemnity may be
sought pursuant to Section 8(a) or 8(b), such person (the "INDEMNIFIED PARTY")
shall promptly notify the person against whom such indemnity may be sought (the
"INDEMNIFYING PARTY") in writing and the indemnifying party, upon request of
the indemnified party shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of
both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the fees and expenses of more than one
separate firm (in addition to any local counsel) for all such indemnified
parties and that all such fees and expenses shall be reimbursed as they are
incurred. Such firm shall be designated in writing by Morgan Stanley & Co.
Incorporated, in the case of parties indemnified pursuant to Section 8(a), and
by the Company, in the case of parties indemnified pursuant to Section 8(b).
The indemnifying party shall not be liable for any settlement of any proceeding
effect without its written consent, but if settled with such consent or if
there be a final judgment of the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or inability by
reason of such settlement or judgment. Notwithstanding the foregoing sentence,
if at any time an indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for fees and expenses of counsel as
contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent of (i) such settlement is
entered into more than 30 days after receipt of such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed
the indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified
<PAGE>
Page 28
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.
(d) To the extent the indemnification provided fro in Section 8(a) or
8(b) is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages or liabilities referred to herein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Initial Purchasers on
the other hand from the offering of the Notes or (ii) if the allocation
provided by clause 8(d)(i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause 8(d)(i) above but also the relative fault of the Company on the
one hand and of the Initial Purchasers on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Initial
Purchasers on the other hand in connection with the offering of the Notes shall
be deemed to be in the same respective proportions as the net proceeds from the
offering of the Notes (before deducting expenses) received by the Company and
the total discounts and commissions received by the Initial Purchasers, in each
case as set forth in the Offering Memorandum, bear to the aggregate offering
price of the Notes. The relative fault of the Company on the one hand and of
the Initial Purchasers on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or by the Initial Purchasers and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Initial Purchasers'
respective obligations to contribute pursuant to this Section 8 are several in
proportion to the respective principal amount of Notes they have purchased
hereunder, and not joint.
(e) The Company and the Initial Purchasers agree that it would not be
just or equitable if contribution pursuant to this Section 8 were determined by
a pro rata allocation (even if the Initial Purchasers were treated as one
entity for such purpose) or by any other method of allocation that does not
take account of equitable considerations referred to in Section 8(d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in Section 8(d) shall be deemed to
include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8, no Initial Purchaser shall be required to
contribute any amount in excess of the amount by which the total price at which
the Notes resold by it in the initial placement of such Notes were offered to
investors exceeds the amount of any damages that such Initial Purchaser has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission of alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Section 8 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or
<PAGE>
Page 29
in equity.
(f) The indemnity and contribution provisions contained in this
Section 8 and the representations, warranties and other statements of the
Company contained in this Purchase Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Purchase Agreement,
(ii) any investigation made by or on behalf of any Initial Purchaser or any
person controlling any Initial Purchaser or by or on behalf of the Company, its
officers or directors or any person controlling the Company and (iii)
acceptance of and payment for any of the Notes.
9. Survival Clause. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, the
Subsidiaries, their officers and the Initial Purchasers set forth in this
Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company, the Subsidiaries, any of
their officers or directors, the Initial Purchasers or any controlling person
referred to in Section 8 hereof and (ii) delivery of and payment for the
Initial Notes. The respective agreements, covenants, indemnities and other
statements set forth in Sections 5 and 8 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
10. Effectiveness; Defaulting Initial Purchasers. This Purchase
Agreement shall become effective upon the execution and delivery hereof of the
parties hereto.
If, on the Closing Date, any one or more of the Initial Purchasers
shall fail or refuse to purchase Notes that it or they have agreed to purchase
hereunder on such date, and the aggregate principal amount of Notes which such
defaulting Initial Purchaser or Initial Purchasers agreed but failed or refused
to purchase is not more than one-tenth of the aggregate principal amount of
Notes to be purchased on such date, the other Initial Purchasers shall be
obligated severally in the proportions that the principal amount of Notes set
forth opposite their respective names in Schedule II bears to the aggregate
principal amount of Notes set forth opposite the names of all such
non-defaulting Initial Purchasers, or in such other proportions as you may
specify, to purchase the Notes which such defaulting Initial Purchaser or
Initial Purchasers agreed but failed or refused to purchase on such date;
provided that in no event shall the principal amount of Notes that any Initial
Purchaser has agreed to purchase pursuant to this Purchase Agreement to be
increased pursuant to this Section 10 by an amount in excess of one-ninth of
such principal amount of Notes without the written consent of such Initial
Purchaser. If, on the Closing Date any Initial Purchaser or Initial Purchasers
shall fail or refuse to purchase Notes which it or they have agreed to purchase
hereunder on such date and the aggregate principal amount of Notes with respect
to which such default occurs is more than one-tenth of the aggregate principal
amount of Notes to be purchased on such date, and arrangements satisfactory to
you and the Company for the purchase of such Notes are not made within 36 hours
after such default, this Purchase Agreement shall terminate without liability
on the part of any non-defaulting Initial Purchaser or of the Company. In any
such case either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Offering Memorandum or in any other documents
or arrangements may be effected. Any action taken under this paragraph shall
not relieve any defaulting Initial Purchaser from liability in respect of any
default of such Initial Purchaser under this Purchase Agreement.
<PAGE>
Page 30
11. Termination. (a) This Agreement may be terminated in the sole
discretion of the Initial Purchasers by notice to the Company given prior to
the Closing Date in the event that the Company or the Subsidiaries shall have
failed, refused or been unable to perform all obligations and satisfy all
conditions on its part to be performed or satisfied hereunder at or prior
thereto or, if at or prior to the Closing Date:
(i) the Company, any Subsidiary or any Acquisition Entity shall have
sustained any loss or interference with respect to its businesses or properties
from fire, flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or any legal or governmental
proceeding, which loss or interference, in the sole judgment of the Initial
Purchasers, has had or has a Material Adverse Effect or there shall have been,
in the sole judgment of the Initial Purchasers, any Material Adverse Change,
except in each case as described in or contemplated by the Offering Memorandum
(exclusive of any amendment or supplement thereto);
(ii) trading in securities generally on the New York Stock Exchange or
The Nasdaq Stock Market's National Market or in the over-the-counter market
shall have been suspended or materially limited, or minimum prices shall have
been established on such exchange by the Commission, or by such exchange or by
any other regulatory body or governmental authority having jurisdiction;
(iii) a banking moratorium shall have been declared by federal or
state authorities;
(iv) the United States shall have become engaged in hostilities, there
shall have been an escalation in hostilities involving the United States or
there shall have been a declaration of a national emergency or war by the
United States;
(v) (a) a downgrading shall have occurred in the rating accorded the
Initial Notes or any other debt security of the Company by a nationally
recognized statistical rating organization, as that term is defined by the
Commission for purposes of Rule 436(g)(2) under the Securities Act, or (b) any
such organization shall have publicly announced that it has under surveillance
or review, with possible negative implications, its rating of any of the
Initial Notes or any other debt security of the Company; or
(vi) there shall have occurred such a material adverse change in
general economic, political or financial conditions (or the effect of
international conditions on the financial markets in the United States shall be
such) as to make it, in the reasonable judgment of the Initial Purchasers,
impracticable or inadvisable to proceed with the offering or delivery of the
Initial Notes being delivered on the Closing Date on the terms and in the
manner contemplated herein and in the Offering Memorandum.
