<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From ________ to ________
Commission File Number 2-96624-D
MAGICWORKS ENTERTAINMENT INCORPORATED
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(Exact name of registrant as specified in its charter)
DELAWARE 87-0425513
--------------------------------- ---------------------------------
(State of incorporation) (IRS Employer Identification No.)
930 WASHINGTON AVENUE
MIAMI BEACH, FLORIDA 33139
- ---------------------------------------- ---------------
(Address of principal executive offices) (zip code)
(305) 532-1566
-------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Common stock, par value $.001 per share: 24,427,652 shares
outstanding as of August 10, 1998
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MAGICWORKS ENTERTAINMENT INCORPORATED
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income
Three Months and Six Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings. 14
ITEM 2. Changes in Securities and Use of Proceeds. 14
ITEM 3. Defaults upon Senior Securities. 14
ITEM 4. Submission of Matters to a Vote of Security Holders. 14
ITEM 5. Other Information. 14
ITEM 6. Exhibits and Reports on Form 8-K. 14
Signatures 15
</TABLE>
1
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MAGICWORKS ENTERTAINMENT INCORPORATED AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company have been
prepared in accordance with the instructions to Form 10-Q and therefore, omit or
condense certain footnotes and other information normally included in financial
statements prepared in accordance with generally accepted accounting principles.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial
information for the interim periods reported have been made. Results of
operations for the three months and six months ended June 30, 1998 are not
necessarily indicative of the results for the entire fiscal year ending December
31, 1998.
2
<PAGE> 4
Magicworks Entertainment Incorporated and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,383,715 $ 5,410,837
Accounts and notes receivable, net 2,614,418 1,735,123
Inventories 715,443 486,954
Advances and temporary deposits 233,158 582,809
Prepaid show expenses 8,532,595 929,566
Other current assets 462,275 477,003
----------- -----------
TOTAL CURRENT ASSETS 18,941,604 9,622,292
PROPERTY AND EQUIPMENT, NET 2,104,950 2,098,785
INVESTMENTS IN PARTNERSHIPS 3,855,219 4,273,973
DEFERRED COSTS, NET 1,703,050 983,679
INTANGIBLE ASSETS, NET 374,167 399,167
OTHER ASSETS 117,500 67,500
----------- -----------
TOTAL ASSETS $27,096,490 $17,445,396
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Borrowings under credit agreement $ 3,100,000 $ --
Current portion of long-term debt 306,635 299,557
Accounts payable 1,077,712 1,252,517
Accrued liabilities 530,108 532,648
Deferred income 9,770,271 3,479,469
Due to affiliates 30,198 357,451
----------- -----------
TOTAL CURRENT LIABILITIES 14,814,924 5,921,642
LONG-TERM DEBT, NET OF CURRENT PORTION 5,810,422 6,047,163
----------- -----------
TOTAL LIABILITIES 20,625,346 11,968,805
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 5,000,000 shares authorized; none issued -- --
Common stock, $.001 par value; 50,000,000 shares authorized; 24,427,652
and 24,404,300 issued and outstanding at June 30, 1998 and
December 31, 1997, respectively 24,427 24,404
Additional paid-in capital 4,160,326 4,078,618
Retained earnings 2,286,391 1,373,569
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TOTAL STOCKHOLDERS' EQUITY 6,471,144 5,476,591
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $27,096,490 $17,445,396
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
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Magicworks Entertainment Incorporated and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Production $ 2,630,405 $ 3,134,762 $ 2,630,405 $ 3,134,762
Promotion 20,401,925 2,598,685 25,376,916 5,413,958
Merchandising 4,354,689 1,398,380 7,718,846 2,477,829
Income (loss) from investments in partnerships (23,249) (141,879) 262,875 806,225
Other 336,181 404,376 1,145,778 951,159
------------ ------------ ------------ ------------
TOTAL REVENUES 27,699,951 7,394,324 37,134,820 12,783,933
------------ ------------ ------------ ------------
OPERATING EXPENSES
Production 2,187,153 47,658 2,187,153 47,658
Promotion 18,754,492 2,828,931 22,226,188 4,793,391
Salaries, wages and benefits 1,201,896 888,461 2,456,860 1,551,572
Merchandising 3,833,409 877,604 6,326,419 1,733,984
General and administrative 904,240 1,886,639 2,030,748 2,803,211
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 26,881,190 6,529,293 35,227,368 10,929,816