(b) Termination of this Agreement pursuant to this Section 10 shall be
without liability of any party to any other party except as provided in Section
9 hereof.
12. Notices. All communications hereunder shall be in writing
and, if sent to the Initial Purchasers, shall be mailed or delivered or
telecopied and confirmed in writing to Morgan Stanley & Co. Incorporated, 1585
Broadway, New York, New York 10036, Attention: Corporate Finance Department,
with a copy to Latham & Watkins, 885 Third Avenue, New York, New York 10022,
Attention: Kirk A. Davenport; if sent to the Company or the Subsidiaries,
<PAGE>
Page 31
shall be mailed or delivered or telecopied and confirmed in writing to the
Company at 650 Madison Avenue, New York, New York 10022, Attention: Howard J.
Tytel, Esq., with a copy to Baker & McKenzie, 805 Third Avenue, New York, New
York 10022, Attention: Howard M. Berkower, Esq.
13. Successors. This Agreement shall inure to the benefit of and
be binding upon the Initial Purchasers, the Company and their respective
successors and legal representatives, and nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any other person any
legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained; this Agreement and all
conditions and provisions hereof being intended to be and being for the sole
and exclusive benefit of such persons and for the benefit of no other person
except that (i) the indemnities of the Company and the Subsidiaries contained
in Section 8 of this Agreement shall also be for the benefit of any person or
persons who control the Initial Purchasers within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act and (ii) the indemnities
of the Initial Purchasers contained in Section 8 of this Agreement shall also
be for the benefit of any person or persons who control the Company or the
Subsidiaries within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act. No purchaser of Initial Notes from the Initial
Purchasers will be deemed a successor because of such purchase.
14. Applicable Law. THE VALIDITY AND INTERPRETATION OF THIS
AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAW.
15. 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.
[Purchase Agreement signature pages follow]
<PAGE>
SIGNATURES
Dated as of November 25, 1998
SFX ENTERTAINMENT, INC.
BGP ACQUISITION, L.L.C.
By: SFX ENTERTAINMENT, INC.,
as managing member
SFX NETWORK GROUP, L.L.C.
By: SFX ENTERTAINMENT, INC.,
as managing member
WESTBURY MUSIC FAIR, L.L.C.
By: SFX ENTERTAINMENT, INC.,
as managing member
By: /s/ Howard J. Tytel
Name: Howard J. Tytel
Title: General Counsel, Executive Vice
President And Secretary
AKG, INC.
AMERICAN ARTISTS, INC.
AMERICAN ARTISTS LIMITED, INC.
AMPHITHEATER ENTERTAINMENT PARTNERSHIP
By: SM/PACE, INC.,
as general partner
ANT THEATRICAL PRODUCTIONS, INC.
ARDEE FESTIVALS N.J. INC.
Signature Page - 1
<PAGE>
ARDEE PRODUCTIONS, LTD.
ATLANTA CONCERTS, INC.
AUDREY & JANE, INC.
AVALON ACQUISITION CORP.
BEACH CONCERTS, INC.
BG PRESENTS, INC.
BILL GRAHAM ENTERPRISES, INC.
BILL GRAHAM MANAGEMENT, INC.
BILL GRAHAM PRESENTS, INC.
BOSTON PLAYHOUSE REALTY, INC.
BOYLSTON STREET THEATRE CORP.
BROADWAY CONCERTS, INC.
BROADWAY SERIES ASSOCIATES, INC.
BROADWAY SERIES MANAGEMENT GROUP, INC.
CAMARILLO AMPHITHEATER MANAGING
PARTNERS, INC.
Signature Page - 2
<PAGE>
CHEVA TOURING COMPANY
By: MAGICWORKS ENTERTAINMENT
INCORPORATED,
as a majority holder
CONCERTS, INC.
CONNECTICUT AMPHITHEATER DEVELOPMENT
CORPORATION
CONNECTICUT CONCERTS INCORPORATED
CONNECTICUT PERFORMING ARTS, INC.
CONN TICKETING COMPANY
By: NORTHEAST TICKETING COMPANY and
SOUTHEAST TICKETING COMPANY,
as general partners
CONTEMPORARY GROUP ACQUISITION CORP.
CONTEMPORARY GROUP, INC.
CONTEMPORARY MARKETING, INC.
CONTEMPORARY PRODUCTIONS INCORPORATED
CONTEMPORARY SPORTS INCORPORATED
COOLEY AND CONLON MANAGEMENT CO.
DEER CREEK AMPHITHEATER CONCERTS, INC.
DEER CREEK AMPHITHEATER CONCERTS, L.P.
Signature Page - 3
<PAGE>
By: DEER CREEK AMPHITHEATER
CONCERTS, INC.,
as general partner
DELSENER/SLATER ENTERPRISES, LTD.
DICESARE-ENGLER, INC.
DICESARE-ENGLER PROMOTIONS, INC.
DLC CORP.
DUMB DEAL, INC.
EAGLE EYE ENTERTAINMENT INC.
EAGLE EYE ENTERTAINMENT USA INC.
EMI ACQUISITION SUB, INC.
ENTERTAINMENT PERFORMING ARTS, INC.
EVENT MERCHANDISING INC.
EXIT 116 REVISITED, INC.
FALK ASSOCIATES MANAGEMENT ENTERPRISES,
INC.
FESTIVAL PRODUCTIONS, INC.
FILLMORE CORPORATION
Signature Page - 4
<PAGE>
FILLMORE FINGERS, INC.
GERSHWINS' FASCINATING RHYTHM
By: MAGICWORKS ENTERTAINMENT
INCORPORATED,
as a majority holder
GSAC PARTNERS
By: SM/PACE INC.,
as the parent corporation of the general
partner
HIGH COTTON, INC.
IN HOUSE TICKETS, INC.
IRVINE MEADOWS AMPHITHEATER
By: AVALON ACQUISITION CORP.,
as general partner
JEFKO TOURING COMPANY
By: MAGICWORKS ENTERTAINMENT
INCORPORATED,
as a majority holder
MAGICWORKS CONCERTS, INC.
MAGICWORKS ENTERTAINMENT INCORPORATED
MAGICWORKS ENTERTAINMENT
INTERNATIONAL, INC.
MAGICWORKS EXHIBITIONS, INC.
MAGICWORKS EXHIBITIONS JOINT VENTURE
Signature Page - 5
<PAGE>
By: MAGICWORKS ENTERTAINMENT
INCORPORATED,
as a majority holder
MAGICWORKS FASHION MANAGEMENT, INC.
MAGICWORKS MERCHANDISING, INC.
MAGICWORKS SPORTS MANAGEMENT, INC.
MAGICWORKS THEATRICALS, INC.
MAGICWORKS TRANSPORTATION, INC.
MAGICWORKS WEST, INC.
MELODY TENT AND AMPHITHEATER, INC.
MURAT CENTER CONCERTS, INC.
MURAT CENTER CONCERTS, L.P.
By: MURAT CENTER CONCERTS, INC.,
as general partner
NEW AVALON, INC.
NOC, INC.
NORTHEAST TICKETING COMPANY
OAKDALE THEATER CONCERTS, INC.
OLD PCI, INC.
Signature Page - 6
<PAGE>
PACE AEP ACQUISITION, INC.
PACE AMPHITHEATER MANAGEMENT, INC.
PACE AMPHITHEATERS, INC.
PACE BAYOU PLACE, INC.
PACE COMMUNICATIONS, INC.
PACE CONCERTS, LTD.
By: PACE CONCERTS GP, INC.,
as general partner
PACE CONCERTS GP, INC.
PACE ENTERTAINMENT CORPORATION
PACE ENTERTAINMENT GROUP, LTD.
By: PACE ENTERTAINMENT GP CORP.,
as general partner
PACE ENTERTAINMENT GP CORP.
PACE MILTON KEYNES, INC.
PACE MOTOR SPORTS, INC.
PACE MUSIC GROUP, INC.
PACE PRODUCTIONS, INC.
PACE THEATRICAL GROUP, INC.
Signature Page - 7
<PAGE>
PACE TOURING, INC.
PACE U.K. HOLDING CORPORATION
PAVILION PARTNERS
By: SM/PACE, INC.,
as managing partner
PEC, INC.
PERFORMING ARTS MANAGEMENT OF NORTH
MIAMI, INC.
POLARIS AMPHITHEATER CONCERTS, INC.
PTG-FLORIDA, INC.
QN CORP.
RUGRATS AMERICAN TOUR, LTD.
By: PACE VARIETY ENTERTAINMENT, INC.,
as general partner
SFX ACQUISITION CORP.
SFX BROADCASTING OF THE MIDWEST, INC.
SFX CONCERTS, INC.
SFX DELAWARE, INC.
SFX RADIO NETWORK, INC.
SFX SPORTS GROUP, INC.
Signature Page - 8
<PAGE>
SFX TOURING, INC.
SHELLI MEADOWS, INC.
SHORELINE AMPHITHEATRE, LTD.
SHORELINE AMPHITHEATRE PARTNERS
By: SHORELINE AMPHITHEATRE, LTD.,
as general partner
SM/PACE, INC.
SOUTHEAST TICKETING COMPANY
SOUTHERN PROMOTIONS, INC.
STEP ENTERTAINMENT SERVICES INC.
SUNSHINE CONCERTS, L.L.C.
By: SFX BROADCASTING OF THE MIDWEST,
INC.,
as the sole member
SUNSHINE DESIGNS, INC.
SUNSHINE DESIGNS, L.P.
By: SUNSHINE DESIGNS, INC.,
as general partner
SUNTEX ACQUISITION, INC.
SUNTEX ACQUISITION, L.P.
By: SUNTEX ACQUISITION, INC.,
as general partner
Signature Page - 9
<PAGE>
TAP PRODUCTIONS, INC.
TBA MEDIA, INC.
THE ALBUM NETWORK, INC.
THE GIN GAME TOURING COMPANY
By: MAGICWORKS ENTERTAINMENT
INCORPORATED,
as a majority holder
INTERNATIONAL MUSIC CANADA
THE WEDDING TOUR COMPANY
TICKET SERVICE, INC.
CONCERT PRODUCTIONS (UK) LIMITED
INTERNATIONAL MUSIC (USA) INC.
INTERNATIONAL MUSIC LTD.
INTERNATIONAL MUSIC TOUR I LTD.
INTERNATIONAL MUSIC TOUR II LTD.
INTERNATIONAL MUSIC TOUR I (USA) INC.
INTERNATIONAL MUSIC TOUR II (USA) INC.
TOURING ARTISTS GROUP, INC. (FL)
Signature Page - 10
<PAGE>
TOURING PRODUCTIONS, INC.
TREMONT STREET THEATRE CORPORATION II,
INC.
TUNEFUL COMPANY, INC.
WARRENTON STREET THEATRE CORP.
WEST COAST AMPHITHEATER CORP.
WESTERN AMPHITHEATER PARTNERS
By: PAVILION PARTNERS,
as general partner and SM/PACE, INC., as
general partner of PAVILION PARTNERS
WOLFGANG RECORDS
By: /s/ Howard J. Tytel
Name: Howard J. Tytel
Title: Executive Vice President
AMERICAN BROADWAY, INC.
CONCERT PRODUCTIONS INTERNATIONAL B.V.
CONNECTICUT PERFORMING ARTS PARTNERS
By: CONNECTICUT AMPHITHEATER
DEVELOPMENT CORPORATION and
NOC, INC.,
as general partners
Signature Page - 11
<PAGE>
FINANCIAL ADVISORY MANAGEMENT
ENTERPRISES, INC.
IRVING PLAZA CONCERTS, INC.
MAGICWORKS ENTERTAINMENT ASIA LIMITED
MARCO ENTERTAINMENT, INC.
PACE U.K.
PACE VARIETY ENTERTAINMENT, INC.
TOURING ARTISTS GROUP, INC. (OH)
By: /s/ Howard J. Tytel
Name: Howard J. Tytel
Title: Authorized Agent
MORGAN STANLEY & CO. INCORPORATED
LEHMAN BROTHERS INC.
BANCBOSTON ROBERTSON STEPHENS INC.
BNY CAPITAL MARKETS, INC.
By: /s/ Jonathan Knee
-------------------------
Name: Jonathan Knee
Title: Principal
Signature Page - 12
<PAGE>
SFX ENTERTAINMENT, INC.
DIRECTOR DEFERRED STOCK OWNERSHIP PLAN
1. NAME OF PLAN. This plan shall be known as the "SFX
Entertainment, Inc. Director Deferred Stock Ownership Plan" and is hereinafter
referred to as the "Plan."
2. PURPOSES OF PLAN. The purposes of the Plan are to enable
SFX Entertainment, Inc., a Delaware corporation (the "Company"), to attract and
retain qualified persons to serve as Directors, to enhance the equity interest
of Directors in the Company, to solidify the common interests of its Directors
and stockholders, and to encourage the highest level of Director performance by
providing such Directors with an ongoing proprietary interest in the Company's
performance and progress, by crediting them quarterly with notional shares of
the Company's Class A Common Stock, par value $.01 per share (the "Common
Stock").
3. EFFECTIVE DATE AND TERM. The Plan shall be effective as of
January 1, 1998. The Plan shall remain in effect until terminated by action of
the Board, or until no shares of Common Stock remain available under the Plan,
if earlier.