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 818,761 865,031 1,907,452 1,854,117
OTHER INCOME (EXPENSE)
Interest income 38,079 21,463 74,473 89,768
Interest expense (354,675) (204,002) (610,537) (403,845)
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 502,165 682,492 1,371,388 1,540,040
PROVISION FOR INCOME TAXES (120,850) (266,172) (458,566) (600,616)
------------ ------------ ------------ ------------
NET INCOME $ 381,315 $ 416,320 $ 912,822 $ 939,424
============ ============ ============ ============
NET INCOME PER SHARE, BASIC AND DILUTED $ 0.02 $ 0.02 $ 0.04 $ 0.04
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC 24,423,028 24,394,299 24,417,467 24,394,299
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, DILUTED 24,739,388 24,475,876 24,608,129 25,571,861
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
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Magicworks Entertainment Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 912,822 $ 939,424
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 188,285 145,361
Deferred income tax provision -- (205,697)
Loss (gain) on sale of property and equipment -- (24,685)
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts and notes receivable, net (879,295) 265,346
Inventories (228,489) 42,749
Preproduction costs -- (1,173,833)
Advances and temporary deposits 349,651 91,479
Prepaid show expenses (7,603,029) --
Other current assets 14,728 76,007
Other assets (50,000) --
Deferred costs (719,371) 47,614
Accounts payable (174,805) 226,942
Accrued liabilities (809) 384,943
Deferred income 6,290,802 1,212,027
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,899,510) 2,027,677
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (169,450) (15,151)
Proceeds from sale of assets -- 143,500
Investments in partnerships 418,754 (4,839,820)
(Advance to) payments from affiliates (327,253) 39,170
Intangible assets -- 34,592
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (77,949) (4,637,709)
----------- -----------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
(continued)
5
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Magicworks Entertainment Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt $ 3,100,000 $ 375,000
Repayment of debt (149,663) (290,755)
Distributions -- (175,115)
Stock registration costs -- (91,148)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,950,337 (182,018)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 972,878 (2,792,050)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,410,837 5,936,611
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,383,715 $ 3,144,561
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 343,506 $ 311,145
=========== ===========
Income taxes $ 457,388 $ 997,105
=========== ===========
SUPPLEMENTAL INFORMATION ON NONCASH FINANCING ACTIVITIES
Conversion of notes to common stock $ 81,736 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
6
<PAGE> 8
MAGICWORKS ENTERTAINMENT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed for the quarterly financial reporting are the
same as those disclosed in Note 1 of the notes to consolidated financial
statements included in Magicworks Entertainment Incorporated's ("the Company")
annual report on Form 10-K for the fiscal year ended December 31, 1997. For
certain theatrical production partnerships and concert joint ventures wherein
the Company did not own in excess of a 50% interest, their results were formerly
consolidated into the operations of the Company. Effective January 1, 1998, the
net assets and results of operations of and from these partnerships have been
deconsolidated from the current and historical financial statement presentation
of the Company.
2. DEBT
The Company has a committed line of credit agreement expiring in May 1999 with a
bank that provides a revolving credit facility of $7.5 million. 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 June 30, 1998, $3.1 million was outstanding as compared to
no outstanding balance at December 31, 1997.
3. COMMITMENTS AND CONTINGENCIES
LITIGATION
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. On July 17, 1998, the
Judge in this case entered an order granting Summary Judgement in favor of all
of the Defendants. The Plaintiff has filed for an appeal of the Summary
Judgement Order. Management believes, based on the advise of counsel that the
lawsuit is without merit, and the outcome of this suit will not have a material
adverse effect on its financial condition or results of operations.
In June of 1998, an action was brought by Cook County Illinois against the
Village of Rosemont and numerous Defendants including Magic Promotions, Inc.