4. DEFINITIONS. The following terms shall have the meanings
set forth below:
"Beneficiary" means the person or legal entity the
Participant designates in accordance with Section 7(d) to receive payments
under the Plan after the Participant's death.
"Change of Control" means any of the following events:
(a) The acquisition (other than from the Company) by any
person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
(excluding, for this purpose, the Company or its subsidiaries, or any employee
benefit plan of the Company or its subsidiaries, or Robert F.X. Sillerman or
any of his affiliates) of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 30% or more of either the then
outstanding shares of Common Stock or the combined voting power of the
Company's then outstanding voting securities entitled to vote generally in the
election of directors; or
(b) Individuals who, as of the date hereof, constitute the
Board of Directors (as of the date hereof the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board of Directors, 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 a majority of the Directors then comprising the
Incumbent Board (other than an election or nomination of an individual whose
initial assumption of office is in connection with an actual or threatened
election contest relating to the election of the Directors of the Company, as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
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<PAGE>
Exchange Act) shall be, for purposes of this Plan, considered as though such
person were a member of the Incumbent Board; or
(c) Approval by the stockholders of the Company of a
reorganization, merger, or consolidation, in each case, with respect to which
persons who were the stockholders of the Company immediately prior to such
reorganization, merger or consolidation do not, immediately thereafter, own,
directly or indirectly, more than 50% of the combined voting power entitled to
vote generally in the election of Directors of the reorganized, merged or
consolidated company's then outstanding voting securities, or a liquidation or
dissolution of the Company or of the sale of all or substantially all of the
assets of the Company.
"Change of Control Consideration" means, with respect to each
share of Common Stock credited to a Deferred Stock Account, (i) the amount of
any cash, plus the value of any securities and other noncash consideration,
constituting the highest consideration per share of Common Stock paid to any
shareholder in the transaction or series of transactions that results in a
Change of Control or (ii) if no consideration per share of Common Stock is paid
to any shareholder in the transaction or series of transactions that results in
a Change of Control, the highest reported sales price, regular way, of a share
of Common Stock in any transaction reported on the Nasdaq Stock Market or on
any national exchange on which such shares are listed during the 60-day period
prior to and including the date of a Change of Control. To the extent that such
consideration consists all or in part of securities or other noncash
consideration, the value of such securities or other noncash consideration
shall be determined by the Committee in good faith.
"Committee" means the committee that administers the Plan, as
more fully defined in Section 12.
"Common Stock" has the meaning set forth in Section 2.
"Company" has the meaning set forth in Section 2.
"Deferred Stock Account" means a bookkeeping account
maintained by the Company for a Director representing an unfunded and unsecured
promise to deliver the shares credited to such account pursuant to Section 6.
"Delivery Date" has the meaning set forth in Section 7(a).
"Director" means an individual who is a member of the Board
of Directors of the Company.
"Dividend Equivalent" for a given dividend or distribution
means the fraction of a share of Common Stock (rounded to the nearest
one-thousandth) with a value based on the closing sales price of a share of
Common Stock on the date immediately preceding the payment date for such
dividend, equal to the amount of cash, plus the fair market value on the date
of distribution of any property, that is distributed with respect to one share
of Common Stock
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<PAGE>
pursuant to such dividend or distribution.
"Participant" has the meaning set forth in Section 5.
"Plan Year" means each twelve month period beginning on June
1, 1998, and ending on the following May 31.
"Plan Quarter" means each of the three month periods of a
Plan Year beginning on June 1, September 1, December 1, and March 1; provided,
that the last Plan Quarter with respect to a Director who ceases to be a
Participant during a Plan Quarter shall begin on the first day of such Plan
Quarter and end on the day such Director ceases to be a Participant.
"Share Amount" means fifty percent (50%) of a Director's
quarterly retainer, or such larger percentage that a Director elects, that is
payable in shares of Common Stock under the Plan.
The "Value" of a share of Common Stock as of the first day of
a given Plan Quarter shall mean the closing price of a share of Common Stock on
the last trading day of the immediately preceding Plan Quarter as reported on
the Nasdaq National Market System (or, if the Common Stock is not listed on the
Nasdaq National Market System, on any national securities exchange on which the
Common Stock is listed).
5. ELIGIBLE PARTICIPANTS. Each individual who is a
non-employee Director on January 1, 1998, and each individual who becomes a
Director of, but is not otherwise employed by, the Company or any of its
subsidiaries thereafter, during the term of the Plan, shall be a participant
("Participant") in the Plan, in each case during such period as such individual
remains a Director. After a Participant has ceased to be a Director, and until
delivery of all the shares credited to his or her a Deferred Stock Account, the
individual shall become an inactive Participant ("Inactive Participant").
6. ACCOUNTS; CREDIT OF SHARES. (a) The Company shall maintain
a Deferred Stock Account for each Participant. As part of the compensation
payable to each Participant for service on the Board, the Deferred Stock
Account of each Participant shall be credited with notional shares of Common
Stock as set forth in this Section 6.
(b) The Deferred Stock Account of each of the three
Participants as of January 1, 1998 shall be credited as of such date with five
thousand four hundred and fifty-five (5,455) shares of Common Stock,
representing the retainer for such Participants payable through May 31, 1999.
(c) At least ten days prior to the beginning of each Plan
Year beginning on and after June 1, 1999, each Participant shall provide the
Company with a written notice setting forth the Share Amount which such
Director elects to have payable in shares of Common Stock pursuant to the Plan.
In the event that a Participant does not make such an election prior to the
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<PAGE>
ten days before a particular Plan Year, then the Share Amount with respect to
such Participant shall be equal to fifty percent (50%) of such Participant's
quarterly retainer. A Participant may amend his or her Share Amount for
subsequent Plan Quarters by providing the Company with written notice of the
amended Share Amount at least ten days prior to any Plan Quarter.
As of the first day of each Plan Quarter, the Deferred Stock
Account of each Director who was a Participant at any time during such Plan
Quarter shall be credited with (i) a number of notional shares of Common Stock
having a Value equal to the Share Amount; plus (ii) a number of shares equal to
(A) the number of shares credited as of the last day of the prior Plan Quarter
pursuant to clause (i) multiplied by (B) the Dividend Equivalent for each
dividend paid or other distribution made with respect to the Common Stock, the
record date for which occurred during such Plan Quarter and at a time when such
individual was a Participant.
(d) In the event that a Director ceases to be a Participant
during the first Plan Year or any subsequent Plan Quarter, the number of shares
credited to the Director's Deferred Stock Account shall be not be reduced or
forfeited, regardless of the fact that the Director did not serve the Company
for the entire Plan Year or Plan Quarter, whichever shall apply.
(e) In addition, as of the first day of each Plan Quarter,
beginning on and after June 1, 1998, each Deferred Stock Account that has not,
as of such date, been delivered in full pursuant to Section 7 shall be credited
with a number of shares equal to (i) the number of notional shares of Common
Stock in such Deferred Stock Account as of such date (before taking into
account any amounts that are credited as of such date pursuant to Section 6(c)
above, reduced by (ii) the number of notional shares of Common Stock equal to
the number of shares of Common Stock that were actually delivered during the
Plan Quarter on or after the record date for dividends or distributions to the
Director (or his or her Beneficiary, estate or legal guardian, as applicable),
multiplied by (iii) the Dividend Equivalent for each dividend paid or other
distribution made with respect to the Common Stock, the record date for which
occurred during such Plan Quarter and at a time when such individual was a
Participant or an Inactive Participant.
(f) The Deferred Stock Account shall represent only an
unsecured and unfunded promise by the Company to deliver shares of Common Stock
in the future under the terms of the Plan.
7. DELIVERY OF SHARES. (a) Unless the Director has made
either one or both elections described in Sections 7(b) and 7(c) below, shares
of Common Stock equal to the notional shares credited to a Director's Deferred
Stock Account shall be delivered as soon as practicable after (i) June 1, 1999
for the number of notional shares of Common Stock credited pursuant to Section
6(b), as adjusted pursuant to Section 6(d), (ii) for all other notional shares,
the date which is twelve (12) months from the first day of the Plan Quarter as
of which such notional shares were initially credited to such Director's
Deferred Stock Account, or (iii) the date the Director ceases to be a Director
for any reason if that is earlier (the "Delivery Date"); provided, however,
that if the number of shares so credited includes a fractional share, such
number shall be rounded to the nearest whole number of shares.
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<PAGE>
(b) Except as otherwise provided in Section 7(c) below, and
subject to Section 11 below, a Director may make an irrevocable election in
writing on the form attached hereto as Appendix 1 to receive delivery of the
shares of Common Stock on the date that is between two (2) years and five (5)
years after the first day of the Plan Quarter as of which such notional shares
were initially credited to such Director's Deferred Stock Account or following
the date of the Director's death, if that occurs earlier. Any such election
must be made at least ten (10) days in advance of the Plan Quarter in which
such notional shares were initially credited to the Deferred Stock Account of
the electing Director.
(c) Subject to Section 11 below, a Participant whose Deferred
Stock Account was credited with five thousand four hundred and fifty-five
(5,455) shares of Common Stock as of January 1, 1998 pursuant to Section 6(b)
above may make an irrevocable election in writing not later than December 31,
1998 on the form attached hereto as Appendix 2 to defer delivery of such shares
to a date that is between one (1) year and four (4) years after the Delivery
Date that would otherwise occur pursuant to Section 7(a) above or following the
date of the Director's death, if that occurs earlier.
(d) Each Director may, by written notice to the Committee,
designate any person or legal entity as the Director's Beneficiary to receive
payments upon the Director's death. A Director may revoke or change the
Beneficiary designation at any time by written notice to the Committee. The
last such designation received by the Committee shall control any prior
designation; provided, however, that no designation shall be effective unless
received by the Committee prior to a Director's death. The form of notice to
designate a Beneficiary or change a Beneficiary shall be prescribed by the
Committee. If the Director does not designate a Beneficiary, then any shares
that are to be delivered after the Director has died or become legally
incompetent shall be delivered to the Director's estate or legal guardian, as
the case may be. References to a Director, Participant or Inactive Participant
in this Plan shall be deemed to refer to the Director's Beneficiary, estate or
legal guardian, where appropriate.
8. SHARE CERTIFICATES; VOTING AND OTHER RIGHTS. The
certificates for shares delivered to a Director pursuant to Section 7 above
shall be issued in the name of the Director, and the Director shall be entitled
to all rights of a shareholder with respect to Common Stock for all such shares
issued in his or her name, including the right to vote the shares, and the
Director shall receive all dividends and other distributions paid or made with
respect thereto.
9. GENERAL RESTRICTIONS. (a) Notwithstanding any other
provision of the Plan or agreements made pursuant thereto, the Company shall
not be required to issue or deliver any certificate or certificates for shares
of Common Stock under the Plan prior to fulfillment of all of the following
conditions:
(i) Listing or approval for listing upon official notice of
issuance of such shares on the Nasdaq Stock Market, or such other
securities exchange as such shares of
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<PAGE>
Common Stock shall trade;
(ii) Any registration or other qualification of such shares
under any state or federal law or regulation, or the maintaining in
effect of any such registration or other qualification which the
Committee shall, in its absolute discretion upon the advice of
counsel, deem necessary or advisable; and
(iii) Obtaining any other consent, approval, or permit from
any state or federal governmental agency which the Committee shall, in
its absolute discretion after receiving the advice of counsel,
determine to be necessary or advisable.
(b) Nothing contained in the Plan shall prevent the Company
from adopting other or additional compensation arrangements for the
Participants.
(c) No Common Stock delivered to a Director pursuant to the
Plan may be sold until at least six months after the Delivery Date; provided,
however, that the six month period shall not apply to any person not subject to
the reporting requirement of Section 16(a) of the U.S. Security and Exchange
Act of 1934.
10. SHARES AVAILABLE. Subject to Section 11 below, the
maximum number of notional shares of Common Stock which may be credited to
Deferred Stock Accounts pursuant to the Plan is 40,000. Shares of Common stock
issuable under the Plan may be taken from authorized but unissued or treasury
shares of the Company or purchased on the open market.
11. CHANGE IN CAPITAL STRUCTURE; CHANGE OF CONTROL. (a) In
the event that there is, at any time after the Board adopts the Plan, any
change in the Common Stock by reason of any stock dividend, stock split,
combination of shares, exchange of shares, warrants or rights offering to
purchase Common Stock at a price below its fair market value, reclassification,
recapitalization, merger, consolidation, spin-off or other change in
capitalization of the Company, appropriate adjustment shall be made in the
number and kind of notional shares or other property subject to the Plan and
the number and kind of shares or other property held in the Deferred Stock
Accounts, and any other relevant provisions of the Plan by the Committee, whose
determination shall be binding and conclusive on all persons.
(b) Without limiting the generality of the foregoing, and
notwithstanding any other provision of this Plan, in the event of a Change of
Control, the following shall occur on the date of the Change of Control (the
"Change of Control Date"): (i) the last day of the then current Plan Quarter
shall be deemed to occur on the Change of Control Date; (ii) the Company shall
immediately pay to each Director in a lump sum the Change of Control
Consideration multiplied by the number of notional shares of Common Stock held
in each Director's Deferred Stock Account immediately before such Change of
Control (including notional shares of Common Stock credited to each Directors
Deferred Stock Account as a result of the Change of Control); and (iii) the
Plan shall be terminated.
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<PAGE>
(c) If the notional shares of Common Stock credited to the
Deferred Stock Accounts are converted pursuant to this Section 11 into another
form of property, references in the Plan to the Common Stock shall be deemed,
where appropriate, to refer to such other form of property, with such other
modifications as may be required for the Plan to operate in accordance with its
purposes. Without limiting the generality of the foregoing, references to
delivery of certificates for shares of Common Shares shall be deemed to refer
to delivery of cash and the incidents of ownership of any other property held
in the Deferred Stock Accounts.