(now known as Magicworks Theatricals, Inc. ("MTI")). The lawsuit relates to a
Cook County ordinance requiring the Village of Rosemont and others who produce
and/or promote entertainment events in Cook County to collect an entertainment
tax based on every ticket sold for each live entertainment event. The Village of
Rosemont, however, passed a Village Ordinance that negated the Cook County
Ordinance on its face and did not require the parties who promoted or produced
events in the Village's facilities to pay the entertainment tax. To date, MTI
has not been named as an actual Defendant, but only as an "Respondent in
Discovery". Management believes, based on the advise of counsel, that the Cook
County claim 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.
Except for the items discussed above, there have been no material changes in
commitments and contingencies from those disclosed in the Company's December 31,
1997 Form 10-K.
4. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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
7
<PAGE> 9
MAGICWORKS ENTERTAINMENT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 per common share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income per
common share assumes the maximum dilutive effect from stock options and
warrants, and conversion of the Company's convertible notes. For all periods
presented, basic and diluted net income per share are substantially the same.
The following is the reconciliation of the number of shares used in the basic
and diluted earnings per share calculations for the three-month and six-month
periods ended June 30:
<TABLE>
<CAPTION>
3 MONTHS 6 MONTHS
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average number of common shares 24,423,028 24,394,299 24,417,467 24,394,299
Impact of dilutive warrants, options and unsecured senior
convertible notes 316,360 81,577 190,662 1,177,562
---------- ---------- ---------- ----------
Weighted average number of shares of common stock and common
stock equivalents for fully diluted earnings per share 24,739,388 24,475,876 24,608,129 25,571,861
========== ========== ========== ==========
</TABLE>
4. SUBSEQUENT EVENTS
The Company entered into a definitive merger agreement on August 6, 1998
pursuant to which SFX Entertainment, Inc. (NASDAQ: "SFXE") will commence a
tender offer to acquire all outstanding shares of the Company for $4.00 per
share in cash. The Boards of Directors of both companies have approved the
transaction and certain principal stockholders owning approximately 78.5% of the
outstanding common stock of the Company have agreed to tender all of their
shares. Any shares not purchased in the tender offer will be acquired in a
second step merger for $4.00 per share in cash. The tender offer is conditioned
upon the tendering of shares representing a majority of the Company's common
stock determined on a fully diluted basis, the expiration of the applicable
Hart-Scott-Rodino waiting period, and certain other customary conditions.
On August 11, 1998, pursuant to the Agreement and Plan of Merger dated June 5,
1998, as amended (the "Agreement"), Magicsports-Marco Management, Inc., a wholly
owned subsidiary of the Company, merged with and into Marco Entertainment, Inc,.
a District of Columbia corporation ("Marco"). Pursuant to the Agreement, the
outstanding shares of common stock of Marco were exchanged for an aggregate of
1,555,000 shares of common stock, $.001 par value, of the Company at closing and
Marco became a wholly owned subsidiary of the Company.
8
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CHANGE IN BASIS OF PRESENTATION
Results of operations for the three months and six months ended June 30, 1997
have been reclassified to deconsolidate the revenue and expense from certain
partnerships wherein the Company did not own a greater than 50% interest. Such
reclassification of prior period components of operations has no net impact on
the Company's results for the three month and six month periods ended June 30,
1997, but allows for consistency in presentation of prior period results with
those of the current period. The Company's balance sheets used to prepare the
consolidated statements of cash flows for the six month periods ended June 30,
1998 and 1997 have been adjusted accordingly to take into account the
deconsolidation of the aforementioned partnerships.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997
Revenues increased by $20.3 million to $27.7 million for the three months ended
June 30, 1998, from $7.4 million in the three months ended June 30, 1997,
primarily due to increases in revenues from promotion and merchandising
activities. See discussion below.
Production revenues showed a decrease of $0.5 million, to $2.6 million during
the three months ended June 30, 1998 from $3.1 million for the corresponding
1997 period. The Company's 1998 production of the Asian tour of David
Copperfield's Dreams and Nightmares contributed $0.9 million less to the
Company's revenues than the Company's 1997 production of the South American tour
of the Magic of David Copperfield. This decrease in revenue was partially offset
by $0.4 million in revenue earned in 1998 by the Company's production of the
tour of the Preservation Hall Jazz Band.