12. ADMINISTRATION; AMENDMENT. (a) The Plan shall be
administered by a committee consisting of directors who are not eligible to
participate in the Plan (the "Committee"), which shall have full authority to
construe and interpret the Plan, to establish, amend and rescind rules and
regulations relating to the Plan, and to take all such actions and make all
such determinations in connection with the Plan as it may deem necessary or
desirable.
(b) The Board may from time to time make such amendments to
the Plan as it may deem proper and in the best interest of the Company. No
amendment to the Plan shall be made more than once in any six-month period that
would change the amount, price or timing of the grants of Common Stock
hereunder other than to comport with changes in the Internal Revenue Code of
1986, as amended, or the regulations thereunder.
(c) The Board may terminate the Plan at any time.
(d) Notwithstanding any other provision of the Plan, neither
the Board nor the Committee shall be authorized to exercise any discretion with
respect to the selection of persons to receive credits of notional shares of
Common Stock under the Plan or concerning the amount or timing of such credits
under the Plan, and no amendment or termination of the Plan shall adversely
affect any Director's Deferred Stock Account without that Director's express
written consent.
13. MISCELLANEOUS. (a) Nothing in the Plan shall be deemed to
create any obligation on the part of the Board to nominate any Director for
reelection by the Company's shareholders or to limit the rights of the
shareholders to remove any Director.
(b) The Company shall have the right to require, prior to the
issuance or delivery of any shares of Common Stock pursuant to the Plan, that a
Director make arrangements satisfactory to the Committee for the withholding of
any taxes required by law to be withheld with respect to the issuance or
delivery of such shares, including without limitation by the withholding of
shares that would otherwise be so issued or delivered, by withholding from any
other payment due to the Director, or by a cash payment to the Company by the
Director.
14. GOVERNING LAW. The Plan and all actions taken thereunder
shall be governed by and construed in accordance with the laws of the State of
Delaware.
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EXHIBIT 21.1
SUBSIDIARIES OF SFX ENTERTAINMENT, INC.
State of Incorporation/
Name State of Formation
---- -----------------------
1. Air Show Partners Texas
2. AKG, Inc. California
3. American Artists, Inc. Massachusetts
4. American Artists Limited, Inc. Massachusetts
5. American Broadway, Inc. Texas
6. Amphitheater Entertainment Partnership Delaware
7. Ant Theatrical Productions, Inc. New York
8. Ardee Festivals N.J., Inc. Delaware
9. Atlanta Concerts, Inc. Delaware
10. Audrey & Jane, Inc. California
11. Avalon Acquisition Corp. Delaware
12. Bayou Place Performance Hall Texas
General Partnership
13. Beach Concerts, Inc. New York
14. BG Presents, Inc. California
15. BGP Acquisition, LLC Delaware
16. BGP Denver, Inc. Delaware
17. Bill Graham Enterprises, Inc. California
18. Bill Graham Management, Inc. California
19. Bill Graham Presents, Inc. California
<PAGE>
State of Incorporation/
Name State of Formation
---- -----------------------
20. Boston Playhouse Realty, Inc. Massachusetts
21. Boylston Street Theatre Corp. Massachusetts
22. Broadway Concerts, Inc. New York
23. Broadway Series Associates, Inc. Indiana
24. Broadway Series Management, Inc. Ohio
25. Broadway Series Management Group, Inc. Ohio
26. Camarillo Amphitheater Managing Partners, Inc. California
27. Concert Productions International B.V. The Netherlands
28. Concerts, Inc. Nevada
29. Conn Ticketing Company Connecticut
30. Connecticut Amphitheater Development Corporation Connecticut
31. Connecticut Concerts Incorporated Connecticut
32. Connecticut Performing Arts, Inc. Connecticut
33. Connecticut Performing Arts Partners Connecticut
34. Contemporary Group Acquisition Corp. Delaware
35. Contemporary Group, Inc. Missouri
36. Contemporary Marketing, Inc. Missouri
37. Contemporary Productions Incorporated Missouri
38. Contemporary Sports Incorporated Missouri
39. Cooley and Conlon Management Co. Georgia
40. Coral Sky Amphitheater Partnership Delaware
- 2 -
<PAGE>
State of Incorporation/
Name State of Formation
---- -----------------------
41. Deer Creek Amphitheater Concerts, Inc. Delaware
42. Deer Creek Amphitheater Concerts, L.P. Delaware
43. Delsener/Slater Enterprises, Ltd. New York
44. DiCesare-Engler, Inc. Pennsylvania
45. DiCesare-Engler Promotions, Inc. Pennsylvania
46. DLC Corp. Delaware
47. DLC Funding Corp. Delaware
48. Dumb Deal, Inc. New York
49. Eagle Eye Entertainment USA Inc. Delaware
50. Eagle Eye Entertainment, Inc. Ontario, Canada
51. EMI Acquisition Sub., Inc. Delaware
52. Entertainment Performing Arts, Inc. Texas
53. Event Merchandising, Inc. California
54. Exit 116 Revisited, Inc. New Jersey
55. Falk Associates Management Enterprises, Inc. Delaware
56. Festival Productions, Inc. Texas
57. Fillmore Corporation Delaware
58. Fillmore Fingers, Inc. California
59. Financial Advisory Management Enterprises, Inc. Delaware
- 3 -
<PAGE>
State of Incorporation/
Name State of Formation
---- -----------------------
60. Grand Slam Sports Marketing, Inc. Florida
61. GSAC Partners Delaware
62. High Cotton, Inc. Georgia
63. In House Tickets, Inc. New York
64. Irvine Meadows Amphitheater California
65. Irving Plaza Concerts, Inc. Delaware
66. Magicsports-Grand Slam Management, Inc. Florida
67. Magicworks Concerts, Inc. Florida
68. Magicworks Entertainment Asia Limited Hong Kong
69. Magicworks Entertainment Incorporated Delaware
70. Magicworks Entertainment International, Inc. Florida
71. Magicworks Exhibitions Joint Venture Florida
72. Magicworks Exhibitions, Inc. Florida
73. Magicworks Fashion Management, Inc. Florida
74. Magicworks Merchandising, Inc. Florida
75. Magicworks Sports Management, Inc. Florida
76. Magicworks Theatricals, Inc. Ohio
77. Magicworks Transportation, Inc. Florida
78. Magicworks West, Inc. Florida
- 4 -
<PAGE>
State of Incorporation/
Name State of Formation
---- -----------------------
79. Marco Entertainment, Inc. District of Columbia
80. Melody Tent and Amphitheater, Inc. Pennsylvania
81. Murat Center Concerts, Inc. Delaware
82. Murat Center Concerts, L.P. Delaware
83. Network Presentations LLC Texas
84. New Avalon, Inc. California
85. NOC, Inc. Connecticut
86. Northeast Ticketing Company Connecticut
87. Oakdale Theater Concerts, Inc. Delaware
88. Old PCI, Inc. Texas
89. PACE (UK) United Kingdom
90. PACE AEP Acquisition, Inc. Texas
91. PACE Amphitheater Management, Inc. Texas
92. PACE Amphitheatres, Inc. Texas
93. PACE Bayou Place, Inc. Texas
94. PACE Communications, Inc. Texas
95. PACE Concerts GP, Inc. Texas
96. PACE Concerts, Ltd. Texas
97. PACE/Contemporary Motor Sports, Ltd. Texas
98. PACE Entertainment Charitable Foundation Texas
99. PACE Entertainment Corporation Texas
- 5 -
<PAGE>
State of Incorporation/
Name State of Formation
---- -----------------------
100. PACE Entertainment GP Corp. Texas
101. PACE Entertainment Group, Ltd. Texas
102. PACE Milton Keynes, Inc. Texas
103. PACE Motor Sports, Inc. Texas
104. PACE Music Group, Inc. Texas
105. PACE Productions, Inc. Texas
106. PACE Signatures Group, J.V. Texas
107. PACE Theatrical Group, Inc. Texas
108. PACE Touring, Inc. Texas
109. PACE U.K. Holding Corporation Texas
110. PACE Variety Entertainment, Inc. Texas
111. Pavilion Partners Delaware
112. PEC, Inc. Nevada
113. Performing Arts Management of North Miami, Inc. Florida
114. Polaris Amphitheater Concerts, Inc. Delaware
115. PTG-Florida, Inc. Florida
116. QN Corp. Connecticut
117. Rugrats American Tour, Ltd. Texas
118. SFX Acquisition Corp. Delaware
119. SFX Concerts of the Midwest, Inc. Delaware
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<PAGE>
State of Incorporation/
Name State of Formation
---- -----------------------
120. SFX Concerts, Inc. Delaware
121. SFX Delaware, Inc. Delaware
122. SFX Network Group, L.L.C. Delaware
123. SFX Sports Group, Inc. Delaware
124. SFX Touring, Inc. Delaware
125. Shelli Meadows, Inc. California
126. Shoreline Amphitheatre, Ltd. California
127. Shoreline Amphitheatre Partners California
128. SFX Radio Network, Inc. Pennsylvania
129. SM/PACE, Inc. Texas
130. Southeast Ticketing Company Connecticut
131. Southern Promotions, Inc. Georgia
132. STEP Entertainment Services Inc. Canada
133. Sunshine Concerts, L.L.C. Delaware
134. Sunshine Designs, Inc. Delaware
135. Sunshine Designs, L.P. Delaware
136. Suntex Acquisition, Inc. Delaware
137. Suntex Acquisition, L.P. Delaware
138. TAP Productions, Inc. Massachusetts
- 7 -
<PAGE>
State of Incorporation/
Name State of Formation
---- -----------------------
139. TBA Media, Inc. California
140. Tennis Events, Inc. Florida
141. The Album Network, Inc. California
142. The Booking Group, L.L.C. New York
143. The Duke of York Theatre(Holdings) United Kingdom
144. The Jekyll Company Limited Partnership New York
145. International Music (Canada) Inc. Ontario, Canada
146. The Wedding Tour Company Texas
147. Ticket Service, Inc. Pennsylvania
148. International Music Ltd. Bermuda
149. International Music Tour I Ltd. Bermuda
150. International Music Tour II Ltd. Bermuda
151. International Music Tour I (USA) Inc. Delaware
152. International Music Tour II (USA) Inc. Delaware
153. Concert Productions (UK) Limited United Kingdom
154. International Music (USA) Inc. Delaware
155. Touring Artists Group, Inc. (Florida) Florida
156. Touring Artists Group, Inc. (Ohio) Ohio
157. Touring Productions, Inc. Texas
158. Tremont Street Theatre Corporation II, Inc. Massachusetts
159. Tuneful Company, Inc. Texas
160. Universal/PACE Amphitheatres Group, L.P. Delaware
161. Walnut Creek Amphitheater Partnership New York
162. Warrenton Street Theatre Corp. Massachusetts
- 8 -
<PAGE>
State of Incorporation/
Name State of Formation
---- -----------------------
163. West Coast Amphitheater Corp. California
164. Westbury Music Fair, L.L.C. Delaware
165. Western Amphitheater Partners California
166. Wolfgang Records California
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<PAGE>
Exhibit 23.2
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) March 5, 1998, except for Notes 1 and 11 as to
which the date is April 27, 1998, with respect to the consolidated financial
statements of SFX Entertainment, Inc., (ii) October 2, 1997 with respect to the
consolidated financial statements of Delsener/Slater Enterprises, Ltd. and
Affiliated Companies, (iii) December 13, 1996 with respect to the consolidated
financial statements of PACE Entertainment Corporation and Subsidiaries, (iv)
May 22, 1998 with respect to the combined financial statements of the
Contemporary Group, (v) November 20, 1997 with respect to the combined
financial statements of The Album Network, Inc. and Affiliated Companies,
(vi) March 20, 1998 with respect to the consolidated financial statements of
BG Presents, Inc. and Subsidiaries, (vii) March 13, 1998 with respect to the
combined financial statements of Concert/Southern Promotions and Affiliated
Companies, (viii) April 10, 1998 with respect to the combined financial
statements of Falk Associates Management Enterprises, Inc., (ix) May 1, 1998
with respect to the combined financial statements of Blackstone Entertainment
LLC, (x) March 5, 1998 with respect to the consolidated financial statements of
The Marquee Group, Inc. and Subsidiaries, (xi) May 21, 1998 with respect to the
combined financial statements of Alphabet City Sports Records, Inc. and
Alphabet City Industries, Inc., (xii) June 3, 1998 with respect to the
consolidated financial statements of Cambridge Holding Corporation, Inc. and
(xiii) July 6, 1998 with respect to the combined financial statements of
Tollin-Robbins Entertainment, all included in the Registration Statement
(Form S-4) and related Prospectus of SFX Entertainment, Inc. to approve and
adopt the Agreement and Plan of Merger between SFX Entertainment, Inc. and
The Marquee Group, Inc. and Subsidiaries.
Ernst & Young LLP
New York, New York
January 25, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
on the consolidated financial statements of PACE Entertainment Corporation and
subsidiaries dated December 15, 1997 (except with respect to the matters
discussed in Note 12, as to which the date is December 22, 1997) and Pavilion
Partners dated December 15, 1997 (except with respect to the matters discussed
in Note 11, as to which the date is December 22, 1997), and to all references
to our Firm included in or made a part of this registration statement of SFX
Entertainment, Inc.