Expenses relating to the Company's production revenues increased
disproportionately in 1998 compared to the same period in 1997. In 1998, the
Company recorded gross revenue and expense associated with the David Copperfield
tour as the Company held an ownership interest in the tour in excess of 50%. In
1997 the Company owned less than a 50% interest in the tour, thus in 1997 the
revenue from the tour was recorded net of expense.
Promotion revenues showed an increase of $17.8 million, to $20.4 million during
the three months ended June 30, 1998 from $2.6 million for the corresponding
1997 period. The Company's promotion of the tours of the Lord of the Dance,
David Copperfield - Asia, Reba McEntire and Kenny Rogers, Riverdance, Les
Miserables, and Annie have significantly increased revenues during the 1998
period as compared to the same period in 1997. The Company did not promote any
dates for David Copperfield's South American Tour in 1997, thus that tour did
not contribute to promotion revenue in that period.
Expenses directly relating to the Company's promotion revenues, expressed as a
percentage of such revenue, decreased to 91.9% as compared to being in excess of
revenues in the same period of 1997. The enhanced profitability associated with
the Company's promotion activities is attributed to the Company's emphasis on
better management, cost containment, and intense promotion of events, as well as
the focus on desirable markets for the presentation and sale of live
entertainment.
9
<PAGE> 11
Merchandising revenues increased by $3.0 million to $4.4 million in the three
months ended June 30, 1998 from $1.4 million in the corresponding period of
1997. The Company's merchandising revenue is impacted by the number of
performance weeks of a production for which the Company has acquired
merchandising rights, as well as the seating capacity and attendance at the
various venues where the shows are being presented. The Company maintains such
rights for all of its productions and negotiates for merchandising rights to
other touring shows. The increase in the second quarter of 1998 as compared to
the corresponding period in 1997 is primarily due to revenues from the tour of
Nickelodeon's Rugrats that primarily plays in arenas rather than smaller
capacity theaters.
Merchandising costs, expressed as a percentage of merchandising revenue,
increased to 88.0% for the three months ended June 30, 1998 from 62.8% for the
comparable period of 1997. This increase is primarily due to the smaller profit
margin the Company is earning on merchandise sold in connection with the Rugrats
shows, as compared to the shows running in the same period of 1997. Revenues
from merchandising activities at Rugrats shows are the major component of
merchandising revenue in the second quarter of 1998, thus skewing the Company's
normal profit margins for merchandising activities. This decrease in margin is
offset by the increased volume of such revenues thus resulting in the
maintenance of the overall profitability of the merchandising division in the
second quarter of 1998 as compared to the second quarter of 1997.
Losses from investments in partnerships decreased approximately $119,000 for the
three months ended June 30, 1998 from approximately $142,000 in the
corresponding period in 1997 primarily due to the slightly better performance of
certain shows during the second quarter of 1998 versus the same period in the
prior year period.
Other revenues remained relatively stable in the three months ended June 30,
1998 as compared to the corresponding period of 1997.
Salaries, wages and benefits increased by $0.3 million to $1.2 million in the
three month period ended June 30, 1998 from $0.9 million during the
corresponding period in 1997, as a result of expanding the corporate financial
staff, the start up of the Company's 401(k) Plan, which includes matching
contributions by the Company, and the increasing activities of the Company's
sports division.
General and administrative expenses decreased $1.0 million to $0.9 million from
$1.9 million in the corresponding period in the prior year primarily due the
write down of $1.2 in investments and receivables taken in the second quarter of
1997. Exclusive of that write down, general and administrative expenses
increased by $0.2 million due to the opening of a second office in Miami Beach
to house the merchandising and sports divisions, as well as due to an increase
in support services to accommodate the larger corporate staff.