/s/ Arthur Andersen LLP
- -----------------------
ARTHUR ANDERSEN LLP
Houston, Texas
January 25, 1999
<PAGE>
Exhibit 23.3
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. (formerly
Sand 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 the Registration
Statement of SFX Entertainment, Inc. on Form S-4, to be filed on or about
January 22, 1999.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Indianapolis, Indiana
January 22, 1999
<PAGE>
Exhibit 23.3
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-4.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 22, 1999
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 27, 1998 on the financial statements of Riverport Performing
Arts Centre, Joint Venture, as of and for years ended December 31, 1997 and
1996, (and all references to our firm) included or made part of the
Registration Statement on Form S-4.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
St. Louis, Missouri
January 25, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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As independent certified public accountants, we hereby consent to the use of
our report included in this registration statement and to the incorporation by
reference in this registration statement of SFX Entertainment, Incorporated of
our report dated February 23, 1998 included in Magicworks Entertainment,
Incorporated's Form 10-K for the year ended December 31, 1997 and to all
references to our Firm included in this Form S-4.
ARTHUR ANDERSEN LLP
Miami, Florida,
January 25, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of SFX Entertainment, Inc. 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/ PricewaterhouseCoopers LLP
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PricewaterhouseCoopers LLP
Houston, Texas
January 25, 1999
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this registration statement on Form S-4 of
SFX Entertainment, Inc. (File No. 333- ) of our report dated June 25, 1997,
on our audits of the consolidated financial statements of ProServ, Inc. and
Subsidiaries. We also consent to the reference to our firm to our firm under
the caption "Experts."
/s/ PricewaterhouseCoopers LLP
--------------------------------
PricewaterhouseCoopers LLP
McLean, Virginia
January 25, 1999
<PAGE>
Exhibit 23.5
PARK ASSOCIATES LIMITED
We consent to the reference to our firm under the caption "experts" and to the
use of our report dated May 28, 1998 and September 22, 1998 included in the
Registration Statement (Form S-4) and related Prospectus of SFX Entertainment,
Inc. to approve and adopt the Agreement and Plan of Merger between SFX
Entertainment, Inc. and The Marquee Group, Inc. and Subsidiaries.
/s/ Grant Thornton
- ---------------------
GRANT THORNTON
REGISTERED AUDITORS
CHARTERED ACCOUNTANTS
Nottingham
January 25, 1999
<PAGE>
Exhibit 23.6
[Richard E. Woodhall & Co. Letterhead]
SFX Entertainment, Inc.
Dear Sirs,
CONSENT OF INDEPENDENT AUDITORS
RE: TONY STEPHENS ASSOCIATES LIMITED
AUDIT YEAR TO 30TH APRIL 1998
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated 14th July 1998 included in the Proxy Statement of
The Marquee Group, Inc. that is made as part of the Registration Statement
(Form S-4) and Prospectus of SFX Entertainment, Inc. dated: 22nd January 1999.
/s/ Richard E. Woodhall & Co.
-----------------------------
Richard E. Woodhall & Co.
22nd January 1999
<PAGE>
Exhibit 23.7
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the reference to our firm under the caption "Experts" in
the Prospectus forming a part of this Registration Statement on Form S-4 of
SFX Entertainment, Inc., a Delaware corporation, and to the incorporation of
our report, dated June 13, 1997 on the financial statements of QBQ
Entertainment, Inc., a New York corporation, as of December 31, 1996 and
for the years ended December 31, 1995 and 1996.
/s/ David Berdon & Co. LLP
----------------------------
DAVID BERDON & CO. LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
January 22, 1999
<PAGE>
EXHIBIT 23.8
CONSENT OF PRUDENTIAL SECURITIES, INC.
January 25, 1999
The Marquee Group, Inc.
888 Seventh Avenue, 37th Floor
New York, NY 10019
Dears Sirs:
We hereby consent to the use of our opinion letter to the Board of
Directors of The Marquee Group, Inc. ("Marquee"), included as Annex II to the
Joint Proxy Statement and Prospectus which forms a part of the Registration
Statement on Form S-4 of SFX Entertainment, Inc. ("SFX") relating to the
proposed merger of Marquee with and into SFX, and to the references to such
opinion in such Joint Proxy Statement and Prospectus under the captions
Summary--"The Merger--Opinion of Financial Advisor;" "The Merger--Background
of The Merger," "The Merger--Marquee's Reasons For The Merger;" and "The
Merger--Opinion of Marquee's Financial Advisor." In giving such consent, we
do not admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission thereunder,
nor do we thereby admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "experts" as used in
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Prudential Securities Incorporated
PRUDENTIAL SECURITIES INCORPORATED
<PAGE>
EXHIBIT 99.2
THE MARQUEE GROUP, INC.
888 SEVENTH AVENUE, 37TH FLOOR
NEW YORK, NEW YORK 10019
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR
THE SPECIAL MEETING OF STOCKHOLDERS
The undersigned hereby appoints Robert M. Gutkowski and Jan E. Chason, and
each of them acting solely, proxies with full power of substitution and with
all powers the undersigned would possess if personally present, to represent
and to vote at the Special Meeting of Stockholders to be held on , 1999 and
at any adjournment or postponement thereof, as designated on the reverse side
hereof AND IN THEIR DISCRETION WITH RESPECT TO ANY MATTERS INCIDENT TO THE
CONDUCT OF THE MEETING AND OTHER MATTERS AS MAY PROPERLY COME BEFORE SUCH
MEETING, all of the shares of common stock of The Marquee Group, Inc. held of
record by the undersigned as of the close of business on , 1999. All
proxies previously given with respect to the shares covered hereby are hereby
revoked.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE
<PAGE>
[X] Please mark your vote as in this example
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE `FOR' THE FOLLOWING
PROPOSAL.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER AND AT THE DISCRETION OF PROXYHOLDERS AS
TO ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING. IF NO DIRECTION
IS MADE, THIS PROXY WILL BE VOTED FOR THE FOLLOWING PROPOSAL AND AT THE
DISCRETION OF THE PROXYHOLDERS AS TO ANY OTHER MATTERS THAT MAY PROPERLY COME
BEFORE THE MEETING.
1. PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF MERGER, DATED AS OF
JULY 23, 1998, AS AMENDED, AMONG SFX ENTERTAINMENT, INC., SFX ACQUISITION CORP.
AND THE MARQUEE GROUP, INC., AND THE TRANSACTIONS CONTEMPLATED THEREBY PURSUANT
TO WHICH SFX ACQUISITION CORP. WILL BE MERGED WITH AND INTO THE MARQUEE GROUP,
INC., WITH THE MARQUEE GROUP, INC. SURVIVING THE MERGER AS A WHOLLY-OWNED
SUBSIDIARY OF SFX ENTERTAINMENT, INC.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(Continued and to be signed and dated on the reverse side)
<PAGE>
(Continued from other side)
PLEASE SIGN AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
--------------------------------
SIGNATURE(S)
--------------------------------
DATE
NOTE: Please sign exactly as
name appears. When shares are
held by joint tenants, both
should sign. When signing as
attorney-in-fact, executor,
administrator, trustee or
guardian, please give full title
as such. If a corporation,
please sign in full corporate
name by the president or other
authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