Interest expense increased to approximately $350,000 from approximately $200,000
in the similar period of 1997 due to the Company's utilization of its line of
credit agreement to fund significant artist advances paid in connection with the
upcoming Janet Jackson Tour. Further increases in interest expense were the
result of a full quarter of amortization of deferred debt costs associated with
the line of credit in the second quarter of 1998 versus only one month of such
amortization being recognized in the second quarter of 1997, and an increased
amount of debt outstanding in connection with bus loans in the second quarter of
1998 versus the same period in 1997.
Tax expense for the three-month period ended June 30, 1998 decreased as a
percentage of income compared to the same period in 1997 due to certain foreign
revenues being taxed at a more favorable rate.
10
<PAGE> 12
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
Revenues increased by $24.3 million to $37.1 million for the six months ended
June 30, 1998, from $12.8 million in the six months ended June 30, 1997,
primarily due to increases in revenues from promotion and merchandising
activities. See discussion below.
As there were no revenues or expenses recorded in connection with production
activities in the first quarters of 1998 and 1997, refer to the discussion of
the second quarters of 1998 and 1997 for an analysis of year to date production
activities.
Promotion revenues showed an increase of $20.0 million, to $25.4 million during
the six months ended June 30, 1998 versus $5.4 million for the corresponding
1997 period. The Company's promotion of the tours of Riverdance, Les Miserables,
Reba McEntire and Kenny Rogers, Annie, David Copperfield's Asian tour, the eight
week European Tour of the Lord of the Dance, and Grease have increased revenues
during the 1998 period as compared to the same period in 1997. Expenses directly
relating to the Company's promotion revenues, expressed as a percentage of such
revenue, remained consistent with the same period in the prior year at
approximately 88%.
Merchandising revenues increased by $5.2 million to $7.7 million in the six
months ended June 30, 1998 from $2.5 million in the corresponding period of
1997. The increase in 1998 is primarily due to the merchandising activities
relating to Nickelodeon's Rugrats Tour which commenced in February of 1998 and
the tours of Scotland the Brave, both of which primarily played in arenas rather
than smaller capacity theaters.
Merchandising costs, expressed as a percentage of merchandising revenue,
increased to 82.0% for the six months ended June 30, 1998 from 70.0% for the
comparable period of 1997. The change in profit margins is due to the high
revenue volume and lower profit margin associated with the Rugrats tour. While
the Company earns a lower margin on merchandise sold at Rugrats performances
than that of other shows the Company has traditionally handled, overall gross
profit for the six months ended June 30, 1998 as compared to the similar 1997
period has increased by $0.6 million.
Income from investments in partnerships decreased $0.5 million to $0.3 million
for the six months ended June 30, 1998 from $0.8 million in the corresponding
period in 1997 primarily due a decrease in sponsorship fees received by the
partnerships as compared to the prior year period.
Other revenues increased by $0.2 million to $1.1 million in the six months ended
June 30, 1998 from $0.9 million in the corresponding period of 1997. The
increase is the result of consulting fees earned in connection with the David
Copperfield Asian tour, and increased transportation division activity in 1998
as the result of servicing the Rugrats Tour.
Salaries, wages and benefits increased by $0.9 million to $2.5 million in the
six month period ended June 30, 1998 from $1.6 million during the corresponding
period in 1997, as a result of expanding the corporate financial staff,
establishing a corporate legal function, the start up of the Company's 401(k)
Plan, which includes matching contributions by the Company, and the operations
of the Company's sports division. Wages also increased due to services provided
by the transportation and merchandising divisions in connection with the Rugrats
Tour.
General and administrative expenses decreased by $0.8 to $2.0 million from $2.8
million in the corresponding period in the prior year due to the same factors
previously discussed in the above comparison of the second quarter of 1998 and
1997.
11
<PAGE> 13
Interest expense increased $0.2 million for the six months ended June 30, 1998
versus the similar 1997 period primarily due to the Company's utilization of its
line of credit agreement to fund significant artist advances paid in connection
with the upcoming Janet Jackson Tour. For additional factors impacting interest
expense for the six-month periods ended June 30, 1998 and 1997, refer to the
above discussion of the second quarters of those fiscal years.
Tax expense for the six-month period ended June 30, 1998 decreased as a
percentage of income compared to the same period in 1997 due to certain foreign
revenues being taxed at a more favorable rate.
LIQUIDITY AND SOURCES OF CAPITAL
At June 30, 1998, the Company had working capital of $4.1 million compared to
$3.7 million at December 31, 1997. The increase in working capital at June 30,
1998 as compared to the prior year period is comprised of an increase in current
assets of $9.3 million and an increase in current liabilities of $8.9 million.
The increase in current assets is primarily attributable to increases in prepaid
show expenses and receivables. The increase in current liabilities is primarily
due to the $3.1 million borrowed against the bank line of credit in 1998 and
$6.3 million in additional deferred income at June 30, 1998 versus the same
period in 1997. See more detailed discussion of these items below.
The Company has a committed line of credit agreement expiring in May 1999 with a
bank that provides a revolving credit facility of $7.5 million. 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 June 30, 1998, $3.1 million was outstanding as compared to
no outstanding balance at December 31, 1997.
The Company's other indebtedness consists of $1.0 million collateralized by
buses used in the Company's business, and $5.1 million of Convertible Notes sold
in a private placement in the third quarter of 1996.
The Company's principal anticipated capital expenditures over the next several
years are expected to relate primarily to acquisitions, if suitable
opportunities arise, and the production of additional theatrical productions.
Net cash used by operating activities during the six months ended June 30, 1998
was $1.9 million as compared to cash provided by operations of $2.0 million in
the corresponding period of 1997. The increase in net cash used by operating
activities in 1998 related to increases in prepaid show expenses principally
arising from artist advances made in connection with the upcoming Janet Jackson
tour, increases in inventory relating the Rugrats tour, increases in deferred
costs associated with accounting and legal fees incurred in the performance of
due diligence and other services specifically for the purpose of the
identification and evaluation of acquisition targets, and increases in
receivables relating to various of the Company's activities. The increase in
cash used was partially offset by an increase in deferred income.
Net cash used by investing activities totaled $0.1 million during the six months
ended June 30, 1998 as compared to $4.7 million in the corresponding period of
1997. Cash used in investing activities in 1998 primarily related to capital
expenditures and payments of amounts due to affiliates, with such amounts being
offset by distributions received from partnerships wherein the Company holds
investments. The increase in cash used in investing activities for 1997 related
primarily to the Company's investment in theatrical and concert productions and
promotions.
Net cash provided by financing activities totaled $3.0 million during the six
months ended June 30, 1998 as compared to net cash used in financing activities
of $0.2 million in the corresponding period of 1997. The increase in cash
provided for 1998 related principally to the amounts borrowed against the
Company's line of credit during 1998. The cash used in financing activities for
the corresponding period in 1997 was primarily due to the repayment of bus loans
12
<PAGE> 14
and final S-Corp distribution payments made to original shareholders of Space
Agency, Inc., now known as Magicworks West, Inc., which was acquired in December
1996.
FORWARD LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis contains various "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 which represent the
Company's expectations or beliefs concerning future events, future liquidity and
capital resource needs. These forward looking statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward looking statements.
13
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Refer to Note 3 of the Notes to Consolidated Financial Statements.
ITEM 2. Changes in Securities and Use of Proceeds.
Not applicable.
ITEM 3. Defaults upon Senior Securities.
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
The Company filed a Form 8-K, dated June 8, 1998, announcing that
it had entered into a definitive agreement to acquire all of the
outstanding stock of Marco Entertainment, Inc. ("Marco") Pursuant
to the merger agreement, the outstanding shares of common stock of
Marco will be exchanged for an aggregate of 1,555,000 shares of
common stock, $.001 par value of the Company at closing. See
Subsequent Events footnote.
Exhibits
Exhibit 27.1 Financial Data Schedule
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 1998
MAGICWORKS ENTERTAINMENT INCORPORATED
By /s/ Brad L. Krassner
-------------------------------------
Brad L. Krassner
Co-Chairman of the Board of Directors
and Chief Executive Officer
By /s/ Barbara Carabetta
-------------------------------------
Barbara Carabetta
Controller
15
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<PERIOD-START> JAN-01-1998
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